Website update: Check out the beta version of our forum for discussion with other members. We’ve got some great discussion going on there on Snap, MongoDB and more. our forum for discussion with other members. We’ve got some great discussion going on there on Snap, MongoDB and more.
Last week, Google had a strong earnings report with 19% growth from $32.6 billion in Q2 2018 to $38.9 billion in Q2 2019. Net income also rose from $12.6 billion to $16.6 billion compared to the year-ago quarter. The leading drivers, according to the earnings call, were mobile search and YouTube, followed by desktop search. Google Cloud Platform has an annual run rate of $8 billion.
As of now, the thesis published in “Google: 2019 Analysis” has not changed. From an industry perspective, Google is between the rock of privacy and the hard place of anti-trust. For Google to have uninterrupted returns, the ad environment will have to remain tilted in its favor. The headlines around these issues are causing fatigue – not to mention complacency (that is warranted) as Google continues to remain a strong stock in the face of these risks.
My next update on these companies will come in early October after I spend a week with advertising professionals at AdvertisingWeek in NYC – one of the biggest ad industry events of the year with a lot of industry intel. I’ll get the scoop on Apple’s ITP 2.2 and update you on anything else I come across.
Apple Earnings:
At risk of being overly contrarian, I am also not excited about Apple as a long-term buy and hold in 2019 and 2020. Mobile saturation is a risk, and secondly, the trade war could potentially compound the cycle of hardware saturation. I don’t see the United States officially lifting a Huawei ban and I wrote about this both before and after the G20 Summit.
On a separate note, watch your Huawei suppliers carefully (QCOM, AVGO, SWKS, XLNX, etc).
Smartphone Saturation:
The smartphone market contracted in 2017 to 1.462 billion units and in 2018 to 1.42 billion units, and is expected to return to minimal yet positive growth percentages at a CAGR of 2.5%. While 1.5 billion smartphones per year is substantial, the law of saturation is likely to drive prices down, with Android owning 85% of the market today, and we see decreasing iPhone penetration in China where lower-priced competitors gain market share.
IDC estimated Apple will sell 242 million smartphones by 2022 up from 221 million in 2018. The issue with these estimates is that IDC does not break down the percentage of potential decline between 2018 to 2022. The most up to date number available from IDC is an anticipated decline of 0.8% in worldwide smartphone sales in 2019, published on March 6th.
We saw China decline 10% last year in global shipments of smartphones. Taiwanese company, TSMC, is the sole supplier of iPhone core processor chips and told Nikkei Asian Review that the company is cautious about demand for high-end smart phones, which is a nod toward Apple from a main supplier. Samsung Electronic’s Vice President Lee Myung-jin told investors in late January that “demand for memory chips has declined in the fourth quarter as external circumstances worsened and customers adjusted their orders” and he believes the decline “will continue in the first quarter, as key customers keep adjusting their orders.” This was before Samsung’s operating profit fell off a 60% cliff.
Conclusions: I do not believe Apple’s operating profit will fall off a cliff like Samsung but I wouldn’t be surprised if we see the stock trading sub-190 this year. With that said, the cash pile and buybacks keep a lot of investors in the stock.
Status: Hold with potential of downside risk over next two quarters.
Facebook reported its first decline between Q4 and Q2 in its history of being a public company. The headlines did not catch that but it seems some investors did as the stock is down about 2.5%, as of time of writing. I was quoted in MarketWatch for calling Facebook an all-or-nothing stock – great financials in the middle of regulatory risk. My opinion is there is lower hanging fruit.
Nobody can predict earnings with 100% clarity, however, Facebook’s decent earnings report followed by a decline in stock price helps our case with the Google thesis. Despite what Google reports today, we believe the browser changes that Apple is implementing will cause revenue erosion into the second half of the year and early 2020. The technicals are also weak on Google.
Regarding Facebook’s technicals, as FB makes new highs, the RSI is making lower highs, which is the type of negative divergence we see just before a correction. While the RSI is still in a bullish trading range, if it breaks 50 and begins to trade below 50, it will indicate a bearish change in sentiment accompanied by lower price action in the stock.
Fundamentally, Facebook is harder to shake from Apple’s browser changes because the majority of its revenue comes from mobile native applications (as opposed to the mobile web). This is an important distinction. For instance, you do not access Google search through an app on your phone – you access Google through a browser. This is why I’m more focused on Google with the browser changes although both show weak technicals.
The scenarios from the PDF provided are below for your convenience.
Scenarios:
• If you are long on Google, put a disciplined trailing stop on the stock and re-enter when the technicals and fundamentals agree on a more bullish outlook.
• If you want to trade conservatively, wait for Google to miss on revenue a second time between Q2-Q4 2019 and enter a short position or long-dated put. Especially watch for the effects of Apple’s ITP 2.2 as if/when effects are reported in Q2 or Q3, they will worsen over the course of the year.
• Higher risk scenario would be to purchase OOM puts that end in March of 2020 prior to earnings.
• Any short positions should be closed if Google makes all new highs around the 1300 mark. Shorting stock is all about timing and discipline. We will update as we go along if support or resistance is broken.
The fundamental analysis and technical analysis provided prior to earnings played out nicely this week. Snap crushed on DAU (daily active users), as our data had indicated the company would. For ad companies, DAU plays into higher revenue. The bigger story for Snap this year has not officially launched – Audience Network.
