Below is a review of tech stock news for the week ending August 30th:
1. The Trade Desk (TTD) President and CEO Sells $74.4 Million Worth of Shares
The Trade Desk (TTD) President and CEO Jeffrey Terry Green recently sold 288,000 TTD shares at $258.27 per share for a total of $74.4 million. The sale was done on August 23.
For context, The Trade Desk has a total market cap of around $11.28 billion, with each share traded at around $250.86. TTD specializes in providing self-service, online advertising solutions for businesses that want to manage their own advertising campaigns using their own in-house staff.
It’s also worth mentioning that the 288,000 shares sold last week was the third batch in the month of August. Earlier this month, Green sold 10,000 shares of TTD for an average price of $267.93 back in August 1st and another 294,000 shares of TTD stocks for $259.44 back in August 13.
Aside from Green, TTD’s CFO Paul Ross, Chief Technology Officer David Randall Pickles, Chief Legal Officer Vivian Yang and various other company directors and officers also sold substantial amounts of TTD shares all throughout August and late July.
2. Modest Expectations for Apple’s Upcoming iPhone 11
Over the past few months, various news sources ranging from Bloomberg analysts to Twitter leakers have offered several hints on Apple’s new iPhone 11. According to these sources, the latest iteration of iPhone will be similar to its predecessor.
Speculation about the iPhone 11 hints that it mainly offers incremental upgrades, such as a more advanced camera, faster chips and the latest operating systems. Analysts also believe that the new product will most likely cost around $1,000.
However, the new phone will be facing tough competition once it’s released into the market. Samsung, Google and other major phone manufacturers have delivered high quality products which feature the latest in mobile phone technology, and most of them are cheaper than iPhones.
Additionally, many analysts also believe that demand for the iPhone 11 will be affected by geopolitical concerns. Given the ongoing US-China trade war and other similar trade issues in other parts of the world, there are expectations that the iPhone will face rocky challenges in Asian markets.
3. Baidu Partners With Chongqing Municipal Government to Explore AI Services
Chinese internet company Baidu recently partnered with the municipal government of Chongqing in China to test several AI technologies, most notably self-driving cars, smart government services, smart city services as well as blockchain solutions.
By partnering with the Chongqing’s municipal government, Baidu aims to develop China’s automated vehicle and smart mobility industry. The deal is also part of the company’s strategy to accelerate China’s automotive industry, and at the same time, enhance Chongqing’s urban traffic management services.
One of the key features of Baidu’s plans is the use of the Apollo autonomous driving platform. The company plans to deploy this platform at Chongqing and Yongchuan to test the use of robo-taxis and other automated vehicle services.
Furthermore, Baidu is also planning to use AI technology to facilitate valet parking, smart court systems and centralized meteorology services. There are also plans to use blockchain technology to facilitate healthcare services and explore other potential applications.
AI and machine learning technologies developed in recent years in response to data analysis and online research. However, these technologies have yet to be fully applied to the consumer convenience market. By working with Chongqing’s municipal government, Baidu hopes to be a pioneer in the latest iteration of AI technology.
4. Tesla to Raise Prices in China
Tesla is planning to raise prices in China. The price hike was originally planned for September, but was pushed back to the tail end of August due to the escalating Chinese-American trade war as well as the declining value of the yuan.
Tesla had planned the price hike back in December as a contingency against Chinese threats to re-impose tariffs on US-brand cars and auto parts. The PRC had discontinued the tariffs back in April but with the trade war escalating, Tesla and other US auto makers may have no choice but to adapt accordingly.
However, Tesla’s problems are not quite the same as those of other US car makers. China remains the largest market for electric cars, and the company is under tremendous pressure to adapt to the escalating tariff situation. To make matters worse, Tesla has no local production facilities in the PRC, which means that its products are directly impacted by any and all tariff increases.
Finally, there is the problem with Chinese yuan, which tumbled to an eleven year low against the dollar earlier this week. A weaker yuan could hamper domestic consumption in China, which in turn could harm Tesla’s sales in the country.
On the other hand, it’s also worth mentioning that Tesla is building a plant in China, a move that is intended to reduce the effects of the tariff war. However, it will be quite some time before it will have an impact on Tesla’s latest problems.
5. Okta Earnings
Okta’s earnings and revenue report beat second quarter estimates however, the October quarter bottom line guidance also missed Wall Street expectations. The reports caused Okta shares to tumble after extended trading, losing 5 cents per share, though it was significantly smaller than the 11 cent loss projected by analysts.
According to reports, Okta’s revenue increased by 49% to reach $140. 5 million during the second quarter. However, the projected estimate for the current quarter puts Okta at a loss of 12 to 13 cents on revenue of around $143.5 million.
Okta is fundamentally weaker than many analysts believe, making its booming stock priced to perfection.
The company was early out of the gate for cloud-subscription IPOs in 2017, and the valuation has reaped the benefits of Wall Street’s enthusiasm for subscription models. However, a reasonable price to initiate Okta as a buy-and-hold investment is now in the rearview mirror, rendering it a momentum play. That will be important for investors when they review its earnings report for the three months through July after the stock market closes Wednesday.
Okta’s stock dropped 10% on weakening guidance for both revenue and earnings per share (EPS) in the March earnings report. The stock quickly recovered, as there was little adjustment given for lower EPS guidance.
Investors put that out of their mind, as the stock recovered with renewed momentum within a few days and has not looked back. Last quarter, Okta raised its guidance to expected losses of $0.45 to $0.49 per share, although this “improvement” is relative, as the original expectations of the full-year loss was at $0.22 per share prior to the March earnings report.
Valuation has been an ongoing worry with Okta, as the company has the highest forward price-to-sales in its category, at 27, with a current price-to-sales of 34. Compare this to Workday at 12 forward price-to-sales, Veeva Systems (which is profitable) at 22, and Twilio at 15.
There is ample evidence that, although Okta is priced to perfection, it does not need to report perfection to continue its momentum. This is one red flag for a buy-and-hold strategy at current prices, but a positive sign for momentum trading. Eventually, the market will want perfection for the price it’s paying when macro conditions warrant more discernment.
For instance, many analysts are touting the stock for positive free cash flow (FCF), although this is from operating cash efficiencies. Okta does not have positive free cash flow from positive net income, which is something financial analysts are writing out of the script entirely.
Free cash flow becomes more indicative of financial health when net income is positive; to separate the two underweights profitability, which is a mistake for buy-and-hold investors (or analysts) when evaluating the stock. Free cash flow positive is much more celebratory when net income is positive.
In fact, Okta suffered a record net loss in the fiscal first quarter that ended in April. Okta’s loss widened nearly 200% year-over-year, to $51.9 million. This led to diluted EPS of negative 46 cents, compared with negative 25 cents in the year-earlier quarter.
Lastly, Okta is no longer a debt-free company and is carrying $275 million in convertible senior notes.
Wall Street is laser-focused on Okta’s top line, and is a little blind-sided to the bottom line as free cash flow and subscription growth were the only touted highlights from last quarter’s earnings report.
Okta posted 53% year-over-year growth in subscription services to $108.5 million, while professional services revenue grew 15% to $7 million. Total calculated billings hit $158.9 million, with trailing 12-month subscriptions jumping 55% to $488.2 million.
