Chainlink: 2019 Analysis

Posted on August 17, 2019June 30, 2026 by io-fund

At the peak of the crypto boom, there were over 1,600 alternative crypto currencies available. CoinMarketCap currently tracks 900 altcoins. These altcoins compete for 30% of the cryptocurrency’s combined market cap with Bitcoin claiming two-thirds. However, the losses altcoin incurred during the crypto winter were much deeper than Bitcoin, with the third most-popular altcoin losing 92 percent of its value and other altcoins losing close to 100 percent of value.

Therefore, to recommend an altcoin is a precarious proposition. However, there is one alt-coin which does not function like the others and fills a much-needed gap in the technological advancement of the blockchain middleware stack – especially as the value extends beyond the realm of currency with the ability to automate trusted computing across computer networks, people and machines.

17629485-f317-4e36-a4c5-3d30f2696253_Chainlink-Premium-Report.pdf

Chainlink: 2019 Analysis

INTRODUCTION

Bitcoin has the majority of cryptocurrency’s market cap. Source: CoinMarketCap

SECTION 1: What are Smart Contracts?

Smart contracts are a more advanced use of blockchain where an exchange between two parties is automated based on conditional provisions. These self-executing contracts are written into lines of code, and the agreements contained exist across a distributed, decentralized blockchain network.

Trusted transactions are necessary beyond virtual currency. Smart contracts enable collateral for agreements that can be carried out without the need for a central authority. Derivatives trading is an example of a contract that uses computer networks and complex term structures.

Smart contracts offer a more complete use for blockchain. First discussed in 1996 by Nick Szabo, some claim that smart contracts are the real use case for blockchain as they aim to automate financial transactions, and in the future, can automate machines.

Financial contracts are omnipresent, and they specify inputs, logic and outputs. Digital contracts are everywhere around you; such as credit card payments, wages (Paypal, Venmo, your employment wages), when paying for an Uber, buying on Amazon, paying Netflix – and on a grander scale, bond payments.

As Framework Ventures points out in the explanation of why the firm invested in Chainlink, there is high overhead costs due to intermediaries, counterparty risk and potential for fraud.[1] Transactions costs are currently pervasive, they limit output, and are unnecessary with the use of blockchain.

1.1 The Problem that Smart Contracts Solve

Centralized oracles are high risk. Automated payments, often up to trillions of dollars’ worth, such as with bond payments, could rely on data that is hacked. This would result in billions of dollars erroneously paid. This is why institutions have not adopted centralized smart contracts – they are able to be tampered with.

Decentralized oracles, such as Chainlink, use reputation scoring to set up and maintain data feeds. This is accomplished with multiple data inputs for smart contract products. Rather than calling data from an API, the smart contract puts the data request “up for bid” on a blockchain marketplace. Several data providers respond and bid with a data reply. Therefore, if a single data source has been hacked/tampered with, there is an effect on data powering the smart contract.

There are many uses for smart contracts to occur between people and humans, even though it requires a bit of foresight to understand this need. Stealing autonomous cars, for instance, will be challenging with smart contracts as the access control will be verified over blockchain. Land titles, birth certificates, degrees, hospital records, deliveries by autonomous vehicles, accessing digital content, paying landlords or bills, purchasing real estate and purchasing insurance are all ways that smart contracts can be used.

From a technology perspective, the world is only now getting comfortable with the infrastructure layer of blockchain technology. Chainlink is middleware and this is more advanced stage of blockchain and the use of cryptography for trusted computing and transactions.

The middleware stage will include tools built on top of core protocols, like Ethereum or Bitcoin’s blockchain, to enable decentralized applications. We will also enter a world where over 25 billion machines must communicate in a trusted manner, and this will be yet another, more advanced stage for blockchain to register and verify the communication and digital transactions across machines.

1.2 Ethereum Network – Beyond Coins

Ethereum is a platform that was created for creating smart contracts. “Turing-complete” is the term for supporting broader computational instructions. The smart contract code facilitates, verifies and enforces the performance of an agreement or transaction, with decentralized automation as the end result.

Although smart contracts on the blockchain are self-verifying and self-executing, they lack connectivity from data feeds and APIs that are external to the blockchain. The full potential of blockchain to decrease transaction costs is not being utilized.

Without Chainlink, Ethereum’s smart contract utility is confined to currency tokens as data cannot be directly fetched from off the blockchain. The only secure input that can power smart contracts is data that exists on the Ethereum blockchain, which is token inflows/outflows.

Chainlink was built for Ethereum but there will be support for all leading contract networks in future development. The system is able to be upgraded across various components as advances are made across smart contract middleware and blockchain infrastructure.

1.3 Are Tokens Necessary?

In order for a smart contract on a blockchain to use a Chainlink node, a payment will need to be made in the form of a LINK token. The prices will be set by node operators based on demand for off-chain resources that Chainlink provides, and the supply of similar resources.

The purpose of the LINK token is to pay Chainlink Node operators for the retrieval of data from off-chain data feeds, the formatting of data into blockchain readable formats, off-chain computation, and uptime guarantees they provide as operators. It is a small payment for the data services.

For instance, the token may compensate parties who provide the data by responding to the data requests. Or the token may compensate a banking network like SWIFT for processing the payment after the smart contract is triggered. LINK tokens help to maintain the reputation system for payment oracles/data providers.

It also penalizes inaccurate or incomplete data by taking tokens away from an oracle and distributes the tokens to accurate participants. Please see below for a competitor who does not require a token for smart contracts.