We will keep you updated if anything changes fundamentally.
Technical Update:
Provided by TA contributor, Knox Ridley:
Snap broke out yesterday. As you can see in the chart above, Snap was following a steady trend channel (in blue), bouncing between this channel until today.
Our previous TA noted that Snap’s support was $14 and resistance was $17. Snap retraced, closed just above $14 on Friday/Monday and then sky rocketed above $17 the day following earnings. It not only closed above $17 but did so with high volume.
This is always a bullish sign. We will likely see it retest the upper trend channel (outlined in the lite blue dotted line, trending up), before testing the $20 resistance level above (in yellow). As long as Snap stays within this upward trend (outlined by the lower blue line), Snap should continue it’s upward movement.
Regarding the internals of Snap – notice the top yellow circle. This is highlighting the current price breaking through the upper Bollinger Band, while the lower Bollinger Band moves down. This is a very bullish indicator, which is supportive of higher prices.
Further supporting the internal strength, the RSI closed above the descending trend line, showing some new found buying pressure. As long as Snap holds the 55-50 region on the RSI, we should continue upward. However, keep in mind that broad market forces can raise and sink all ships, regardless of fundamentals. If the $14 support region is broken due to a weakening broader market, we could see the price fall into the green box on the chart ($12.50-$9.50).
Per Beth’s analysis, fundamentals are strong. The should be seen as a long term hold that will benefit from Audience Network in the second half of the year. If you’re in, mind your stops if the broader market moves downward. If you have yet to make a position, follow Snap’s retrace to the upper trend channel previously mentioned. That would be a good time to enter.
SNAP Forum:
Please check out our forum and post there if you traded Snap or have questions on Snap for community discussion. One user posted some great information on the number of funds moving into the stock over the past two quarters. Here’s the post:
Institutions have been moving into SNAP over the last 2 quarters:
Date # funds:
Sep 2018, 177 funds
Dec 2018, 168 funds
Mar 2019, 198 funds
Jun 2019, 321 funds
MongoDB outperformed the tech sector a few times over the past 12 months, most notably during Q4, when MongoDB managed to trade between $65 and $80. The stock recouped losses by early December, when MongoDB reached new highs at $90 per share. By March, MongoDB had gained more than 50% off its new highs to $152 in March.
MongoDB’s Atlas has proven to defy gravity even in the face of AWS launching a competing product called Amazon DocumentDB in January. This sent shares of MongoDB down 15 percent, with a few larger investors exiting based on the news, but the company quickly shrugged it off.
The first quarter results reported a 78% year-over-year increase in total revenue with a 82% increase in subscription revenue. Notably, the company reported first-quarter net losses of $33.2 million, or 61 cents a share, compared with losses of $26.6 million, or 53 cents per share, in the year-ago period. Adjusted losses were 22 cents a share.
AWS Pitches MongoDB Atlas at OSCON
Amazon’s DocumentDB advertises MongoDB compatibility in its headline throughout the AWS website while MongoDB’s Atlas website focuses on the differences between the two products. AWS wants to be seen as a friend, but MongoDB thinks they are more of a foe.
Amazon’s NoSQL JSON document database is not based on the MongoDB server, however, and there are key differences which AWS’s product is unlikely to compensate for.
Here are a few:
AWS walks a razor edge between capturing the NoSQL database revenue segment or disrupting the customer base, who now have many options in cloud, including Microsoft and Google Cloud – both motivated to compete with AWS from any angle. Trying to disrupt MongoDB’s Atlas could have the opposite effect on AWS as developers are notoriously tribal.
Not surprisingly, last quarter, MongoDB announced a new business partnership with Google Cloud Platform with MongoDB’s Atlas integrated into the GCP console. MongoDB also announced new product features, including Atlas Data Lake, Atlas Full-Text Search and increased availability of MongoDB Charts. These upgrades will be hard for larger, more diversified tech companies (like AWS) to keep up with.
Needless to say, I was on the edge of my seat at OSCON when Amazon presented a keynote and pitched MongoDB Atlas to the crowd. At OSCON, Amazon stated that “AWS effectively endorses MongoDB Atlas as the segment winner” and that MongoDB Atlas is an “AWS reinvent 2019 top level sponsor.” Amazon also stated that Atlas growth has continued on the platform after the AWS DocumentDB release.
Takeaway:
The financial markets guessed wrong about AWS’s ability to compete with MongoDB. We see very little evidence that AWS’s DocumentDB has been a success with Amazon changing its tone at a recent software developer conference. One area that I have written extensively about is developer mindshare, as software developers are not easy to convince. You can access my analysis on Nvidia and developer mindshare here – the time to learn a new AI and ML platform is one reason I remained long on Nvidia during the crypto sell-off.
“Imitation is the sincerest form of flattery, so it’s not surprising that Amazon would try to capitalize on the popularity and momentum of MongoDB. However, developers are savvy enough to distinguish between the real thing and a poor imitation,” Dev Ittycheria, MongoDB’s CEO
In addition, IDC updated its forecast and expects the worldwide database software market to grow from $64 billion in 2019 to $98 billion in 2023. MongoDB’s Atlas is positioned to capitalize on this growth, especially as a flexible option for running applications on-premise, in a private cloud, or a private cloud, without being locked into any one cloud vendor.