The increase in net losses from the most recent quarter was under-reported due to subscriptions driving revenue growth of 50% year-over-year.
In the upcoming earnings report, the bar for revenue is set to less than 40%, which is an easy hurdle for a subscription cloud company that has been posting 50%-plus revenue growth for many consecutive quarters.
In Okta’s case, there are two areas I am watching more closely, as spending is substantial and executive decisions are slightly unusual.
The first is sales and marketing expenses, which are nearly two-thirds of revenue. At Workday, sales and marketing comprise 30% of revenue, Twilio is at about a third and Zoom Video Communications is at about half.
This signifies Okta needs to spend a lot to scale and maintain its footing. Selling, general and administrative (S&GA) expenses were nearly 85%, or $107 million, of $125 million in total revenue in the most recent quarter. Notably, Okta’s S&GA and research and development (R&D) exceed revenue at 114%.
The second clue is a few recent acquisitions that will hurt Okta’s financials. For instance, Okta’s $52.5 million purchase of early-stage startup Azuqua will dent operating expenses. (Early-stage startups tend to have thin margins, although exact numbers from Azuqua weren’t provided.)
There is also a recently announced $50 million venture fund. Creating venture funds is typically a positive, as companies including Twilio and Workday also have created venture funds to help incubate firms that use its product and services. However, in Okta’s case, it’s funding startups to help innovate the core product, which is concerning because Okta is not even profitable yet and is already looking for help to iterate the core product, rather than incubate to increase demand in the market.
Looking deeper, I believe Okta is throwing a lot of weight into product because the mega-cap cloud server companies are in the identity and access management (IAM) market. Okta has to provide a compelling reason to use an add-on service to Microsoft Azure, Google Cloud, Amazon’s AWS and IBM Cloud rather than use the in-house identity and access management service.
See: Beth Kindig runs a premium service that includes a forum on tech stocks where she answers questions from readers. See: Beth Kindig runs a premium service that includes a forum on tech stocks where she answers questions from readers.
Okta does have a competitive advantage due to its superior product, which is confirmed by third-party analysts Gartner and Forrester. The one issue to consider for the long term is that larger rivals are going to protect their turf. Cloud infrastructure is a revenue segment that will determine the world’s most valuable company over the next few years, and Okta has an incredible feat ahead to remain more agile and to iterate faster than opponents that have bottomless amounts of cash. On that note, Okta could make a great acquisition for one of those companies, though any prospective suitor would have to overpay.
Okta is unlikely to miss estimates on revenue as the subscription model helps protect growth, yet other line items may continue to miss or weaken. Okta has no choice but to spend heavily on its market position — either through S&GA, R&D or acquisitions — to fend off larger cloud competitors that are a one-stop shop for identity and access management, and are currently engaged in a battle for cloud infrastructure.
Overall, Okta became a fundamentally weaker company in the past two quarters, yet the stock price does not reflect this, which is why it makes a better momentum play than a buy-and-hold. Previous earnings reports prove that although priced to perfection, the company does not need to report perfection in order for the stock to claw at a higher price-to-sales ratio.
SUMMARY: Workday began to pivot from software-as-a-service (SaaS) to a platform-as-a-service model in 2018. The company is becoming a leader in machine learning and AI in the HCM market, and a PaaS model will assist platform-level ML capabilities. This also helps to leverage the Adaptive Insights acquisition by combining the insights from business planning across the other segments, such as financial management, HCM and analytics.
Market Research Future estimates the global human capital management software market will reach $24 billion by 2023 at a CAGR of 9 percent during the 2017-2023 forecast period. Workday not only is the leader in Gartner’s magic quadrant from a product standpoint, but had led the category in year-over-year growth of between 30-40%.
It is reasonable to believe Workday will control the majority of the $24 billion market if the company executes globally.
As with many cloud stocks on the market today, Workday has solid revenue growth yet is not profitable on a GAAP basis. Workday carries debt on its balance sheet of $1.22 billion. Net losses last quarter were $116 million.
In the previous quarter, Workday’s revenues grew 33% to $825 million, which beat forecasts of $814 million. Subscription services grew 34% to $701 million, exceeding expectations of $692-$694 million.
In the upcoming quarter, Workday expects to earn subscription revenue of $746 million to $748 million and services revenue of $124 million. Zack’s consensus states Workday is expected to report revenues of $872 million, up 29.9% from the year-ago quarter. This is in line with the company’s guidance on the last earnings call.
Unlike other cloud stocks, Workday is profitable on a non-GAAP basis. The company is expected to post quarterly earnings of $0.35 per share for a year-over-year change of 4 cents. Notably, expectations are lower than last quarter’s reported adjusted EPS of $0.43 per share.
Cash Flow is negative due to a streak of acquisitions, such as Adaptive Insights for $1.5 billion last year. In total, Workday has acquired 13 companies; many small startups which hurts its operating efficiency and overhead.
Last quarter, Workday raised its full-year outlook for subscription revenue a hair from $3.03 to $3.045 billion to $3.045 to $3.06 billion. The company states there is a subscription revenue backlog of $6.80 billion, up 30% yearover-year.
SECTION 2: Product Overview
Workday offers tools for enterprises to manage human resources, payroll, and finances. The company is a software-as-a-service company with over 85% of revenue coming from cloud subscriptions.
The company serves the human capital management (HCM) and financial management ERP markets with applications that expand its cloud-based system to include analytics and business planning. HCM allows an organization to staff, pay, organize and develop its workforce. Financial management ERP provides core finance functions, such as general ledger, accounting, accounts payable and cash management.
According to the fiscal Q2 2019 earnings call, more than 35 percent of the Fortune 500 and 50 percent of the Fortune 50 companies use Workday HCM for core HR. The product was placed as a leader in the Gartner Magic Quadrant for Cloud HCM Suites for midmarket and large enterprises in August 2018, with no update released since.
Workday’s cloud financial management solutions have less traction with 8 companies in the Fortune 500 and 530 customers overall.
The acquisition for Adaptive Insights, which is a provider of business planning and financial modeling tools, will help to strengthen Workday’s presence in Enterprise Resource Planning (ERP). At time of acquisition, Adaptive Insights also had 3400+ customers compared to Workday’s 450+ customers due to Adaptive Insights strength in the small-to-medium business (SMB) base.
Workday began to pivot from software-as-a-service (SaaS) to a platform-as-a-service model around 2018. The company is becoming a leader in machine learning and AI in the HCM market, and a PaaS model will assist platform-level ML capabilities. This also helps to leverage the Adaptive Insights acquisition by combining the insights from business planning across the other segments, such as financial management, HCM and analytics.
Machine learning and graph analysis applications were launched in April with Skills Cloud, which discerns team and candidate skills to offer hiring recommendations, team building and training. The newly launched Discovery board will uses ML, graph and pattern-detecting, and natural-language processing (NLP) generation to provide unified reporting.
Looking into the future, Workday’s ML capabilities may be able to reduce employee headcount. Although Workday prefers to not advertise the fact their product enhanced by machine learning can replace jobs, this is an understood benefit of Workday’s product that is presented at conferences.