SECTION 2: FUNDAMENTALS

2.1 Addressable Market

Addressable market and potential value for middleware is hard to determine although having an early investment with the right entry price is likely to pay off. Framework Ventures, which has a large holding in Chainlink, believes middleware blockchain technology will have a market size equal to the blockchain platforms, such as Ethereum, as both will be critical for the majority of blockchain applications.

The distinction between the coin and the middleware is important to note. Typically, using the middleware can occur without necessarily using the coin. Reasons for using the token are indicated above in the section “Token vs. Token-less.” Middleware that does not require a coin is a risk to Chainlink, although Chainlink has a substantial lead and most transactions today require some form of earnest payment or transaction fee.

The total addressable market for a service like Chainlink is not able to be determined today. We have a glimpse into the market as the application of securities settlement can save up to $7.5 billion per year in actual costs savings from automation. This is only one piece to the addressable market for Chainlink. Data-fetching from off the blockchain will be a larger addressable market, for instance. See below in partnerships for more information.

Framework Ventures estimates the LINK token will be used for data input/output for over 300M messages per year, and will be processing around 820K transactions a day. This is more than Ethereum at 600K transactions per day or Ripple at 200K transactions per day. Again, financial transactions are only one piece to the addressable market as the problem Chainlink solves is fetching data from off the blockchain to be used on the blockchain.

For application developers, Chainlink is likely to be their first choice for flexibility and agnostic purposes (not tied to one protocal), and developers can often create the tipping point for platform adoption. Chainlink’s value is likely to come from the startup ecosystem as the middleware is blockchain-agnostic.

Chainlink works across the Ethereum blockchain, Hyperledger ecosystem, and the SWIFT banking system. It is the only protocol that enables Ethereum smart contracts to pay out in Bitcoin and provides an advantage to businesses on Hyperledger or Bitcoin protocols. This is also a major advantage over Ripple which is confined to the Ripple protocol. (These are not direct competitors as Chainlink will be fetching data off the blockchain, but helps to put into perspective its capabilities and potential market size).

2.2 Competitors

Token-less oracles do exist, however, the customization that these token-less oracles provide comes at the cost of development time. There is also less incentive for participating oracles that may not be compensated for providing accurate data.

Competing token oracles, such as Streamr, may be able to take some market share as savvy data providers can realize more profits by accepting multiple tokens. Chainlink’s vision is to own the enterprise-grade partnership market with relationships, such as Swift, and focusing on consumer-grade partnerships second. We’ve also seen some evidence that Chainlink is favored by data corporations, such as Google and Oracle (more on this below).

Chainlink is moving quickly right now and if Google and Oracle deem Chainlink the preferred altcoin for offblockchain data integration, then it’s positioning will be hard to shake.

2.3 Partnerships for Future Growth

Altcoins are an all or nothing gamble and validation from other companies is essential for picking the one or two winners out of the crowd. Chainlink is distinct due to its larger partnerships.

• Google announced a partnership with Chainlink to help place BigQuery data onto the Ethereum blockchain using a Chainlink oracle smart contract. As Google states, the possible applications are “innumerable” with a few having “high and immediately utility,” such as prediction marketplaces, futures contracts and transaction privacy.

• In June, Oracle announced at the CloudEXPO conference a partnership to “co-develop Chainlinks with 50 qualified startups to prepare them to sell their data to Oracle’s 430,000 customers in 175 countries on the Oracle Blockchain Platform.”

• Chainlink advertises a partnership with SWIFT on its website and in a published case study. Notably, I cannot find any announcement on SWIFT’s end, and this is likely a proof of concept for now. If the partnership is fully implemented, Chainlink will not only enable SWIFT to process smart contracts, but it’s possible SWIFT will enable other external smart contracts to settle through fiat on its network by means of a Chainlink/SWIFT oracle.

See Recommended Reading below for more information on partnerships.

2.4: Internet of Things for Future Growth

Internet of Things, or IoT, has become a common term for machines communicating with machines in an automated method. Smart things is another term for IoT connections. For instance, in the smart home, you have a smart refrigerator, a smart thermostat, and a smart door lock.

Perhaps the most forward-thinking IoT device will be the fully autonomous smart car, with many critical sensors communicating with one another through data gateways. For instance, the data from a street light will be sent to the sensor on your vehicle for a red light, and this will trigger the vehicle to brake.

Financial transactions will be the first iteration of smart contracts, however, the internet of things will connect 25 billion machines and this will help smart contracts reach critical mass and full-fledged adoption as a means of securing these connections. However, for this to be realized, data external to the blockchain is required for smart contracts to be verified and executed.

The automation of trusted computing across machines and people will take time to fully realize and these examples will extend beyond the financial sector.

2.5 Recommended Reading: White Paper

The founders of Chainlink wrote a whitepaper on September 4th, 2017. Authored by Steve Ellis, Ari Juels and Sergey Nazarov, the team has expanded to include a strong team across crypto, trusted data, finance and security. The founder of DocuSign is on the advisory board, which should help solidify some of the use cases noted in this report. The whitepaper is worth a read as it lays out the problem that Chainlink solves, which is that blockchain protocols do not support native communication with external systems. The solution that provides access to external systems is called an “oracle,” and these oracles need to be decentralized in order to be secure and tamper proof. Centralized smart contracts can be altered, terminated or even deleted by a privileged party.

“Chainlink offers a decentralized oracle network. Decentralized oracle networks achieve trusted computing for digital agreements, which is important for both human-powered digital agreements and machine-powered digital agreements.”

Example use cases for Chainlink that are provided in the whitepaper include:

• Securities smart contracts for bonds, interest rate derivatives and other market information reported via API

• Insurance smart contracts will require information for liability issues, including if doors were locked, or flights ran on time.