After gaining 200% in the past two quarters, is MongoDB still a buy? Premium research members receive updated recommendations and entry/exit scenarios on tech stocks. Learn more here.Learn more here.
The O’Reilly Open Source Convention (OSCON) is an annual convention for the discussion of free and open source software. Open source has seen tremendous support over the last decade after going through a dark winter of software commercialization in the 80s and 90s. A historical turning point was when Netscape released the Netscape Communicator internet suite as free software in 1998 and the source code was used to spur Mozilla Firefox, Thunderbird, SeaMonkey and KompoZer.
Background on Open Source:
Proponents of Free and Open Source (FOSS) during the 90s included heavy weight Microsoft, Oracle and IBM. For instance, a Microsoft executive stated in 2001 that “open source is an intellectual property destroyer. I can’t imagine something that could be worse than this for the software business and intellectual-property business.” Fast forward nearly two decades, and Microsoft has reversed direction, and is pining for the open source community to accept the company as a contributor and supporter of open source.
Tim O’Reilly of O’Reilly Media, and the founder of OSCON, was at the strategy session in April of 1998 when the term open source was coined. Open source software today has won the war with most software development containing open source code and many previously opposed corporations changing their stance to support FOSS. According to the Open Source Initiative, the movement has caused a $60 billion loss for proprietary software, which correlates to $60 billion in customer savings per year.
This year’s conference reflected the relative calm confidence around open source development with most keynotes used for marketing purposes to win over the attendees on using their services rather than anything news breaking. Google, Amazon, Microsoft and IBM were among those bidding for the crowd in the keynotes.
Blockchain Technology Decline: False Signal?
Interesting enough, O’Reilly’s insights showed blockchain technology losing interest from software developers in the keynote on developer audience insights. The term fell 18 points in their rank points to number 26 on search terms. Kubernetes, the open source container framework, was effectively number 1.
According to Brian Behlendorf of Hyperledger, blockchain technology is not likely to create the next Amazon or Google as it’s more of a cooperative consortium. In his session, “2019: Year of professionalization for open source blockchain,” he pointed out that 45% of companies stated they would join with their competitor on blockchain technology development.
With that said, 80% of companies have not put blockchain technology into production and the market is very early. Many mistakenly think blockchain technology is synonymous with crypto, however, some of the most compelling use cases today include traceability with the food supply chain, judicial consortium chain, routing and settling insurance claims, and digital identity within businesses and government agencies. These uses are currently being explored by companies, such as Wal-mart with FoodTrust, LegalX Chain, the Intelligent Health Care Network and the OrgBook.
Here are a few more companies putting blockchain technology into use:
NASA for secure flight data
Honeywell for used aircraft parts market
Chinese Central Bank’s has processed $4.36 billion on blockchain trade platform
Malta is using smart contracts to initiate and register rent remittance
Visa is planning to join a growing list of blockchain-based international payment providers
Behlendorf also pointed out that the United States is more averse to centralized technologies overall. Intermediaries in finance, such as SWIFT, are more comfortable for people in the United States compared to other countries around the world. Therefore, the trends presented by O’Reilly may not be reflective of blockchain’s use globally.
In addition, venture funding in blockchain technology has reportedly tumbled 60% in 2019 from $1.6 billion, down from $4.1 billion in venture funding in 2018, according to CB Insights. Taking a closer look, CB Insights reported an increase in early stage funding from 80% of equity deals in 2017 to 88% of equity deals in 2019, with funding nearly non-existent at Series D and E.
There are a few conclusions you can draw from this information:
Blockchain technology is incipient and not able to stand up to the premature pressure that initial coin offerings placed on the technology. With ICOs now fizzling, there is more wariness around blockchain than what is deserved (and scaring off VCs)
Blockchain technology is less of a venture-funded effort and more of a development effort, like a programming language or an internet protocol, with not much ROI to offer investors
Blockchain technology will be developed in-house at companies rather than requiring a startup ecosystem (similar to a new programming language)
Crypto is consolidating and other industries will need to be the impetus for blockchain’s commercialization
In the early 2000s, Python was a neglected programming language. Today, Python is the most widely used programming language, with the majority of the growth in the last five years. I think we are very early on blockchain and its potential should not be dismissed.
Conclusion:
Blockchain databases are revolutionary and will disrupt the way many industries record and share data (beyond the financial industry). The recent withdraw of blockchain development interest is very common for new technologies. You can think of disruptive technology products like an ocean wave that comes in stronger with each attempt. Crypto pushed blockchain too hard, too soon. The market saw dollar signs rather than carefully architecting sustainable blockchain applications. We will be keeping an eye on companies for cheap, early investments in this area.
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Financial analysts and journalists continue to question why Google missed in Q1 2019. Without properly identifying the cause of the revenue miss, which was the slowest sales growth since Q4 2015, it is nearly impossible to predict how Google will perform in the future. Google executives offered very little on the earnings call.
“Alphabet Inc.’s growth is slowing, and analysts don’t have a clue as to why because executives aren’t talking … After releasing disappointing first-quarter results in late April, executives were vague, if not outright unresponsive, about slowing growth.” -Marketwatch, July 19th, 2019
Deciphering exactly why Google missed is impossible to prove, although we believe the quiet contention between Apple and Google on browser ad-tracking may have played a role. The Safari browser captures 58% of overall mobile traffic in the United States with Chrome capturing 33.3%. In the UK, 45% of users use Safari and Mozilla. Therefore, Google’s revenue is susceptible to Apple’s Intelligent Tracking Prevention (ITP), with tighter restrictions going into effect throughout 2019.