SECTION 3: TAM and Competitors
Market Research Future estimates the global human capital management software market will reach $24 billion by 2023 at a CAGR of 9 percent during the 2017-2023 forecast period. Workday not only is the leader in Gartner’s magic quadrant from a product standpoint, but had led the category in year-over-year growth of between 3040%. Ceridian and Ultimate Software have posted the next highest growth levels. Ultimate Software is also in Gartner’s leader quadrant, yet was founded in 1990 and has been usurped by Workday. It is reasonable to believe Workday will control the majority of the $24 billion market if the company executes globally.
In my opinion, Workday’s competitors are a strength as Workday is without an attractive alternative. Both Oracle and SAP tend to be overpriced and clunky, which means they require too much software for the desired task.
In Oracle’s case, the company is distracted with data management, and sales and marketing. HCM and financial ERP are not Oracle’s core revenue segment, and this helps Workday standout as Workday invests more into newgen applications. Notably, Workday was spun out of a “hostile takeover” by Oracle of the company PeopleSoft in 2005 for $10.3 billion. After the acquisition, over half of PeopleSoft’s workforce was laid off, totaling 6,000 people. The former CEO of PeopleSoft and chief strategist went on to found Workday approximately two months later. Today, Oracle’s PeopleSoft is known for having security issues with several cases reported between 2010-2016 including social security numbers.
SAP has a similar lack of focus, and is also not entirely cloud based, which makes SAP unlikely to innovate faster than Workday on machine learning. Workday has captured more customers in the United States, as well, where the majority of its customers reside. Notably, SAP will be harder to compete against in its native geo, Europe.
On that note, Workday continues to see global expansion as one of its growth levers, with total revenue outside the U.S. up 41 percent to $184 million, representing 23 percent of total revenue.
See Conclusion Below Section 4 See Conclusion Below Section 4
SECTION 4: Technical Analysis:
By Knox Ridley
4.1 Moving Averages:
Workday is currently trading below its 50-Day Simple Moving Average, and just above the 200-Day Simple Moving Average. The 50-day is a generally accepted measure of determining the uptrend’s primary support, to where the 200-Day is considered the last stand for the uptrend. Workday is trading well below its 50-Day and has been riding the 200-Day.
Simple Moving Averages can seem arbitrary in their time frames, and in a way, they are. The 50-day and 200-day do not really align with any significant accumulation of time other than they are round numbers and are commonly accepted as indicators by the investing community. Because of their popularity, they are powerful tools that any chartist must factor into their analysis.
However, to get a better idea of who is in control of the price for a deeper insight other than popular moving averages, I prefer to use Anchored Volume Weighted Moving Averages (AVWAP). These averages factor in volume to the price, and we can anchor the average to any time we want.
I anchored, in green, the AVWAP, to the November lows in 2018, just as this renewed uptrend began. You can see that it sits just below the 200-Day.
This is a more accurate portrayal of who is in control of this trend. If this average is breached, and the price trades below, then Workday’s pressure will trend down and a larger retrace could be in its future. However, for now, the price is respecting this average, indicating that the uptrend is still intact.
4.2 Retrace Target:
In short, if Workday breaks this average, as well as breaks the current support range it is trading in, we can expect a deeper pullback. My first target is around the $172.5 support. This coincides with closing the gap, and will likely remain at this support for some time.
Below this level, and I will target the 38.2% retrace, which also coincides with the 168% extension. This range has also been a strong price cluster for the Workday’s price action, so it will be a likely target for any deeper retrace, which is around the $142-$140 region.
4.3 Internals:
The RSI was indicating negative divergence leading up to the sell off at all-time highs. This is evident with the red and green arrows going in opposite directions. The RSI has broken through the 40 line, and is attempting to climb back, while price stays flat.
The RSI is now turning back down before even hitting the 50 line. The momentum has faded from Wday, and the RSI is in a selling range. However, looking back at its 3-year trading history, you’ll notice that it’s hit the bearish zone numerous times, and each time it was a short stay.
Until Workday meets resistance multiple times at the 50 line and punctures the 30 line with force, it’s very possible that it could regain its momentum and continue in an uptrend.
Conclusion:
Quite a few stocks are showing weak price action, and are pointing to continued weakness, likely due to broader market issues, such as the inverted yield curve, trade war, etc. – rather than due to factors in the individual stock.
Workday is fundamentally strong with low competition and good prospects for future growth from machine learning, as indicated in the fundamental analysis. Ideal buy-and-hold from technical analysis is in the $142-$140 region. If the earnings report is weaker than expected, I’d see that as a buying opportunity – especially if the price breaks the $172 support and we get a deeper correction.
Short-term, Workday can make a good trade with call options at or near $190 and/or a small position with 10% trailing stop. Less than a month ago, Workday was at $212 and was at $195 less than a week ago. A strong earnings report could renew these prices. I personally like the end of September $190 call options. Per the paragraph below, any calls may need some time as this week has been a little choppy for cloud stocks.
This week, we are seeing mixed reactions to cloud earnings. Veeva Systems beat earnings Tuesday, received analyst upgrades, yet the stock price has dropped a few percentage points today. Anaplan also beat earnings, yet stock price dropped a few percentage points today. Okta, as well, is down after-hours despite an earnings beat. Therefore, there’s a chance, even with an earnings beat, that Workday’s price doesn’t withstand the broader market.
Splunk Inc’s (NASDAQ: SPLK) shares are currently trading at $118.46 which represents flat gains over the past 12-months basis compared to the broader market returning flat gains over the same time frame. Second-quarter earnings were reported on Wednesday and the question of weakening cash flow is taking center stage.
Splunk Overview
Splunk is a hybrid cloud computing company that harnesses the power of artificial intelligence to offer data analytics solutions to a variety of organizations. The company is one of the leaders in the big data analysis and security space, which according to Statista is expected to grow from roughly $42 billion in 2018 to $103 billion by 2027 representing a CAGR of 9.4 percent.
The company derives the majority of its revenue from licensing its platform which gives users the ability to investigate, monitor, analyze and act on machine data regardless of format or source. “Machine data is produced by nearly every software application and electronic device across an organization and contains a real-time record of various activities, such as transactions, customer and user behavior, and security threats,” Splunk notes in its annual report.
Splunk offers customers two options; either Splunk Enterprise whose license fee is based on the estimated daily data indexing capacity required and Splunk Cloud which offers the core capabilities of Splunk Enterprise as a scalable cloud service.
Splunk’s Q2 Highlights
Ultimately, the most important aspect that potential shareholders were looking for was whether Splunk would be able to improve its cash flow going forward. Back in May when the company released its first-quarter earnings report, the share price tumbled by at least 17 percent driven by concerns about the company’s weakening cash flow.
History seemed to repeat itself again on Wednesday when shares fell over 10 percent after it reported earnings. Apparently, the market chose to ignore the fact that Splunk had another one of its best quarters in recent years and that it had made significant progress towards shifting its business model from perpetual software licenses to recurrent cloud-based revenue.
As a matter of fact, Splunk reported better than expected numbers in the quarter, and also reaffirmed guidance for the rest of the year. According to the earnings release, the new business model is already paying off with revenue for the second quarter posting a 33 percent increase to $517 million compared to the year ago quarter. Software revenues, which combines licensing and cloud, were up $350 million or 46 percent year-over-year.