• Trade finance smart contracts will need GPS data about shipments, data from supply chain ERP systems, etc.

Notably, the company is located in the Cayman Islands, likely to escape paying income tax. I prefer companies that are based in the country where they are breaking ground.

Additional Reading:

Chainlink whitepaper

FrameWork Ventures: Our Investment in Chainlink

Google in Blockchain

Smart Contracts with SWIFT

SECTION 3: Technical Analysis

Provided by Knox Ridley

LINK’s Recent Price Action:

Chainlink is currently trading in a downtrend from its June 29th high, making lower highs and lower lows (highlighted in yellow). The question is: have we bottomed and are in the beginning stages of a new uptrend or is this the midpoint of the downtrend with more to come?

Chainlink has found strong support at the $1.9 region, where it has tested that region 3 times this year. It’s currently trading in a tight range between the $1.95 region, which has been a major price cluster for Chainlink (highlighted with the red band), and $2.9 resistance region (highlighted in yellow). It has tested each region twice, and each time failed to break through.

Internal Strength:

In a downtrend, I will often look at the RSI to gauge the internal strength of the momentum. What I’m usually looking for is positive divergence while in a downtrend – for instance, ideally RSI would be making higher lows while Chainlink would be making lower lows – but this is not happening right now. I look for this because it is a reliable sign that selling pressure is waning, and usually follows a reversal.

If the RSI is at or below the downward extreme 0, we can usually expect, at the very least, a short-term bounce. We are not seeing this now. In fact, the RSI is comfortably below the 50 and 40 line and trending with the price action. In other words, Chainlink’s price is showing a stable balance between buyers and sellers.

Conclusion:

Remember that we are dealing with an alt-coin within the crypto space. You should expect low volume and volatile moves. Small position sizing to begin with and wide stops are crucial. We believe in the long-term potential of Chainlink in the smart contracts space, and believe it is worth a lotto ticket.

Scenario 1: Chainlink finds increased buying pressure, breaks out above the $2.9 resistance, and continues in an upward movement.

Scenario 2: It is likely that Chainlink will make one more attempt in the coming weeks at support by first breaking the upward trend line and then testing the $1.9 support region. If it breaks support, we will likely see it find support around either the 50% retrace, around $1.7, or the 61.8% retrace, around $1.25. This region is highlighted in the green box.

Chainlink is currently in a correction after starting a powerful uptrend earlier this year, which is similar to all cryptocurrencies. I believe the body of evidence supports scenario 2, where Chainlink breaks $1.95. We will look to buy our first tranche at $2/$1.95, and then the remainder based on the velocity and structure of its price action below this region. However, if Chainlink breaks the $2.9 region, we will shift to scenario 1 as the more likely scenario, and begin our position into the momentum with tight stops. We will offer updates as we progress.

Please note: the fundamental analysis on Chainlink is early and negative price volatility would be welcomed.

Beaten-down Nvidia is diligently preparing to pounce on its rivals

Posted on August 16, 2019June 30, 2026 by io-fund

Nvidia’s stock went from unstoppable to nearly uninvestable in the matter of a few weeks last year and has not recovered.

The sudden drop in Nvidia’s stock price and a competitive ecosystem that’s hard to understand are two reasons the chipmaker has scared away growth investors, who have opted for momentum bets such as cloud-software companies. The fact that semiconductor companies are cyclical, and mired in the U.S.-China trade war, has further overshadowed Nvidia’s growth potential.

But the real story is that Nvidia is spring-loaded as its product offerings quietly gather strength in a market of enormous magnitude: artificial intelligence (AI). The path for Nvidia’s market domination in the AI economy, worth $15 trillion over the next decade, will be choppy now and exhilarating later.

Nvidia’s profits have been slammed over the past two quarters, and will require a few more quarters to return to levels before the cryptocurrency bust, which reduced demand for Nvidia’s mid-range graphics chips. A spectacular comeback is not likely when the company reports earnings Thursday after the stock market closes.

In the first quarter, Nvidia reported $394 million in net income and earnings per share (EPS) of 65 cents, down from $1.24 billion and EPS of $2.05 a year earlier. Analysts are predicting EPS of $1.07-$1.24 for the third quarter. Still, profit margins are better than those of rival AMD, which booked net income of $35 million on revenue of 1.53 billion in the second quarter. Despite that, AMD’s stock has risen 79% over the past 12 months, compared with Nvidia’s -40%

Nvidia vs AMD

Taking a somewhat contrarian stance, I do not regard AMD as Nvidia’s primary competitor. AMD is more focused on Intel and taking market share from the CPU data center. Nvidia’s true rivals are FPGA chips from Xilinx and Intel/Alterra. I also believe AMD will have to choose if it plans to go against two 800-pound gorillas (Intel on CPUs and Nvidia on GPUs).

It would be nearly impossible to stave off Nvidia, which is putting all of its weight into the GPU data center with the acquisition of Mellanox and new partnerships such as with Arm on AI and high-performance computing software. That will help strengthen Nvidia’s lead, which already owns over 90% of the cloud infrastructure-as-a-service market.

Chief Executive Officer Jensen Huang had an excellent quote that described Nvidia’s ongoing cooperation with CPUs as the necessary backbone to GPUs, and why his focus has been elsewhere in the data center stack. It helps to provide a glimpse into his future strategy.

“These two types of processing are going to be here to stay,” he said. “With accelerated computing, we don’t suffer from Amdahl’s Law — we obey it, and the thing that you don’t accelerate becomes the critical path. We believe in fast CPUs, and that is why we work with all of the world’s fastest CPU makers — IBM, Intel, AMD, Arm.”