There is also evidence of weakening fundamentals that extend beyond any one change to the way ads are targeted and monetized. We lay out these details below.
SECTION 1: PRODUCT OVERVIEW
1A. Apple’s Intelligent Tracking Prevention (ITP 2.1 and ITP 2.2)
Launched in 2017, Apple’s Intelligent Tracking Prevention (ITP) places a limit on how long cookies are available for third-party contexts. ITP restricts cross-site tracking for targeted advertising purposes by removing cookies after 24 hours. Login cookies are available for up to 30 days, however, login cookies do little for targeting purposes as they do not track a user’s activity. After 30 days, the login cookie is purged.
When Apple first introduced ITP in 2017, it did not have an effect on Google as users of Google’s search service and other properties visit these sites daily. ITP 2.0 was aimed towards third-party trackers, such as Criteo and Doubleclick. Some critics state ITP strengthened Google as one of few remaining options to target niche audiences at scale.
Apple continued to battle data collection on the Safari browser in 2018 by shutting down finger printing, a method of triangulating who a user is through fonts, screen dimensions and plugins.
We’ve seen statistics from publishers where they get half the CPM value as a result of ITP’s impact. If they can’t have good targeting, some of their sites become less worthwhile for their advertisers.” – Google, CES 2019
In March of 2019, Apple announced ITP 2.1, which prevents third-party cookies from being stored as first-party cookies. This update also puts a limit on how long first-party cookies can be stored of up to 7 days. To put this in perspective, a Google Analytics cookie, in theory, would last for up to two years. Safari can now delete it within 7 days.
The final hammer was dropped in May of 2019, when Apple announced ITP 2.2. This update is intended to limit any workarounds by limiting all tracking to 24 hours. This includes Google and Facebook. The result will be weakened attribution, which in turn, lowers CPMs due to weakened ad targeting.
Here’s a description from Digiday that puts into context how ITP 2.2. works:
“ITP 2.2 cuts the first-party cookie’s lifespan from seven days to one day. As a result, the first-party cookies that Facebook and Google have introduced in order to continue measuring site traffic and attributing ads will be deleted after 24 hours. As a result, if a person clicks on an ad for a product on Friday and decides to take the weekend to think about buying, then the cookie wouldn’t be around on Monday to register when the person returns directly to the site to buy the product.” -DigiDay, May 2019
ITP 2.2 will have more of an effect on Google and Facebook than the previous ITP releases. This release will prevent Facebook’s pixel and Google’s tag from using unique identifiers to store information. These tracking mechanisms allow Facebook and Google to track a person’s visits long after they have clicked on an initial link, as the first-party cookie had not expired due to their strong first-party relationships (most people use Google and Facebook every 7 days).
As DigiDay states, Google and Facebook are the companies most affected by ITP 2.2.
1B. GOOGLE’S CHROME BROWSER
The privacy changes implemented to the Safari browser and Mozilla’s Firefox puts Google between a rock and a hard place on the privacy terms and conditions for the Chrome browser. Either Google proactively follows Apple and Mozilla, or Google risks Chrome’s reputation.
On April 9th, 2019, an insider leak in Adweek stated Google is “contemplating a number of changes to its consumer and advertiser-facing tools.” The translation is that Google may follow ITP 2.0 by disallowing thirdparty ad tracking software across browsing sessions. The market penalized Criteo with a 30% stock pullback, TradeDesk with a 15% pullback, and Alphabet’s stock was penalized with a 5% pullback.
“According to sources, certain Google teams want to placate the growing zeitgeist around the protection of consumers’ data privacy, which has grown ever louder since the Cambridge Analytica scandal last year. These internal discussions also follow the implementation of third-party tracking restrictions on Apple’s web browser, Safari, and similar moves from Mozilla’s Firefox and Brave’s offering in recent months. Although the various businesses within Google advocate similar measures, the breadth of the company’s interests (i.e., the dominance of its Chrome browser and ad-tech stack) make its decision-making process more complex.” -Adweek article Google Mulls Third-Party Ad-Targeting Restrictions:
And as part of that, we will have more changes through the course of this year, be it Chrome — Chrome is super committed to making sure it's best-in-class in privacy and security, and we always put user experience first and follow through. -Q1 2019 earnings call
Privacy restrictions have not been implemented for Chrome, however, we are watching this closely.
PRODUCT OVERVIEW CONCLUSION:
Google’s revenue is susceptible to stricter browser ad-tracking policies. Due to some iterations occurring in Q1, this may have affected the decrease in revenue that was reported. Regardless, Apple’s ITP 2.2 is specifically aimed at Google and Facebook.
We know that ITP 2.0 affected third-party ad companies by reducing CPMs by nearly 50%. If targeting is weakened through ITP 2.2, we will see a decline in click-through rates (CTRs) and CPMs as the people seeing the ads are not as likely to engage with the ad due to a lack of tracking/targeting. There is evidence that ITP 2.0 and ITP 2.1 may have already affected CPMs and CTRs (see below).
If this is the cause of the minor revenue miss, the situation should surface by Q3 – and most certainly by Q4.