Moreover, the company added more than 500 new Enterprise customers including Verizon Media Group and ABB Group, in addition to recording 93 orders greater than $1 million. In spite of this, the company still posted an operating loss of $100.9 million, though adjusted earnings came in at $0.30 per share which beat Wall Street’s expectations of $0.12 on revenue of $488.4 million.
Overall, gross margin for the quarter was 84 percent up 2 points on a year-over-year basis with cloud delivering over 50 percent gross margin.
In Q2, 95 percent of software revenue was either term or cloud and management expects the elimination of perpetual license sales will accelerate the renewable mix to 99 percent in Q4 and high 90s for the full year.
As previously highlighted in Q1, the accelerated shift to renewable has a timing impact on cash collections. In other words, Splunk’s transition from perpetual licenses to more predictable, cloud-based subscription model is happening much faster than the company initially anticipated and this has caused the timing of Splunk’s cash flow to take a hit over the short term.
Newly appointed CFO Jason Child had this to say about the cash flow situation:
“As expected, Q2 operating cash flow was negative, given the more rapid growth of multi-year term and cloud contracts. This translates to a greater cash flow drag this year, as more of our contracts are paid ratably. We are now expecting negative operating cash flow for the balance of the current year and expect fiscal 2020 with $300 million net negative operating cash flow.”
This is in stark contrast to the Q1 cash flow guidance of positive $250 million which understandably spooked investors triggering a mild sell off.
According to Child, there were two new drivers behind this expected reduction. First, the renewable transformation is already essentially complete with the mix at 95 percent in Q2 and expected to go to 99 percent by Q4. Second, the company is significantly reducing its upfront cash invoicing for term and cloud deals from 58 percent paid upfront in the first half of FY 2020 to an estimated 33 percent paid upfront in the second half of FY 2020.
William Blair analyst David Griffin further explains that “because the entire value of perpetual contracts is invoiced and collected in cash up front, the lower contribution creates a significant headwind to cash flow.” The company is also billing customers for fewer months in advance, which again reduces cash received up front.
Apart from transitioning away from perpetual licenses, Splunk has made some strategic purchases in the recent past to boost its artificial intelligence position, including SignalSense in 2017 and VictorOps last year. On the call, Splunk revealed that it would be making another acquisition – cloud-monitoring service SignalFX for $1.05 billion in a cash-and-stock deal which is expected to strengthen the company’s application monitoring service.
The combination of Splunk and SignalFx will give application developers and IT departments a unified data platform that allows them to monitor and absorb data in real-time, no matter the infrastructure or scale, in order to cut costs, boost revenue and improve the customer experience. “I am excited by our strong quarter, tremendous cloud growth and our agreement to acquire SignalFx,” Splunk CEO Doug Merritt said during the earnings call. “I am particularly pleased with how quickly we are accelerating our business transformation to cloud, and the impact cloud is having on our customers.”
Splunk’s Valuation
A quick look at Splunk’s revenue multiples shows that it is trading well below its three-year historical price to sales ratio. Furthermore, on a relative valuation basis, Splunk doesn’t appear to be as expensive as other companies in a similar space. The chart below shows the price to sales ratios for Splunk versus Adobe (NASDAQ: ADBE), Talend (NASDAQ: TLND), Salesforce (NASDAQ: CRM), Workday (NASDAQ: WDAY).
(Source: YCharts)
With the company expecting total revenues of approximately $2.25 billion in 2020, this would imply a forward price to sales of roughly 7x which would make it a bargain compared to other companies in the same sector.
Conclusion
Splunk has delivered revenue figures above analysts’ forecasts in the past 12 consecutive quarters. The main takeaway is that the transition of the business model is just about completed and any near-term weakness should be watched closely for a potential buying opportunity. Acquisitions, like Salesforce and Tableau, and Google and Looker, are shaking up the space and this may have also affected buying pressure.
Disclosure: Disclosure: Subscribers to my premium service may have positions in the securities mentioned in this article or may take positions at any time. Splunk is not currently on my list of top tech stocks although this may change in the future.
Okta, like most Cloud stocks, has been on an epic run since going public. However, Okta’s price action is showing signs of slowing down. With 5 waves up from the beginning of this long-term uptrend, which started in late 2017, Okta’s final 5thwave in green had its own extended 5thwave, noted in magenta. When a stock completes it’s larger degree 5thwave structure, like we see in green, I tend to get cautious.
Okta has taken out its 8-day, 21-day, and 50-day Moving Averages. As long as the 200-day is not breached, Okta can rebound and continue this uptrend, which would reset my primary count above, and see Okta extend further before taking a breather.
Let’s start with the price trend line in blue, which started off the December lows in 2018.
You’ll notice a clear uptrend that the price action respected, even in the June correction of this year. Note that at the peak of this uptrend, just above the maroon arrow, Okta’s price broke through this trendline with force. Also, if you look at the RSI leading up to this moment, you’ll see it making lower lows while the price action is making higher highs, which is signaling weakness, and a coming pullback. This is a very typical pattern we see just before a pullback.
Furthermore, my 2 favorite momentum indicators, the MACD and RSI, both showed the same uptrend within these indicators. At the exact same moment, highlighted with the maroon arrows as well, you’ll notice that they too broke their uptrend.
This outside day pattern is a rather notable pattern where a single day of trading engulfs the prior day’s high and low. What makes this pattern strong is that it engulfed not only the day prior, but nearly 2 weeks of trading days before it. It also dramatically closed below the prior days and it did so on heavy volume. You’ll see that what followed was the beginning of a trend change. When I see a moment where multiple trendlines are broke, as well as an outside day reversal pattern, I take note of a possible reversal in sentiment – the extent to which is yet to be seen.
However, it’s worth noting that the buying pressure is still strong with Okta. Until the RSI breaks the 40 line, and the $118 support is broken, Okta could continue higher.
Relative Strength Index
Looking at the RSI, we see the buying pressure that is still evident in Okta. In the first chart, which shows a longer time frame, you’ll notice a similar RSI trend that was broken. When a momentum trend breaks, it typically signals a correction is imminent; however, the extent to which is always in question.
Keep in mind that the 40 line is a crucial support for a bullish continuation; notice how this line played out in each trend break, which is noted by the first line of maroon arrows, which occurred in June of 2018. The RSI trend broke, as price began to retrace. However, the RSI held the 40 line, and began a new uptrend, which was a rather shallow pull back.
The next RSI trend break occurred in October of 2018, also noted by a line of maroon arrows. This time, the RSI collapsed beyond the 40 line into bearish momentum territory. What followed was roughly a 40% pullback.
Where we are today, is more similar to the first example of the RSI trendline breaking, so far. The RSI broke its trend line, but has held support at the 40 line. The price action today is in a holding pattern, which can be noted in the RSI holding a tight pattern between the 60 and 40 line.
More information is needed from earnings to determine if we get a continuation of the bull trend, or a further retrace.
Where we are:
As stated, Okta’s price action is slowing. It has broken numerous trend lines, both in price and momentum, and signaled a possible sentiment change with the Outside Day Reversal Pattern shown. However, it has yet to follow through both on price and momentum, showing that the buyers are still very excited about this stock. The earnings report will likely be the catalyst for the direction of this stock as well as the trading plan you might want to follow.