Huang went on to say he’s focused on the X factor, or what will accelerate the path forward at the highest percentages possible. Rather than compete with many players on CPUs, Huang wants Nvidia to be the leader in the highest growth piece of the data stack — parallel computing and acceleration, especially in AI.

The $7 billion acquisition of Mellanox, announced in March, will help Nvidia accelerate the performance of GPUs while maintaining a low barrier to entry for developers who favor Nvidia’s CUDA platform for AI development.

Mellanox acquisition

To illustrate how Mellanox accelerates the performance of GPUs, Nvidia and Mellanox support more than 250 of the world’s top 500 super computers, including the world’s two fastest supercomputers, Sierra and Summit, operated by the U.S. Department of Energy.

Mellanox’s Ethernet switch systems are the most used internal system in the top 500 in a recent report released at ISC High Performance, with 247 systems, and InfiniBand is the second most-used, with 140 systems. However, InfiniBand, a computer-networking communications standard, connects the most high-powered computers where the presence of Ethernet is nearly non-existent.

This is clearly a strategic acquisition for Nvidia as Mellanox has small profits (net income of $38.4 million in the second quarter) with profit margins of 2%, and the acquisition will require nearly all of Nvidia’s cash reserves. As a result, Nvidia may have to take on debt.

Some speculate that Chinese regulators could block the acquisition, similar to what happened when Qualcomm attempted to acquire NXP Semiconductors. This is less likely, though, as Nvidia and Mellanox are in separate categories and don’t pose security risks from communications. In addition, China is a large customer of Nvidia for AI applications and stands to benefit from the combined company.

In other words, Nvidia is not acquiring Mellanox to simply own InfiniBand and Ethernet, but rather to boost its GPUs as the best data center option available. Nvidia is aligning its architecture with speed, as Mellanox supports Virtual Protocol Interconnect (VPI), which allows the ubiquitous Ethernet to provide bandwidth as cheap as possible, and InfiniBand to deliver higher throughput and fewer bottlenecks during high loads.

Mellanox has done an excellent job of taking market share from Ethernet incumbents, such as Cisco, Arista Networks, Juniper Networks, Hewlett-Packard, Dell and Intel. Some of this is due to Ethernet, and also InfiniBand, and now a hybrid of the two.

Nvidia’s Mellanox acquisition helps 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/Alterra). This is a strategic acquisition for Nvidia and Mellanox to become the strongest combination for artificial-intelligence and machine-learning computations.

Declining data center revenue

This thesis hinges on data center GPU revenue, which is declining quarter-over-quarter across both Nvidia and AMD. The Mellanox acquisition won’t close until the end of the year. Plus, rumor has it, China may delay trade talks through the 2020 election. Therefore, timing remains a primary challenge for Nvidia investors to capture this forward-looking opportunity.

Nvidia’s data center sales have fallen over the past two quarters by 14% in January and 7% in April. According to MarketWatch, some analysts predict data center revenue will continue to decline through the third quarter of this year.

AMD reported its average GPU sales price was down slightly quarter over quarter due to lower data center GPU sales. Still, sales rose year over year.

Nvidia’s singular focus is GPU-powered cloud and artificial intelligence applications, and FPGAs are the second runner-up rather than AMD’s GPUs. According to Liftr Cloud Insights, 97.4% of cloud infrastructure-as-a-service (IaaS) compute instances deploy Nvidia’s GPUs across the top four cloud providers. The top four cloud providers are Amazon, Microsoft, Google and Alibaba, and account for 62.3% of the IaaS and platform-as-a-service markets. According to the insights report, AMD accounts for only 1% of the cloud IaaS market.

As with many of the best growth opportunities, the current earnings outlook does not accurately portray Nvidia’s potential. This will be true for a few quarters. It may require sniper-like timing (or a generous trailing stop), but betting on Nvidia and AI will have spring-loaded gains when there are clearer skies for semiconductors and hyper growth in the $15 trillion AI economy.

This article appeared on MarketWatch August 14th, 2019.MarketWatch August 14th, 2019.

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August 14th: Alibaba Quick Glance

Posted on August 14, 2019June 30, 2026 by io-fund

Last month, Alibaba.com expanded into the United States when Alibaba Group opened its business-to-business online marketplace to US companies and will allow US manufacturers, distributors and wholesalers to sell their products. The size of the B2B market is more than five times that of online retail at $23.9 trillion.

Trade war tensions can certainly put Alibaba’s global ambition and stock gains in question. Alibaba Cloud is one segment that will continue its growth despite fluctuating trade war news. China’s IaaS market was worth $1.2 billion in 2018 compared to the United States at $40 billion. One day, Alibaba’s cloud profits will surpass e-commerce profits, which is not a bold claim as this is what happened with Amazon with $25.7 billion in revenue last year with AWS reporting $7.3 billion in operating income compared to Amazon North America reporting $7.27 billion.

Alibaba’s margins are slimmer than Wall Street would like to see due to investments in cloud services and other areas, but overall, Wall Street has a Strong Buy on BABA with a low 12-month estimate of $195 and a high estimate of $280 with average price target of $218. The stock has underperformed the S&P 500 with -10% returns over the past 12 months. Due to the market shedding over 500 points today, Alibaba is trading below its 200-day moving average and 50-day moving average.

There’s a high probability that Alibaba beats earnings when it reports before market open tomorrow .A few other points adding to the higher probability:

Alibaba’s last earnings report beat by $0.33 and GAAP EPS beat of $1.47 beat by $0.96
Revenue last quarter grew 51% YoY or 39% excluding acquired businesses
Revenue of $13.93B beat by $600M last quarter
com had strong earnings, giving us a small glimpse into China’s e-commerce market last quarter
According to MarketWatch, analysts surveyed by FactSet expect that Alibaba earned 10.32 Renminbi a share for the June quarter, or $1.46, up from 8.04 RMB, or $1.17 a share, in the year-earlier period.