Recommended Reading: Fallout from Apple’s ITP is Severe
SECTION 2: FUNDAMENTALS
2A. Q1 EARNINGS
Google is transitioning into a slower-growth company across most metrics. Earnings per share are expected to grow 4% to $45.46 although analysts are calling for a rebound of 18% EPS to $53.65 per share in 2020[1].
Google on April 29 reported earnings that topped expectations, excluding a $1.7 billion European Union fine. However, revenue fell short of estimates. Google’s advertising revenue rose 18% to $30.7 billion, missing estimates of $31.5 billion. This caused Google’s stock to sell off, falling below 1,236.54.
Analysts have a consensus of $11.49 EPS for the upcoming quarter (source: NASDAQ). Notably, Google beat on earnings but missed on revenue in the last quarter.
· Google’s 2019 revenue is expected to grow 17.3% to $160.5 billion from 23% sales growth in 2018.
· Revenue is projected to slow to 16.7% to $187.3 billion in 2020.
· Operating margin fell 21% in the December 2018 quarter, down from 26.5% in the first quarter of 2017.
· Capital spending rose to 18% of revenue in December 2018 quarter, up from 10% two years earlier.
Notably, EBIT, EBITDA and FCF were all stronger than expected, but the concerns around slowing growth in the Websites revenue segment is likely to affect stock price in the near-term.
"As expected, Google ad revenue growth has been slowing amid downward pressure on ad prices, especially for revenue coming from international markets," -Monica Peart, senior forecasting director at eMarketer.
“We appreciate quarterly results can be volatile and acknowledge the company’s long-term focus, but the magnitude of the deceleration on a constant-currency basis marked the largest sequential move down since 3Q12,” -Deutsche Bank’s Lloyd Walmsley.
“Overall, we expect GOOGL shares to be under pressure in the near-term given sub-20% revenue growth & downward earnings revisions. As noted above, the exact drivers of GOOGL’s slowing topline are unclear, & we believe frustration around GOOGL’s lack of transparency will only increase.” – JP Morgan
SECTION 2.2: Key Metrics
Aside from regulatory pressure, Google is already seeing some weakness in its core business with ad click volume rising but cost-per-click (CPC) growth trending downward. According to Marin Software and Merkle, CPC has slowed over the past five quarters.
Source: Marin Software
According to last quarter’s earnings, paid clicks on Google properties grew 39 percent, down from 66 percent in Q4 2018. The cost of the clicks also declined by 19 percent.
FUNDAMENTAL ANALYSIS CONCLUSION:
From an analyst’s perspective, it is very difficult to say a debt free company with $110 billion in cash that is growing at a rate of around 17% is at high risk over the next 2-3 earnings seasons. There are plenty of ways the product issues noted above could be alleviated. Placing ads in Google Maps could make up for lost revenue from browser changes, with one estimate valuing ads in Google Maps at $9 billion by 2023.
However, we feel that the changes to Apple’s Safari browser and Mozilla’s Firefox will have an effect on both Google and Facebook. Combined with weak technicals, I am placing a Hold on these two stocks with the anticipation they may enter a Sell recommendation over the next two quarters.
PART TWO: TECHNICAL ANALYSIS
Time Frame Comparison
Currently, Google’s price action is in a weakened state that warrants caution for longs. Some have likened Google’s current price movements to 2011, which a case could be made. I believe its price is eerily similar to late 2014, which is highlighted in the yellow circle in the chart.
That yellow circle shows where we are today vs. where we were in late 2014. What you’ll notice is that in both time frames, we completed a double top pattern on decreasing volume (where the yellow circle highlights the completion of that pattern). The initiation move down then took us below the 50 Day Moving Average.
Also, you’ll notice the similarity of the internals, as outlined in the RSI. Google, on higher volume, was in a strong uptrend in 2014, which can be seen in the elevated RSI levels in green. Then, as volume began to decrease, the RSI suddenly drops below 50 and starts to make lower highs, unable to break back above 60. In fact, at the double top peak in 2014, you’ll notice the RSI dropped below 50 and began the bearish internal pattern in red.
There is similarity between 2014 and today. We have the same double top confirmation with light volume, and very similar RSI changes from bullish in green to bearish in red.
Today, we have broken the 50 line on RSI, attempted to retest it, and broke below it again.
Further evidence of weakness in Google is found in the pink arrows. You’ll notice as the price of Google increased, the RSI was making lower highs, which is negative divergence – and usually indicates weakness in buying pressure and signals a drop in the near future.
And finally, the blue dotted line indicates long term support, which started at the beginning of this cycle uptrend in March of 2009. This is very strong support, which did not break in 2015 or 2016. Today, we are comfortably below this support, which, once again, is not a good sign for the near term.
Elliot Wave Analysis
According to Elliot Wave Theory, the 5 waves up/3 waves down framework is fractal. So, this is happening on multi-decade super cycles to minute moves in the market. In interpreting where we are, the 5-wave impulsive move up started in March 2009 and has completed its Wave 3 (July of 2018), and we are currently in the 4th Wave retrace.
Google, being a major part of the broad market, mimics the same movements. Thus, Google is currently in the middle of an A-B-C, Wave 4 retrace, which began in Late 2018 and appears to end in late 2019/early 2020. I believe we have completed the B wave and are now beginning the C wave down, which has the potential to take us sub $1,000, and in a worst case scenario, as low as the mid $700 region.