It should be noted, with a Price to Sales hovering around 34, coupled with no earnings, Okta is priced to perfection. If Okta’s price breaks the $118 support, we will likely see a deeper correction that can take us to the green box highlighted in the chart, which I have as likely targets around key retracements, highlighted in black.
On the other hand, if Okta’s price breaks to all new highs, around $142, we can see an extension of the uptrend. If you decide to play the continuation of this momentum, it will be crucial that you put tight stops in place – $142, but no lower than $118.
1. Amazon Calls on India to Reduce Ecommerce Restrictions
Amazon executive Amit Agarwal recently told Reuters that India needs to reduce red tape and encourage ecommerce if it is to overcome sluggish domestic growth. “There is so much opportunity to just let ecommerce thrive versus trying to define every single guard rail under which it should operate,” Agarwal said.
Agarwal’s comment was directed at India’s latest ecommerce laws which limits Amazon and Walmart’s ability to operate in the country. Pushing back on these new legislations, he emphasized Amazon’s role in helping small and medium enterprises in the country by enhancing their export capabilities. According to reports, Amazon has allowed India’s businesses to earn more than $1 billion in exports, with another $5 billion expected in the next three years if certain barriers are eliminated.
“The number of basic paper cut opportunities out there are so many,” Agarwal said. “I feel we’re getting lost in the high level debate around ecommerce and data localization.”
Despite these concerns, Amazon is actively expanding its presence in the subcontinent. Not only has the company launched a new campus in India, Amazon founder Jeff Bezos also promises to invest $5 billion into India. Furthermore, Indian demand for the Amazon Prime loyalty program also doubled in the last 18 months, and the country remains one of the fastest growing markets for Prime Membership in the world.
2. Splunk Expands Cloud Capabilities With $1 Billion Acquisition Of SignalFx
Splunk made news this Wednesday when it announced that it had acquired cloud monitoring SignalFx for $1.05 billion. This new acquisition will not only allow SignalFx to expand its cloud capabilities, it will also allow Splunk to expand its presence in the application performance monitoring market.
SignalFx offers real time cloud monitoring services for data anomalies, and it seems to be doing well. It managed to generate $25 million in revenue last year, and raise $179 million at a recent valuation of $500 million. It also managed to secure venture capital support from well-known firms like CRV and Andressen Horowitz.
Aside from its SignalFX deal, Splunk’s stock also rose to $141.25 shortly after it released its latest quarterly earnings and revenue report. According to the official data, the company’s revenues rose by $517 million, which represents a 33% year over year increase. This news, combined with the Signal Fx acquisition, helped to drive up sentiment for Splunk shares throughout most of the week.
3. NVIDIA Jumps by 7% After RTX Ray-Tracing Technology Announcement
NVIDIA shares recently jumped by 7% after announcing that their RTX Ray-Tracing technology will be used for the PC version of Minecraft, the most widely sold video game in the world. NVIDIA shares closed at $170.78 this Monday, bringing the stock’s year to date 2019 return to 28%.
NVIDIA’s RTX Ray-Tracing technology promises to allow Minecraft fans to experience more realistic lightings, shadows and colors on the PC platform. Additionally, this new technology is also expected to increase exposure for NVIDIA’s latest graphic processing unit (GPU) technology, which happens to be the only GPU with real time ray tracing capabilities.
NVIDIA originally introduced RTX technology back in 2018, a huge achievement at that time. Today, NVIDIA’s leaders believe that by introducing RTX technology into Minecraft’s PC platform, it will be able to expose PC gamers to what the technology has to offer.
“Minecraft will expose ray tracing to millions of gamers of all ages and backgrounds that may not play more hardcore video games,” GeForce head of Marketing Matt Wuebbling said.
Aside from its Ray-Tracing announcement, NVIDIA’s stock also benefited from last week’s second quarter earnings report. Although adjusted earnings per share fell by 36% year over year to $1.24, they were still higher than expectations.
Finally, NVIDIA also benefitted from the overall strength in tech sector, which rallied due to investor expectations that the US-China trade war may be cooling or at least stabilizing.
4. The Trade Desk Brings in New Talent to Speed Up China Strategy
The Trade Desk’s (TTD) recent appointment of Calvin Chan as their general manager for their China operations marked another key step in their growth strategy. The news comes at the heels of The Trade Desk’s announcement back in in spring that it will allow customers to purchase ads in the country.
Prior to joining The Trade Desk, Chan originally worked for AdMaster, a major data and digital company in China. He also briefly worked at Nielsen, which specializes in data, information and management. TTD Senior vice president of North Asia, Troy Yang said that, “Calvin’s appointment will help accelerate our growth with major Chinese partners and advertisers.”
Although TTD’s presence in China is relatively small, it is aggressive expanding under the assumption that it can tap into the country’s growing middle class. Chan was chosen because of his experiences and connections in China, and also because of his deep understanding of TTD’s long term strategy for the country.
The Trade Desk’s China strategy aims for a ‘long term approach,’ comparable to the one used to create a platform for the connected-TV market. Not only will the company need to adapt to serve China’s growing middle class, it will also need to cultivate deeper connections with the Chinese tech industry.
Lyft’s shares took a big jump this Tuesday, climbing 3% in early trading. Investors have always been bullish on Lyft’s future prospects, but there was another reason why the stock jumped the way it did earlier this week: cheaper Lyft Options.
Many were betting that Lyft shares would soon bottom out, which in turn forced many investors to rethink their strategies, particularly with regards to the $50 support level. This all happened in conjunction with the lockup expiration, which failed to cause many major selloffs among shareholders.
According to Seymour Asset Management’s Tim Seymour, people who bought Lyft shares this week did so because they believe in its long term value. “If you’re buying this company today … I don’t think you’re buying it for a trade. I think you are truly going to be an investor,” Seymour said.
Additionally, there was also Lyft’s August 7 earnings report, which beat most expectations, further reinforcing the sentiment that ride-shares and Lyft’s business model as a whole have bright futures.
Roku recently announced the creation of a “Kids and Family” section for its ad-supported channel this Monday. The announcement came at the heels of last week’s news which saw Roku shares reaching a new record high of 142.10 on August 13 based on strong second quarter data.
According to official reports, the new child streaming service will not only offer quality, child-friendly shows and content, it will also allow parents to control what their children can watch. Furthermore, there are also premium subscription offerings for children’s entertainment as well as other future services.
The new Kid’s and Family service promises to offer around 7000 free, ad-supported shows and movies from several Roku partners, including Lionsgate, Mattel, Hasbro, Pocket Watch and more. Lego has also willingly signed on as the first advertising sponsor for the new Roku service.
7. Salesforce Beats Revenue Forecasts; Shares Rise by 7%
Salesforce shares climbed by around 7% on Thursday after the software company announced that its quarterly revenue had beaten expectations. The company’s shares briefly touched $149 per share before closing at $148.24.