I am personally buying a call before earnings and will build a larger position if BABA pulls back per Knox’s technical analysis below. This way, I stand to gain no matter what happens tomorrow and regardless of what the market decides to do over the next few months.

Note: I plan to dedicate a full research report to this stock as there are a few more positives to consider for building long-term positions.

Alibaba Technicals:

Technical analysis provided by Knox Ridley.

Relative Strength Index: RSI trends in red (bearish internals), yellow (neutral internals), green (bullish internals). Alibaba, on its most recent move, broke 60 and reversed back into red. This can change quickly, but Alibaba is currently showing weak buying pressure. Alibaba broke it’s RSI trendline from green to red mid-2019 and has struggled to regain green territory.

BABA is trading on its 200-day Simple Average after testing many times since mid-2018. It’s currently at an inflection point and trading within a wedge pattern, which is highlighted in blue.

The wedge pattern is a trading range that comes to a point, that forces the price action to trade in a very narrow band and builds momentum for a break-out or a break-down. Fundamentals are strong while broader market is weak, and therefore, we have two scenarios for you and will be watching the $148 support and the $180 resistance.

Scenario 1: BABA has traded along the blue trendline for many years and this has been major support. If BABA breaks down below this long term trendline, which coincides with the bottom of the wedge, then we will test the $148 support and this is a warning sign (and a gift). If this breaks, we will update you on entry for a bigger position.

Scenario 2: BABA reports strong earnings and continues along the blue trend line or breaks above the wedge and reaches the $180 resistance. If you like this scenario, consider buying an out of the money call.

August 12th Update

Posted on August 13, 2019June 30, 2026 by io-fund

This week, we have a blog analysis on Alibaba that will be published after earnings. This is my favorite growth stock from China and if/when the price is low enough, it’ll make a solid long term holding. You’ll get this on Thursday.

We will also be publishing a PDF report on the alt-coin that I’ve been preparing over the last two weeks. Of the 1500+ alt-coins, this one is my favorite. This long-form analysis will be published on Friday. Keep in mind, it’s very early days for this alt-coin as the blockchain stack hasn’t been fully developed yet. I truly believe you’ll be pleased in about two years from now.

I’m also writing an article for MarketWatch on Nvidia this week. They tapped me to write a more technical explanation of Nvidia’s market position especially compared to AMD. There is an interesting angle that I dug up after revisiting these semis that I’m saving only for my Premium subscribers. You’ll get this by next Tuesday. I haven’t seen anyone publish on this angle and we’ve seen some documented trading by company insiders that confirms it’s worth a second look.

Last week was a bit of a roller coaster ride. Lyft saw a 11% spike after earnings due to revised guidance of $850M in losses. It eventually settled when the company announced the lock-up period is being shortened to August 19th. The next day Uber confirmed that profitability in the ride-sharing business is still a moonshot. These are my least favorite IPOs and I went on record about that before they went public.

Regarding Roku, its fundamental story remains as strong as it was the day it went public. I like the leadership quite a bit at Roku, as well. One reader asked on the forum if I thought Roku might be an acquisition target. My understanding is this is Anthony Wood’s opus and I think he will take this all the way. For anyone who didn’t read the full report under the PDF tab on this website (I understand my analysis is quite long!), my best guess is Roku will be a $100 billion company due to global expansion. They have an excellent product and platform for global audiences – better than any OTT company on the market today.

The Trade Desk appears to be settling in price. Even after the earnings beat, the stock appeared to be overbought and is correcting. One reader had asked how to predict when The Trade Desk will face the inevitable competition that all third-party ad products face. It’s not easy as to track but I am going to an advertising event in September that should provide enough information to make a good assessment.

I had published a list of Huawei suppliers for hedging any long positions on August 1st. The 90-day exemption period ends this Monday, August 19th. You can watch that list closely and Apple and Google (Android), as well. Depending on how the story evolves, we may try to pick one or two trades from the list and cover them. I personally made decent money on hedging with Qualcomm and Skyworks in May but have not looked at the pricing since.

Website changes: There’s a new menu to help navigation on the site. You’ll see we nested the various research options. We are building a new forum and will be excited to see this launch in about 2 weeks. Content will be locked for new members dating back about 45 to 60 days starting in September. This means new members will not be able to sign up and access a long catalog of research for a lower price than our continuous and most loyal customers.

Gentle Reminder: Please do not share the PDFs or research via email or on other sites. However, it is okay to paraphrase on other sites and I appreciate the traffic that is sent to me – thank you! We want our paying members to have time to place their trades before the stock price changes. I do have a few institutions that follow me and I’ve locked them out of this site by requiring a commercial license.

August 12th: Broad Market Technical Update

Posted on August 13, 2019June 30, 2026 by io-fund

There’s reason for caution today. Right now, the chart above shows that the market is flashing yellow. We have closed below the 200-day EMA, broke through the bottom channel of the Bollinger band with force and turned down right at the midline. We’re seeing a noticeable elevation of volume, pushing stocks down. And, most telling, is the RSI of the broad market. Look at the last 2 times it dipped below 50 and couldn’t break that level. In short, in downturns, the RSI usually stays below 50 and does not break 60, and in bull markets, it usually stays above 50 and does not break 40.