Based on my primary count using Elliot Wave as well as the internal structure of Google, I believe a retrace is likely. What would invalidate this count, which would force me to reassess a new count, would be if Google makes new highs – around $1300. An update will be provided if this occurs.
Scenarios:
• If you are long on Google, put a disciplined trailing stop on the stock and re-enter when the technicals and fundamentals agree on a more bullish outlook.
• If you want to trade conservatively, wait for Google to miss on revenue a second time between Q2-Q4 2019 and enter a short position or long-dated put. Especially watch for the effects of Apple’s ITP 2.2 as if/when effects are reported in Q2 or Q3, they will worsen over the course of the year.
• Higher risk scenario would be to purchase OOM puts that ends in March of 2020 prior to earnings.
• Any short positions should be closed if Google makes all new highs around the 1300 mark. Shorting stock is all about timing and discipline. We will update as we go along if support or resistance is broken.
There was a new web analytics report from SimilarWeb released last week that showed an increase of traffic to Snap’s advertising URL, up 23% YoY, compared to Facebook’s URL, up 4%. The comparison is provided to illustrate a common growth metric for ad URL traffic on social ads with the understanding FB receives much higher traffic volume.
This is positive news. The report also confirmed that the popular filters maintained an increase in daily active user growth, up from 10 million to 11.6 million (peaking around 13 million with the new filters). One concern was if the filters had created an artificial new high, which does not look to be the case.
Due to the increase in app usage from this past quarter, illustrated in the PDF, the probability that Snap will beat earnings is the more likely scenario. If for some reason Snap does not beat earnings, I will still have a buy rating on the stock due to Audience Network. This will be a major breaking out point for the company’s revenue (Audience Network in testing as of April).
In the article released 7/19, Audience Network is what Goldman is referring to as “Our checks with advertisers also lead us to believe that the company’s continued innovation in its ad-stack, particularly in self-serve, should allow SNAP to substantially improve monetization of user time spent on the platform over time.”
Technical Update:
Snap is currently trading at the $14 support level, and is holding as of today. Per our technical analysis, if Snap closes below $14, we could see it trade within the green box on the original chart ($12.50 – $9.50 range), before taking us up beyond the $20 range. Listen to your stops, and understand that Snap’s growth story regarding Audience Network is a matter of when, not if. The increase in app usage should also translate to an increase in quarterly revenue.
Keep in mind, there is high volatility in this stock. With the price retreating down to support levels as we head into earnings, there is likely to be a strong reaction tomorrow after- hours. Snap has jumped as much as 22% after a strong earnings report and dropped as much as 14%.
Regarding stops, we purposefully suggested wider stops to keep you from exiting prematurely, but also to get you out with a minor loss in case a correction occurs. We may be early to Audience Network compared to the broader market, but that’s by design.
Institutional adoption of bitcoin and economic uncertainty are two phases previously discussed in this series that evaluates if bitcoin will make a good investment. Finding the right entry price is critical for a buy and hold strategy as there is unusual volatility in this asset. Trading bitcoin may be successful for some; however, this series predicts that holding bitcoin until the technology matures is the better option – all of which is dependent on the right entry price for this volatile, yet high-potential asset
Bitcoin is not trading at support levels and there will likely be a better entry later this year. Also, this is a mix of tech analysis and my opinions; not financial advice
The third phase that will contribute to bitcoin’s potential as an investment will be the adoption of crypto wallets and crypto payment transactions. Today, bitcoin is a speculative play. The tipping point will occur when bitcoin is used for transactions. Psychologically, bitcoin will have a permanent place in society when this occurs, and the value of bitcoin will reflect this due to the limited supply of the coin.
Bitcoin and Free Markets
Bitcoin’s ultimate opportunity will be reached when the coin provides seamless and low-cost digital transactions. Opponents to bitcoin believe central banks and governments will create obstacles that cryptocurrency cannot overcome. However, the free market is already moving towards capitalizing on bitcoin as many corporations do not want to miss out on this opportunity.
As discussed, Starbucks is partnering with Bakkt, and this will create a payment gateway for the security-backed exchange. Keep in mind, Starbucks’ payment app has more users than Google Pay or Apple Pay
Several more online retailers are currently accepting bitcoin payments, such as:
Wikipedia accepts donations in bitcoin
Expedia accepts bitcoin through Coinbase
KFC accepts bitcoin through BitPay
Overstock accepts bitcoin through Coinbase
Subway branches (where available) accepts bitcoin as a payment
Virgin Mobile and Virgin Airlines accepts bitcoin for space travel
CheapAir accepts bitcoin through Coinbase
Purse.io allows you to shop on Amazon and pay with bitcoin
Hotels.com will reward you with micro-amounts of bitcoin for booking through the site
Notably, AT&T became the first major U.S. mobile carrier to let customers pay in bitcoin through a third-party service provider.
There are important distinctions between bitcoin and digital transactions. Knowing the difference between AliPay, Venmo, Apple Pay, Facebook’s Libra, JP Morgan’s JPM Coin – and why bitcoin is not like any of these options is critical to understand. This has been covered in the previous articles in this series, Part 1: Institutions, and Part 2: Economic Uncertainty. Here is a side-by-side comparison that summarizes key differences:
Paying for daily goods with a mobile wallet, tied to crypto, will become effortless in the years to come. One of the leading startups right now is Flexa’s SPEDN, which is linked to fifteen retailers, such as Whole Foods, Barnes and Noble, Nordstrom, Petco, Ulta Beauty, Lowe’s and Bed, Bath and Beyond.