According to official data, Salesforce’s quarter revenue rose to around $4 billion this quarter, higher than the $3.95 billion estimate from earlier projections. A significant portion of the revenue was generated by the company’s largest product, Sales Cloud which grew by 13% while the second largest, Service Cloud grew by 22%. Due to the positive data, Salesforce is raising its revenue forecast for 2019 from $16.2 billion to between $16.7 billion and $16.9 billion.
However, even before the company released its latest report, Salesforce had already expected to beat its revenue target for the current fiscal year by several billions dollars. A major portion of this growth came from Tableau and Mulesoft, which were acquired for $15.3 billion and $6.5 billion respectively. The company plans to continue its rapid expansion all throughout the year.
SalesForce is a company that I’ve been watching closely but I don’t think it’s ready for a position yet. If they pivot, the company could become interesting again. I think hybrid is where the real market share is right now. I wrote about this in MarketWatch.
On the hybrid cloud note, I think Microsoft has a lot of runway. I wrote about MSFT before their earnings on Research Services but want to reiterate the strength of this company’s strategy right now.
I realize not everyone that subscribes to Research Services is interested in cryptocurrency. I did publish last week on the one alt-coin I recommend. Tomorrow I am publishing a PDF report on Bitcoin. That will be the last full-length research report on crypto for some time. Even if you are not a crypto investor, I encourage you to read them as I believe we are in a critical time period for Bitcoin and Chainlink. Quite a few technical analysts are calling for a Bitcoin pullback, but nobody truly knows with this volatile asset. You should have an insurance position in both and be prepared to add to the position during pullbacks over the next year for Bitcoin and next three years for Chainlink.
Over the next two weeks, I will be bringing you my best cloud stock analysis as we buckle up for an exciting period in the earnings season. We have Slack, Okta, Zoom and Workday reporting between now and the first week of September. I’ll be keeping an eye on Veeva, as well.
I look forward to chatting with you on the forum – our new UI will be released right around Labor Day.
This PDF will help guide entry and predicts that 2020 will be an important year, and thus to establish a bitcoin position in 2019. Below is background information on why the newly-launched Lightning Network is key to bitcoin’s success – something that has not been widely discussed. We also cover the halving of bitcoin to occur in 2020 (and how this affects price), and the potential market cap for bitcoin to help put our price target in perspective.
Bitcoin has been covered on my free blog to make the following points:
• SEC-regulated institutional trading is on the horizon
• Global unrest will help establish bitcoin as a safe haven
• The Bitcoin protocol is too important for the development of all cryptocurrencies for the United States to take direct action against the token and/or protocol. If the United States wants a Fed coin, preventing further development on bitcoin would be counterintuitive.
My previous series provides a good base for understanding the potential for bitcoin.
This PDF will help guide entry and predicts that 2020 will be an important year, and thus to establish a bitcoin position in 2019. Below is background information on why the newly-launched Lightning Network is key to bitcoin’s success – something that has not been widely discussed. We also cover the halving of bitcoin to occur in 2020 (and how this affects price), and the potential market cap for bitcoin to help put our price target in perspective.
SECTION 1: August 2019 Update
Since writing on bitcoin in July, Bakkt has made progress and is slated to launch bitcoin futures on September 23rd. Here is an excerpt from my original coverage on what Bakkt is and why it’s important to track:
“Jeff Sprecher, the Chairman of Intercontinental Exchange (ICE) and Founder of the New York Stock Exchange (NYSE) and many other exchanges internationally, aims to create a federally-regulated crypto ecosystem. The consortium includes Microsoft, Starbucks and the Boston Consulting Group, who are working together to help leverage ICE’s trading infrastructure and to cater to retail investors, institutional investors, and consumers. This could help baby boomers put their 401K into bitcoin, and pave the way for bitcoin-backed ETFs or mutual funds.
Bakkt plans to launch its physically-settled bitcoin futures products for testing in July, according to the company’s blog post. At the core of Bakkt is the custody of digital assets for institutional clients. The first solution will be physical-delivery bitcoin futures traded on a federally regulated exchange and clearing house.
The trades will happen on ICE Futures US (IFUS) and will be cleared on ICE Clear US (ICUS). Bakkt will provide regulated custody as the company has filed with the New York Department of Financial Services for approval to become a trust company and to serve as a Qualified Custodian for digital assets.”
Bakkt will also store bitcoin for institutional investors as an in-house custody solution with insurance of $125 million, which has been another missing piece for institutional interest.
Notably, Starbucks’ payment app has more users than Google Pay or Apple Pay, which paints a bright future for Bakkt to open up a separate arm for digital payments in the future.
China’s yuan also made news recently as China was accused of being “a currency manipulator.” Bitcoin’s price went up during the volatility and the economic uncertainty around foreign currencies (and perhaps someday, the dollar) was proven to be a catalyst for bitcoin. We saw more evidence that crypto, which is a non-sovereign, and highly secure digital store of value, will likely be leveraged during future recessions.
SECTION. 2. Lightning Network & Market Cap
2A. Lightning Network
Perhaps the only thing more turbulent than bitcoin’s price is the acceptance of bitcoin as a payment currency. During the most recent bitcoin selloff in Q3 2018, bitcoin payment volume dropped 80% from a high of $427 million to a low of $96 million, according to a survey of 17 bitcoin payment processors.
To help stability, bitcoin payments need to be faster and cheaper. The lightning network was recently launched to address the issue around how many transactions per second the bitcoin network can handle. Prior to the lightning network, bitcoin was capable of processing about 7 transactions per second. This creates a serious lag, and transaction fees are prohibitive for frequent payments. Visa, for instance, processes about 24,000 transactions per second with a peak capacity of up to 50,000 transactions per second.
The Lightning Network is a “Layer 2” payment protocol that operates on top of cryptocurrency blockchains, and enables fast transactions. The users of the Lightning Network dedicate a funding transaction to the base blockchain, known as Layer 1.
Instead of keeping a record of every single transaction that occurs, the Lightning Network enables users to log records only when a payment channel between two parties is closed. This two parties to create a multi-signature wallet and conduct numerous transactions outside of the main blockchain and record them as a single balance when the payment channel is closed.
Once the Lightning Network is more built out, you will be able to pay people you are connected to without setting up dedicated channels. This network will be used for small transactions that don’t require the security of the bitcoin network. Large transfers that require decentralized security will continue to take place on the original layer.
The final iteration for the Lightning Network will be the cross-chain atomic swaps, which will exchange crypto tokens between different blockchains without the need for a crypto currency exchange.
Benefits of the Lightning Network:
• Transactions will take place on the Lightning Network channels and outside of the blockchain:
• Fees will be minimal to non-existent for small payments like coffee, dinner, and local stores.
• Quick transactions no matter how busy the network is. The transactions will be instantaneous and able to keep pace with Visa, MasterCard and Paypal.
• Cross-chain atomic swaps will eliminate the need for separate crypto exchanges. The first tests of crossblockchain transactions functioned well and this is currently undergoing more testing.
• The Lightning Network can reach 1 million transactions per second.
As of now, the Lightning Network is very new to the market with the first white paper published in 2016 and interoperable test transactions performed in late 2017. By 2018, The Lightning Network concept was endorsed by Jack Dorsey of Square and Twitter, and the network had a growth rate of about 15%. The number of nodes increased from 1,500 to 3,000 and the number of channels increased from 4,000 to 11,000.