I took the 3% down day last week to be a warning. When you consider SPY to be the ETF tracking the greatest 500 stocks in the United States, you come to realize just how diversified this index is, which should put into perspective how violent a 3% move in one day is. We are not recommending selling stocks, but we are recommending that you mind your trailing stops, and be patient with entry into other names. Some of our stocks tested support, and are currently right above their recommended support levels. Let’s see what the market decides to do before adding or initiating any positions.

August 13th: Bitcoin Technical Update

Posted on August 13, 2019June 30, 2026 by io-fund

Bitcoin Insurance

A more detailed report on bitcoin will follow in the coming weeks. In summary, we see BTC trading to $60,000 plus in the coming years. The fundamental thesis supports the price action on this move, and we will publish this for you in mid-September. The question is – will we have a major retrace before this move, or will we breakout from here, leaving these levels behind?

BTC’s price has been relatively stable over the last couple weeks, trading within a very tight range. If you look at the blue lines in the chart, you’ll notice that BTC is coming to the point of a trading pattern known as a wedge. A wedge is a defined trading range that tightens to a point, where price builds up momentum before it makes a decision to break out or break down.

Scenarios:

My primary count has BTC breaking down to the $9,600 support region and then retracing to $8,000-$7,000, which coincides with the .382% retrace.
My secondary count is that BTC breaks out from here, reaching new highs above $13,875.
$4800 is the must-hold point for this bull market

Taking out insurance and allocating 20% of your BTC position today at current prices is something to consider, and planning to add to the position depending on if the price breaks up or breaks down. You can add the remaining 80% in tranches depending on if we break out or break down.

I’m personally holding BTC with a 40% stop, and viewing $4800 as the must hold point for this bull market. This would be a welcomed and final pullback, although appears to be more elusive. as the price has remained steady for an extended period. Please only allocate a small portion of your portfolio to BTC. This is highly speculative and very volatile.

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.

Uber and Lyft: Unprofitable Powerhouses

Posted on August 9, 2019June 30, 2026 by io-fund

Ride-share earnings this week proved that if you lower the bar to the ground, any earnings performance can leap over it. Both companies reported staggering losses that were delivered with positive PR spins.

Lyft reported “record second quarter results” while losing roughly the same amount of money as previous years. Uber had an epic $5 billion loss that is closer to $1.3 billion adjusted. The second number only looks acceptable in the parallel universe where a $65 billion market cap company can report any losses at all, let alone $4 billion per year.

Likewise, Lyft looks digestible compared to its counterpart at $850M in losses, until you realize these numbers haven’t improved since 2016 when the company reported negative net losses of $692M and net losses of $708M in 2017. There is an improvement from 2018, but again, this depends on how you spin it. To me, it’s cut and dry – Investable companies should have fewer losses as they grow revenue. There may be quarters where a company moves backwards, maybe due to capex or another legitimate reason, but the revenue growth in ridesharing creates losses due to subsidizing, and this is a holistic problem that is not going away.

The market found it encouraging that Lyft was expected to lose $1.1B but has revised this to $850M for 2019. Profit margins are negative 23%versus negative 37.7%. The price was adjusted for the $200M improvement, which during after-hours resulted in a 11% spike. The spike soon settled when Lyft announced they are moving up the lock-up period from late September to August 19th.

We see evidence of the holistic problem where Lyft’s losses will marginally improve this year compared to last year. There is no evidence, however, that this is sustainable. If Lyft needs to support R&D on autonomous driving, for instance, then the margins will be deep in the red once again. An important metric to watch is the EBIT margin of -77% compared to -61% a year ago.

Uber’s Q2 resultsare more straight forward to analyze. Adjusted EBITDA was negative 292M in the year-ago period compared to negative 656M in the current period for an increase of 125%. Keep in mind, Uber Eats and Uber Freight help offset the losses.

As I stated in MarketWatch, I’m not a fan of the price war narrative. Increases in revenue per users is irrelevant if the losses are also accelerating or stagnant. This means the subsidization of rides continues to drive demand, and if both companies raise prices, they will also have more losses. The end of a price war sounds like a PR spin to me and we see no evidence in the financials that this will do anything for profitability.

There are also many other unknowns in how demand will react to higher priced supply. Gross bookings may decrease as people decide to drive to a destination, park at the airport for $8 per day, or hire a regular taxi who is already waiting outside many venues. Also, Uber may pull ahead of Lyft if prices go up as the service has more drivers readily available and is a larger brand.

I’ve written extensively about these companies and expressed why my readers should steer clear ahead of the IPOs during the exuberant market of April 2019. I highly recommend anyone who wants to invest in the ride-sharing story to consider the liquidity the lock-up expirations will create with more shares flooding the market.

I won’t repeat everything here, but below are a few bullet points from my previous analysis published March 14th, 2019 – one month before Lyft went public. I’ve also included links to my previous analysis on Uber – both before and after the company went public.

Lyft and Uber pay incentives to acquire and retain users. In gaming, a company might spend $8 to acquire a user with a lifetime value of $15 per user for a profit of $7. The problem with ride-sharing apps is that the incentives offered do not cover the costs of the ride, and that is one reason we see strong sales growth mired by substantial net losses.
Reuters has some historic information on this dated back to 2015, when Uber passengers paid only 41 percent of the actual cost of their trips. At the time, Reuters reported that this creates an “artificial signal about the size of the market” with Uber releasing limited financial data that showed losses of $708 million per quarter.
Lyft and Uber are mobile applications, but the business model is more of a large-cap human resources department with many variables around wages, and potentially regulations due to independent contractor classifications. (There was a recent $20 million settlement due to the misclassification of drivers in California).
A paramount risk to both Uber and Lyft is total addressable market. Room for geographic expansion is limited beyond the United States, other than a few outlier countries like Saudi Arabia. Of course, the underlying issue with TAM is a lack of intellectual property with an easy-to-duplicate mobile application that leverages common app features such as GPS location and SMS/voice. For a list of competitors, reference “Lyft: Risky Valuation and No Intellectual Property”

My premium subscribers received a 12-page report on Roku And TTD prior to earnings, Snap prior to earnings and tech trade war plays to hedge their portfolios. Premium researchPremium research members receive updated recommendations and entry/exit scenarios on tech stocks. Learn more hereLearn more here.