The app integrates existing point-of-sale with blockchain technologies and simplifies the payment settlement process for the merchant while allowing Ether, Bitcoin, Bitcoin Cash and the Gemini dollar payments. As Gemini’s CEO Tyler Winklevoss stated, “This technology shifts cryptocurrency from investment and speculation toward real usability.”
There will be many startups offering to bridge the gap between crypto’s current lack of flexibility and the broader world of crypto users who want to pay with an alternative form of currency. The barrier to entry is relatively low, requiring a team of software developers, compared to 5G or autonomous vehicles, which require entirely new infrastructure or complex robotic systems.
Thus, the number of startups in this space is likely to swell. Whatever friction exists for crypto payments, technically speaking, will be solved in short order over the next few years.
As stated, larger corporations and the free market are driving the supply forward. To interrupt this process, via the Federal Reserve, the IRS, or control from other central banks, will require direct action against free markets – and, essentially, capitalism. In addition, stopping the advancement of technology around blockchain will severely hinder a free market economy as blockchain transactions reduce intermediary fees, that in turn, lowers debt and improves savings for the financial system and all of its participants.
Blockchain and cryptocurrencies also assist banking with a much more secure, decentralized system. Too many critics misunderstand how development around Bitcoin, Ethereum and blockchain protocols improves the fiat system by removing unnecessary costs. The token, bitcoin, may compete with fiat currencies, but development around the token is essential right now for an economy to run on blockchain in the future (even if the bitcoin blockchain is not the one adopted).
The countries that do adopt blockchain, and some form of cryptocurrency, will be superior technologically speaking, and the United States is very unlikely to halt this progress by attacking Bitcoin – a token and a protocol that is laying the groundwork for economic efficiency.
The more likely response from the federal government will be a centralized, regulated token that competes with bitcoin (while allowing bitcoin to run its course). There is room for both, and to repeat this point, development around bitcoin will cut the path for any centralized tokens. The Federal government cannot hinder development around bitcoin while expecting to have a federal cryptocurrency in the future; this would be counterproductive.
Despite the likelihood of a centralized domestic token, my prediction is that bitcoin’s value will persist due to its global potential, as covered in my previous articles in this series.
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Scenarios for when to enter the asset and build a buy and hold strategy.
Why I timed my analysis to Q2/Q3 2019 (and not 2018 or 2020) – from a fundamental standpoint.
The one alt-coin that I am watching closely and has potential for a 1000% return along with recommendations timed for the next (and perhaps final) pullback for this alt-coin.
My style of analysis is not about calling earnings. I have a much longer buy-and-hold strategy, and sometimes, missed earnings is a buying opportunity if the stock has good long term potential. Please keep that in mind!
With that said, I doubt we will see a slowdown in earnings from the major cloud providers. The broader market may drag down tech as a sector, however, cloud is a more secular trend.
I spoke with the CTO of Kubernetes at IBM yesterday at OSCON, the Open Source Conference in Portland. He stated cloud has a long runway with about 80% of companies still running on-premise.
Microsoft is unique because they attacked this problem from a new angle; the hybrid cloud. This allows companies to keep sensitive information on-premise and less sensitive information off-premise. This is a winning strategy because it will allow AI applications and scalability without compromising security and IP.
Again, this is not an earnings call, but Microsoft is a company that has runway despite already hitting the $1 trillion mark. If there is a missed earnings, or the broader market drags tech stocks down, this will be welcomed news for entering the stock.
If you already own MSFT at an attractive price, you should have a solid investment into the foreseeable future
If you’re looking to enter MSFT, wait for a missed earnings (from too high of expectations from analysts) or for a broader sector sell-off
We will provide more fundamental analysis and technical analysis when something new occurs
Snap has seen remarkable volatility in its stock price this year, down 80 percent from its peak in March of 2017 at $29 to a low of $5 in December of 2018. The stock is currently trading in the $15 range, at time of writing.
Previously, in August of 2018, I had a sell recommendation on Snap. I am changing this to a buy
recommendation due to a few key reasons. For one, Snap should report higher than usual user growth, which has become known to the market. Secondly, Snap is extending its monetization methods and this is not widely known to the market. The increase in user growth should be reported in Q2 and the new monetization method should take effect by Q3.
Background:
Snapchat is one of the best platforms for Millennials and Gen Z audiences. The company reaches between 75% to 90% of people aged 13 to 35. The issue that Snapchat has faced is flat to declining daily active users (DAU) and monthly active users (MAU). Overall, the company does not report enough growth to command a social network multiple.
Revenue growth and profit margins have been problematic for Snap. The most recent quarter showed an improved gross profit margin of about 36%, however, in the quarters following the IPO, Snap reported negative gross profit.
The company switched to selling ads programmatically through software algorithms instead of through salespeople – this led to lower ad prices and resulted in lower revenue. Snap also had a redesign that halted Snapchat’s user growth.
2A. App Sessions Skyrocketing
Snapchat’s new gender-swapping filter has been extremely popular and this should show up in the earnings results for Q2 2019. Downloads and sessions have surged causing Snapchat to rank #4 overall in China’s App Store, its highest rank there in more than four years.