The concept of the Lightning Network (LN) has been proven, however, the technology is undergoing development and not ready for deployment yet. Bitcoin’s transaction fees could rise, causing the cost of LN to rise. For instance, if one billion people use LN, the fees will rise to cover the scale.
Additionally, the funds must be stored online, which is considered to be less secure than off-line cold storage. There’s also the potential for Fraudulent Channel Close, which occurs when one party closes the channel and pockets the funds while the other party is offline.
The remaining hurdles that the Lightning Network must overcome will likely be solved through the pool of developers working on the network. This phase, when bitcoin moves beyond being an investment and becomes a currency used for transactions, will greatly increase its value and market cap.
2B. Bitcoin’s Potential Market Cap
It’s hard not to miss the headlines that predict bitcoin will reach $100,000 or $250,000. These numbers are hardly fathomable considering bitcoin was worth less than $1 about a decade ago. The problem with these headlines is that the growth may seem appalling (to anyone not invested), but the market cap projected by 6-figure bitcoin values is in line with what bitcoin is setting out to achieve.
• Priced at around $10,000, bitcoin has a market cap of $200 billion, or the size of Oracle or Salesforce.
• Priced at $50,000, bitcoin will have the market cap of Apple, Microsoft, Amazon and Google.
• Priced at $250,000, and bitcoin will have the market cap of gold, a safe haven asset that protects against inflation and economic uncertainty.
My prediction is that once the Lightning Network is built out, bitcoin will surpass the market cap of Apple, Google, Microsoft and Amazon to reach a minimum of $50,000 per token. This is because the protocol solves critical needs for global populations, including the reduction of financial fees for 7 billion people, and offers a need to store money during times of inflation.
Bitcoin is based on the most secure network in the world, and this solves a very real need for the financial system – which cannot be automated without a decentralized blockchain solution. Technically speaking, bitcoin is also the world’s most secure financial network. The transfers eliminate 3% in processing fees and hedges against inflation. This can, and should be, worth as much as a search engine, enterprise software, a social media network, warehouse fulfillment (AMZN) or iPhone hardware.
Apple, Google, Microsoft and Amazon reached market caps of $1 trillion because their products scale to global populations and are required on a daily basis. Bitcoin not only scales to the global population but it also protects their livelihood – a necessity rather than a convenience. In fact, we see populations who are not necessarily tech savvy most enthusiastic about bitcoin, and this is a strong signal that it will scale beyond the reach of $1 trillion market cap.
Once bitcoin hits our target price, we will take some gains while remaining invested through a minimum of 2025 until digital payments are popularized.
SECTION 3. Bitcoin’s Halving
This is a preliminary report on bitcoin halving. A blog update will be released in Q4 2019.
Bitcoin is limited algorithmically to 21 million bitcoins, which makes it a deflationary asset instead of an inflationary asset. Every ten minutes, a “block” of bitcoin is added to the blockchain. Miners are rewarded with bitcoin and the new distribution of bitcoin is known as a “block reward.” The block reward in the beginning of bitcoin’s existence was 50 BTC. Now it is 12.5 BTC. This was due to bitcoin halving which occurs every four years and will continue until the last bitcoin is mined until approximately 2140.
To date, 17.6 million bitcoin have been created, representing 84% of the total supply.
In May 2020, bitcoin will go through another halving and the block reward for miners will decrease from 12.5 to 6.25. This will be the third halving event in the network’s history. One of the main purposes of halving is to preserve the economic principle of scarcity for bitcoin, which with a peer-to-peer financial network, reinforces bitcoin’s potential.
According to recent surveys, 32% of bitcoins in circulation have remained in the same wallets since July 2016, and therefore, this is new territory for many holders of bitcoin. Historically, the last two halvings produced returns of 81x from the first halving and 3x from the second halving in the one-year period that followed.
The trick to bitcoin halving, historically, is that the price becomes extremely volatile. We saw from the first halving that bitcoin went from $11 to $1,100 and back down to $220. The second halving went from $230 to $20,000 and back down to $4,000. extremely volatile. We saw from the first halving that bitcoin went from $11 to $1,100 and back down to $220. The second halving went from $230 to $20,000 and back down to $4,000.
Prudent investors will recognize the potential here as the new support levels that follow halving are much higher than prior support levels.
CONCLUSION:
If you’ve read this far, then the question on your mind is likely entry. This is by far the most important question for bitcoin (rather than the viability). This is due to the painful volatility of cryptocurrencies. Even with Bakkt’s announcement, bitcoin met resistance in the high $10Ks and dropped back down to support to the low $10Ks in the matter of a couple of days.
As you’ll see below, putting a very small amount into bitcoin now is good insurance (10-20% of your position). We believe there is a high probability that bitcoin’s price will retreat one more time, and this will the final opportunity for reasonable entry (80-90% of position). This scenario comes from scouring many technical analysts on this topic and being very diligent in our scenario recommendations.
We realize we could be wrong and bitcoin could rally – which is why some insurance keeps you in the digital asset. If you are concerned this could be the case, consider buying 20%-25% insurance now.
Bitcoin is currently in a correction off its June high around $13,880. The price is currently below the volume weighted moving average, which is anchored to the June high, noted above in black. This tells us that the bears are in control for now, and will remain so until broken. However, the 200-day simple moving average is in purple, and tells us that the long-term bull market for bitcoin is still in-tact and healthy.
Typically, during the first retrace off the first initial push into a new bull market, I’ll target the 50%-61.8% retrace of the initial move higher as entry. However, based on the strength of this bull market, I’ve moved my target between $8500-$7700. When we hit this target, we will update you on the probability of a 50% retrace to $6,600, although right now, the probability of hitting this retrace and the $6,000 support is lower than it was in June/July due to the bullish activity.
Finally, Bitcoin is currently trading in a corrective wedge, which is highlighted in the dotted blue lines. There are 2 possibilities for this move, which are shown with the green and red arrows. Simply put, either Bitcoin has bottomed, breaking through the wedge and initiating a new uptrend, or it breaks-down below the wedge testing support along the way.
Internal Strength:
Before we get into the likely scenarios of Bitcoin, I’d like to highlight the strength of this uptrend for context. The Relative Strength Index is my favorite measurement for the strength of the current price trend.
I highlighted two increasing trends in the RSI, which coincide with the 2 most recent uptrends in Bitcoin’s price. You’ll notice the first dotted red line in 2017. The RSI followed this trend until it diverged from the increasing price, signaling weakness, and then broke the trend line. The price immediately broke through the 40 line on the RSI, which initiated the internals into bearish momentum. Through-out the recent bear market, the RSI mostly stayed below 50.
Today, we have a similar uptrend, highlighted by the second red dotted line. The price broke through this trend, signaling the current retrace we are still in. However, instead of breaking the 40 line, the RSI has respected this support level, which is showing that the buying pressure for Bitcoin, though not in a bullish stance, is also not entirely bearish either. This is signaling strength within this correction. If we break the 40 line and then go through the 30 line, it will be worth noting.