For additional information on Uber:

Uber IPO: Record-Breaking for All the Wrong ReasonsUber Stock Had Disappointing Q1 Earnings: So Why Did the Price Go Up?

Lyft and Uber Update: August 7th

Posted on August 7, 2019June 30, 2026 by io-fund

SimilarWeb provided a glimpse into Lyft’s driver daily active users in Q2 2019. The report revealed a decline of 18% in Q2 ahead of earnings today. The data does not account for riders; however, it does require caution as fewer daily drivers is likely to trickle down to less revenue.

Lyft is a native application only and does not operate a website. Native app data from companies like SimilarWeb tends to be accurate in this case. I’ve seen some data not translate if the company also has website traffic, such as Pinterest or Facebook.

Install penetration YoY has also slowed, according to SimilarWeb.

SimilarWeb has access to more data than they publicly disclosed to Yahoo – likely for liability purposes. The company has visibility into app rank and rider daily active users, as well. Therefore, a leak to Yahoo Finance from an unbiased third-party that directly precedes earnings is something I tend to take seriously. SimilarWeb’s business model is to sell data to investors. There is no guarantee Lyft will miss earnings today, however, SimilarWeb will see a material impact either positively or negatively if the data they release is seen as accurate.

Quick Notes on Uber:

Arianna Huffington and Matt Cohler stepped down from board positions – not common this soon following an IPO
Uber laid off 400 employees in marketing, or about 1/3 of the team, which was announced at the end of July

According to MarketWatch, Uber is expected to report losses of $3 billion this quarter due to stock-based compensation from its IPO. Lyft is expected to report losses of half a billion dollars. Fundamentally, this is unprecedented for a company at the $65 billion market cap level. If either company pulls off earnings this quarter, I don't think the rebound will last long.

My original analysis on these two companies was during the euphoria of April 2019 when the market was confident Lyft and Uber would perform well. I wrote an analysis that went against the bullish sentiment before Lyft dropped 20% following the IPO and before Uber became the worst IPO performance in history. The issues that I pointed out still remain:

Subsidizing of Rides: Venture capital is typically used for product development and for human capital to help the company scale. In a rare twist of startup mechanics, venture capital for these two companies was used to drive market demand by using the capital to lower the price of the ride-share. The result is artificial supply and demand, and it’s uncertain what demand will be when the ride is no longer subsidized with venture money. This should have been solved prior to going public and prior to the companies reaching balloon-sized valuations.
The lockup expires in November and I agree with the theory that Uber and Lyft are liquidity events. Look for the true valuation of these companies in the two years following the lock-up period. While I do not expect an immediate dump, there will be a noticeable unwinding as more shares become available, and the stock price undergoes dilution. If you want to bet on these companies long term for autonomous vehicles or another thesis, then you will have much better opportunities for entry after the six-month lock-up period. (I am personally betting against these companies into Q1 and Q2 2020).

You can access my previous analysis on the public blog:

https://beth.technology/lyft-risky-intellectual-property/

https://beth.technology/uber-ipo/

https://beth.technology/uber-stock/

Roku and The Trade Desk: 2019 Analysis

Posted on August 7, 2019June 30, 2026 by io-fund

99574f65-8ab7-4dc6-a844-cc770be96e4a_Roku-and-TTD-Premium-Analysis.pdf

Roku and The Trade Desk: 2019 Analysis

SECTION 1: Connected TV Advertising

Connected TV advertising is in my top three favorite tech trends for serious gains in the near term of 2-3 years, and therefore, the opportunity requires a lengthier analysis. CTV ads offer investors a sizable opportunity, which has not been available for over a decade – since the early proliferation of mobile devices. The CTV ad market will take at least until 2021, and perhaps until 2023-2025, until the market is mature and the gains slowdown.

Roku and The Trade Desk are first movers in connected TV advertising in their respective categories of OTT platform/player (ROKU) and third-party ad network (TTD).

Roku investors are speculating the Roku Channel can compete with the big 4 for time spent on over-the-top applications: Netflix, Amazon Prime Video, Hulu and YouTube. Investors in The Trade Desk are speculating the third-party ad network can stave off competitors, which are likely to appear in droves over the next two years as the ad-tech space is the most crowded space across the technology sector with little IP to speak of. Those are the risks while the runway for this opportunity is quite long.

1.1 Overview of Connected TV Advertising

Connected TV advertising is taking market share from mobile for a few reasons that are important to understand.

The first is that brands with the largest ad budgets prefer television advertising as opposed to desktop or mobile.

I’m referring to companies such as McDonalds, Geico, Budweiser, Pizza Hut, Coca-Cola, Macy’s, BMW, Mercedes, Toyota, Loreal and Nike, for example. Big-budget brands have struggled over the past 10-20 years because mobile and desktop are not as effective for brand messaging yet these mediums have been stealing the eyeballs and are fueled by data.

Budweiser ads are not plentiful on mobile or social but they continue to pile in the ads for televised sports and pay dearly for Superbowl ads. Beer drinkers are also on mobile but Budweiser can’t measure the impressions because the screen is small, the customer is distracted/on-the-go and these brands need at least 30 seconds for a proper impression. Mobile and desktop are better for companies that want clicks and “purchase intent” rather than brand impressions.