According to app intelligence provider, Adam Blacker of Apptopia, Snapchat had its most downloads ever dating back to January 1st, 2015 at 2 million compared to the average daily downloads of 665,000. As Apptopia has noted, retention will need to be proven, with retention likely higher for Snapchat Games than Snapchat filters.
Regardless of retention, the surge in user activity will be a welcome relief for investors.
Predictably, this app activity placed Snapchat as the number one downloaded app in the United States for the first time since March of 2017. We will be monitoring this intelligence closely to see if Snapchat places in the top spot for June of 2019, as this would indicate further additional strength in the stock’s key metrics for the upcoming quarter.
3A. Average Revenue Per User
Snap’s average revenue per user (ARPU) is on an upward trend. This helped cause the stock rally we saw in the past few quarters.
4A. Audience Network
Less widely known to the market is Snap’s plans to monetize its Millennial data across other mobile applications. Snap will no longer be confined to monetizing the 190 million users on the platform, and instead, will use the data to broker ads across various mobile applications. This will have a parabolic effect on the company’s average revenue per user (ARPU).
Audience Network is a software development kit (SDK) that allows advertisers to use Snapchat data to reach audiences outside of Snap on the applications that install the software. The flat daily active users (DAU) growth on Snap will become less important as Snap will effectively broker ads to a scalable audience outside of the native Snap application. Full-screen, vertical video ads will appear across third-party mobile applications.
Snap has data on a lucrative demographic that few companies have ownership of, as both Facebook and Twitter are out of favor with this age group. Snap’s Audience Network will open up the ability to reach the Millennial and Gen Z audience segments across a much larger total addressable market.
The product was announced on April 4th, however, the company will now need to sign up application developers and advertisers before the revenue shows up in quarterly results. The formal launch will occur later this year.
Conclusion: Buy recommendation on Snap with price target of $17-$23
Catalyst: Audience Network should not be underestimated. Facebook launched an Audience Network in 2014 when the average revenue per user (ARPU) hovered around $12 in the United States. Audience Network was the turning point for Facebook’s ARPU reaching the $26 we see today in the United States region. The market is preparing for renewed user growth from Snap in the current quarter, however, Audience Network is what will cause the stock to climb and is still relatively unknown to the broader market.
SECTION 2: SNAP – Technical Analysis
Technical Analysis provided by Knox Ridley
Background:
Snap is out of favor with a tarnished sentiment – and for good reason based on a string of bad earnings and questionable management decisions in 2018. As mentioned in the fundamental analysis, the stock was down 80 percent from its peak in March of 2017 at $29 to a low of $5 in December of 2018.
However, Snap currently is in a quiet and strong uptrend. We do not think the market will ignore Snap for long, and we believe their next earnings report could be a turning point. Regardless of the upcoming earnings, we want to enter Snap before Audience Network goes live and becomes public knowledge.
The technicals of Snap are strong, as it just confirmed an inverse Head and Shoulders pattern by breaking the $14.47 neckline, then re-testing that support, and trending upward from there. Holding for 6-18 months will be important to let Audience Network take effect, while keeping a close eye on privacy laws. Because of this time frame, we can get a clear picture of Snap’s price pattern on the daily chart – below.
2B: Technical Overview
Using the RSI to measure Snap’s internal strength, Snap is clearly in a bullish position (holding above 65). However, you’ll notice that the buying pressure is starting to falter. This is evident in how the RSI is making lower highs while the price of Snap is making higher highs. This is Negative Divergence, with a sign of weakening buying pressure, and could signal a short term draw down. As long as Snap does not break below 60 on the RSI, it will remain in a strong bullish position.
Regarding the price pattern of Snap, we can a see a classic Inverse Head and Shoulder pattern, outlined in blue, that was recently confirmed once Snap broke above the neckline around $14.47. This is a bullish pattern that has played out. As long as Snap can hold the $14 support, the stock has the potential to trend higher to the $20-$23 range.
If the RSI breaks 50 and then moves below 43, which has recently been a strong ceiling for Snap once it enters a sustained downtrend, we will be looking to our stops to exit our position, or add more depending on the price action. However, in a market environment like the one we have, where we see a divergence between the upwards price of the broad market and the decelerating data in the economy, using stops is highly suggested. This will allow you to lower risk while investing in the remaining upside of this bull market.
2C: Elliot Wave Analysis
With limited price data due to Snap’s IPO in 2017, we’ll use this data as a rough guide to Snap’s general direction. It appears as though we are finishing an impulsive 5 waves up in a Wave (1) of (5). This is very bullish for the intermediate to long term for Snap, while being bearish in the short term. The question remains: how far will the Wave (2) retrace take us? As long as the broad market cooperates, and based on the current strength of Snap’s price action this year, a large retrace is not anticipated. The green box indicates the most likely target if Snap cannot break the $17 range. Above $17, and the Wave (2) retrace will be moved significantly up, making our current entry much safer.
Conclusion:
The line in the sand will be $14. Below $14, and we will likely see the green box come into play. On other hand, above $17 and our next level of pullback will likely be around the $20-$23 range, before taking us higher. Keep in mind that Snap is a volatile stock, so we will set a wide stop to give it room to breathe; however, we do not want to get caught up in a major market downturn, so our stop will allow us to play the upside, while avoid any severe losses. We recommend a 25-35% trailing stop.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
