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Building an Innovation-Intensive, AI-led, 21st Century Share Portfolio

November 14, 2023

A classic 3G stock has a great chart, great growth and a great story but there is something else that is well worth having in a world of accelerating technological progress. A key determinant of a company’s future earning power is its successful innovations. The ideal 21st century stock has all the 3G characteristics and is also an innovation machine.

We could adopt this strategy writ large by aiming to build an innovation portfolio and that is what I shall be talking about below.

Crowdstrike ticks all the boxes.

I am pleased to report that in the second quarter, we exceeded our guidance across both top and bottom-line metrics, delivering strong durable growth at scale, incredible leverage, and operating within our target model on every metric. Even with a challenging macro backdrop, we delivered an impressive quarter, highlighting CrowdStrike’s structural competitive moat, making Falcon the definitive cybersecurity platform for the cloud era. Financial highlights for the quarter include ending ARR [annually recurring revenue] of $2.9bn, up 37pc year over year with record contribution from cloud security, identity protection, and log scale next-gen SIEM [SIEM, pronounced “sim,” combines both security information management (SIM) and security event management (SEM) into one security management system}. together surpassing $500m in ARR; record non-GAAP operating margin of 21.3pc,record non-GAAP net income, which grew 109pc year over year; GAAP profitability for the second consecutive quarter; record Q2 free cash flow of $188.7m; and an over 80pc year-over-year increase in deals involving eight or more Falcon platform modules. Our commitment to operational excellence and the utilization of AI within our platform and across our entire organization is driving enviable leverage in our financial results even as we aggressively invest in fueling growth. 

George Kurtz, CEO, Crowdstrike, Q2 2024, 30 August 2023

Crowdstrike is incredibly aggressive in pursuing growth, what I call the ‘battle for territory’ approach and what they call ‘land and expand’. In the just reported Q2 2024 the group had turnover of $731.6m. Net of variable costs this produced a gross profit of $548.7m. Most of this was poured into sales and marketing ($282.9m) and research and development ($179.4m).

Incredibly the company still managed to make a tiny profit indicating that spending on this scale should be sustainable. Crowdstrike has the intention to become a much bigger company and both chart and fundamentals suggest it is well able to realise its ambition.

Strategy – Building an Innovation-Led Portfolio

Which are the best shares to have in your portfolio in the third decade of the 21st century. They have to be 3G (great chart, great growth, great story) but once we have established that as our short list which ones should we pick to go into a portfolio.

One type of business which is a clear contender is the great innovators. Innovation explains a lot about which shares are doing well. The mega caps (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla) are all great innovators. Their businesses are built on innovation and their research and development budgets are both massive and growing all the time. They are spending, literally hundreds of billions on research. Who would bet that one day their combined r&d spend won’t exceed $1 trillion, which would be a staggering number, especially if, as seems most likely, it was all funded out of free cash flow.

Megacaps Great Innovators but There are Others

But there are many other companies spending heavily on r&d such as companies involved in electronic design like Cadence Design Systems and Synopsys. Also great innovators are companies in the cyber security space like Crowdstrike, Palo Alto Networks and Zscaler. Then there are companies like ServiceNow which help enterprises to automate their workflow and incorporate AI into their businesses.

So here we have the beginnings of an AI-focussed, innovation intensive group of businesses to form the heart of a 21st century investment portfolio.

Share Recommendations

Apple AAPL Buy @ $184.50

Microsoft. MSFT. Buy @ $366.50

Alphabet. GOOGL. Buy @ $131.50

Amazon. AMZN. Buy @ $141.50

Nvidia. NVDA. Buy @ $487.50

Meta Platforms. META. Buy @ $329.50

Tesla. TSLA. Buy @ $217.50

Cadence Design Systems. CDNS. Buy @ $261

Synopsys. SNPS. Buy @ $517

Crowdstrike. CRWD. Buy @ $199

Palo Alto Networks. PANW. Buy @ $255.50

Zscaler. ZS. Buy @ $176

ServiceNow. NOW. Buy @ $633.50

I shall be creating this AI and innovation focussed portfolio as a subset of the main benchmarks portfolio and will monitor it and add to it in future alerts.

One ETF to Rule Them All

I am also going to include one ETF, my favourite QQQ3. My guess is that QQQ3, after a stunning rise, between 2012 and 2021 (up 90 times!) is now building a consolidation from which it will eventually break to new highs to launch a major new advance. QQQ3 is stuffed with exciting innovation led companies and is rapidly becoming a dramatically leveraged AI-focussed ETF. What could be more exciting?

Wisdomtree Nasdaq 100 3x daily leveraged QQQ3. Buy @ $121

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