Entry Scenarios:
First, it’s crucial that you adhere to proper position sizing with an asset like Bitcoin. It is extremely volatile asset. Proper position sizing is crucial, and should lean to the lower end of a portfolio allocation. Because of our conviction in the long-term growth of Bitcoin, we suggest layering your investment starting at today’s prices. Possibly, 10-20% of your Bitcoin allocation in today, and based on how shallow the current correction is, we will add into support or momentum at key levels.
Scenario 1: Bitcoin continues lower. If Bitcoin breaks the $9040-$9,000 support, which is in black on the chart, we will likely see it trade between $8500 – $7700. There is an open gap around $8500, which, once closed, will likely act as support. Below this gap, you’ll see a long-term price cluster around $8195 (shown in black). When you factor in the 38.2% retrace around $7700 as the next level of support, we will have exceptionally strong support between this region. Once again, I think the likelihood that we fall to the 50% retrace around $6600 is unlikely in this uptrend. However, if we do break the long-term price cluster around 6000 (also highlighted in black), I’ll target the 61.8% retrace around $5500.
For now, I added to my position at $9,000 and look to be a heavy buyer sub-$8000. However, anything is possible with Bitcoin, which is why we will want to wait for a renewed uptrend to initiate the full position. Save the bulk of your allocation for when we get a strong bounce off major support levels, followed by a 5-wave impulsive move. That will signal an end to the correction.
Scenario 2: Bitcoin breaks-out higher. If we see a move above $13,880, it would signal that the correction is likely complete, and we are now entering the next leg higher. Remember, we are attempting to get Bitcoin at a reasonable price for a long-term holding.
We want to be in Bitcoin before the fundamental thesis Beth outlined with Lightning Network and potential market cap becomes a popular view. So, we don’t want to over think an entry, while at the same time respecting the volatility of this asset and the likelihood of a pullback.
Technical Analysis is all about probabilities, and it is a snapshot of where we are today. This can change, which is why we recommend a circuit breaker in the form of a stop. If your stop. is triggered, look to re-enter in a new uptrend. However, because of the volatility of Bitcoin, and until we are definitely in the next leg up, I will likely use a deviating stop based on price action and support, which will move up with the price of Bitcoin.
Blog updates will be provided as we go along.
The Big Picture
It’s undeniable that Bitcoin (BTCUSD) is in a renewed uptrend. Earlier this year, Bitcoin found major support around $3,125, and began to make higher highs and higher lows for the first time in over a year. Even though Bitcoin is a relatively new asset that inherently lacks many of the valuation methods commonly used in security analysis, it still adheres to the laws of human sentiment, which is evident within the decade long price action in Bitcoin.
That being said, Bitcoin’s price over the last 3 years experienced a global focus that road the waves of extreme sentiment in both directions. The historic bull run and the bear market that followed, succinctly aligned with Fibonacci ratios, typically used in Elliott Wave Theory. We can thus extrapolate an on-going wave structure, which aligns with these important ratios in order to gauge an approximation of the likely price action going forward. Because of this, I will lean on Elliott Wave Theory to gauge a long-term framework for Bitcoin’s likely path.
Once we have a Wave 2 in place, we can then find our Fibonacci extensions as a likely target for future moves. The red number on the graph above are not random. They assume a correction to the 31.8% retrace around $7800. From here, the math takes us to a minimum of $65,000-$75,000 region, with the likelihood of extending higher.
Elliott Wave Theory is just one tool amongst many used to gauge likely targets, but based on the data we have today, this is a high probability path. Not only does the product research line up, but so do the technical, which is always exciting to see.
I want to put this graph in front of you so that you can get an idea what we are after.Entry is crucial, but in light of where we both see Bitcoin going, we don’t want to over complicate it too much, and simply want to invest in this opportunity.
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.
Last March, Nvidia announced an agreement to acquire Mellanox for a total enterprise value of $6.9 billion. Pursuant to the agreement, Nvidia will acquire all of the issued and outstanding common shares of Mellanox for $125 per share in cash.
I’ve covered the product details of this acquisition in detail with an analysis last April and one last week. To summarize, the Mellanox acquisition will help increase Nvidia’s competitive lead on GPUs, while also slightly reducing the requirement for CPUs from companies like Intel and AMD. Mellanox can be leveraged to speed up GPUs while closing the gap in latency performance with FPGAs (Xlinx and Intel/Altera). This is a strategic acquisition for Nvidia and Mellanox to become the strongest combination for artificial-intelligence and machine-learning computations. Nvidia beat out Intel and Microsoft in the bid for Mellanox.
Mellanox is trading below the $125 price at $108, time of writing. This is likely due to concerns the acquisition won’t be approved by Chinese regulators, similar to Qualcomm’s failed acquisition of NXP Semiconductors. The deal would have been the biggest semiconductor takeover globally at $44 billion. According to sources from China, the case was not approved for anti-monopoly reasons rather than trade-war tensions.
Nvidia and Mellanox are in separate categories and don’t pose security risks from communications, therefore, it is less likely this acquisition will be blocked. In addition, China is a large customer of Nvidia and stands to benefit from the combined company. China needs this acquisition for its sizable AI ambitions to reach a domestic AI market of $150 billion up from the $6.7 billion today. These plans were published in 2017.
We also see some company insider activity with Stephen Sanghi, a director at Mellanox, buying shares worth $2.2 million at $110 per share in June 2019. Sanghi is also the CEO of Microchip Technology. At this price, Sanghi will make 11.6% return with an annualized return of over 21% if it closes by the end of 2019.
The acquisition is an all-or-nothing gamble with technical analysis indicating shares could go as low as $72 if the acquisition is not approved. If the deal is approved, investors have a merger arbitrage worth about 15%.
My best guess is that China will not block this acquisition as it does not constitute a monopoly, is a much smaller company than NXP, and accelerates Nvidia’s product to compete with Intel/Altera, an acquisition that closed at $16.7 billion in 2015. This is a guess and is dependent on what Chinese regulators decide. From a tech product perspective, there are no obvious issues with regulatory approval.
Technical Analysis
By Knox Ridley
Price Action
Mellanox is currently in a strong uptrend, which we are able to track with the dark blue trend channel in the above graph. You’ll notice how well the price action respects this channel as both support and resistance through-out the move up as well as the slight retrace we are in now. Mellanox was already trading through the upper trend channel when the Nvidia acquisition was announced, causing the price to gap-up an then trade slightly higher. When a stock breaks through the initial trend channel with as much force as Mellanox has and then begins to retrace, we can draw a new channel to gauge the likely points of attraction for a further retrace as well as a new advance. You’ll be able to see this is the dotted blue lines in the above graph.
In short, the price is trending towards the $105 support level, which coincides closely with the 200-day moving average. Expect strong support here. The resistance is $121
Scenario 1: If we break the $105 support, there is not much support until the $91-$88 range, which coincides with the 38.2% retrace as well as the lower channel of the trendline. This will be very strong support for any additional retrace.
Scenario 2: The $105 trendline holds, and we maneuver to all new highs above the green resistance level, around $121. If the Nvidia deal is allowed to go through, which we believe it will, expect this move to be sudden.
Internal Strength
The internal strength, as outlined by the MACD, is currently in a weak spot. It turned hard on the current retrace and is making higher lows, which is a good sign for building momentum. As long as the MACD does not break the -2.4 line to make new lows, then we can expect the price to build momentum.