However, despite the high cost of TV commercials, they do not offer data on the audience who is viewing the ad. The only information Budweiser has to buy an audience on traditional television is the content that is being watched (football). If Budweiser has determined that men between 25 to 45 are the heaviest beer drinkers, with Connected TV ads, they can now target them specifically on television. Perhaps Michelob Ultra wants to target people who are health conscious. They can do this with audience targeting through Connected TV ads rather than wasting money on showing ads to people who are not health conscious (general football audience) or guessing on what health conscious beer drinkers watch in the evening. They can buy the exact audience “health conscious.” Pizza Hut can buy a college student audience. Geico can buy an audience of income earners in the $40,000 to $70,000 range. State Farm can buy families who own homes. Mercedes can buy audiences who make over $150,000. Macy’s can buy audiences of families who have children for school shopping ads.

These brands can buy audience targeting on television – and this has not previously been the case.

Connected TV takes the best part of mobile (audience data) and combines it with the best part of television (brand messaging). This is a very important trend for brand dollars that should not be dismissed as “eyeballs migrating to OTT.” The opportunity is much larger than represented by the number of people who are cutting the cord as Connected TV ads are not merely a 1:1 ratio. Rather, these ads represent a higher ratio as the demand (advertisers) consider the medium more valuable. This places Connected TV ads in a league of their own.

We are in the early days of Connected TV ads and already see a $20 average revenue per user. This is 200% more than social ads, such as Twitter, at $9 ARPU. It took Facebook over a decade to surpass $20 per user while we can trace the relevant emergence of Connected TV ads to late 2017/early 2018.

1.2 CTV Ads by the Numbers

Mobile’s share of programmatic video will peak in 2020 at 53.9%. By 2021, mobile’s share will dip below the 50% mark due to the rise of CTV ads. To illustrate the growth of CTV, SpotX saw the share of impressions it serves through connected TV increase from 15% in Q1 2018 to 33% in Q1 2019. Innovid also saw CTV ads jump from 13% to 27% and Extreme Reach reported an increase from 15% to 44% over the time span of a year.

To date, CTV ads account for $8.2 billion of the $70 billion spent on global TV advertising in 2018. Data is driving personalized ads with data-driven video increasing 79% in 2018. Customized ads combining localization and personalization can generate over 12,000 unique versions with the largest customized ad having over 200,000 customized versions. This provides an engagement lift of over 78%.

According to CMO.com, an eye-tracking survey revealed that TV commands 2x the active viewing attention compared to YouTube and 15x the active viewing attention of Facebook. Completion rates are also higher on connected TV at 95% compared to 75% on desktop and 72% on mobile. Brands are convinced they should integrate with digital audience data with 28% saying they have already done so, but 68% plan to do so by September 2019.

SECTION 2: The Trade Desk

The Trade Desk is a “demand-side” or “buy-side” ad platform which allows advertisers to buy ads in an auctionlike format through real-time bidding. This is an automated method for buying and selling inventory that eliminates the need to call up an agency or salespeople to place the ads. The official term for this is programmatic, and the trend is popular in ad-tech, with over 50 demand-side platforms that transact programmatically. By utilizing machines instead of salespeople, the cost of the ads goes down and both parties (supply/publishers and demand/advertisers) prefer programmatic due to fewer middlemen and higher returns.

Strong drivers for The Trade Desk include omnichannel capabilities, which is the ability to buy ads across many channels, such as mobile, video, audio, display, social and native. The universal ad ID is another important differentiation as it offers an anonymized ID that helps track users, target audiences and provide attribution. This feature is rare for a third-party ad networks and helps The Trade Desk compete with first-party data companies (Google, Facebook, Amazon, Snapchat, Pinterest, etc.) To further compete with first-party data companies, The Trade Desk buys data. This is combined with the brand advertisers’ data on a data management platform for targeting purposes.

Differentiation in this category is essential for investors in The Trade Desk to track closely. Risks are noted below, with the primary risk being the competitive ad ecosystem, which includes many companies that are able to copy ad-tech features as there is very little IP and/or complexities with these products. There is also little loyalty from advertisers who will quickly switch to the next best-performing programmatic DSP.

2.1 The Trade Desk and Connected TV Ads

Connected TV ads is one of many revenue segments for The Trade Desk. In the most recent quarter Q1 2019,

The Trade Desk stated CTV spend grew over 300% from a year ago. In previous years, The Trade Desk reported 1000% growth in Connected TV advertising from Q3 2017 to Q3 2018 and 900% growth when adjusting for the period between Q4 2017 and Q3 2018.

“We've never seen an opportunity like CTV before and I don't think we'll ever see one like it, again … It is the biggest opportunity we've ever seen (and) probably ever will.” – TradeDesk CEO

2.1B Amazon Partnership

The Trade Desk shares jumped in late July following an announcement that Amazon Publisher Services is partnering with The Trade Desk and Dataxu TouchPoint, which will allow advertisers access to Amazon’s inventory on Amazon’s Fire TV marketplace. Publishers on Amazon’s Fire TV marketplace will also benefit from increased access to advertisers.

There are a few things to note about this announcement:

• Amazon will likely open up ads to more demand-side platforms with CTV advertisers. The Trade Desk will be competing with Dataxu and Amazon DSP on Fire TV inventory for now. However, it’s likely there will be more demand-side platforms joining as it’s common for the supply side (content publishers) to work with as many buyers (advertisers) as possible.

• It’s not clear if The Trade Desk and Dataxu’s demand will be as competitive on CPMs. Amazon has the better in-house data and targeting information.

• This could be a PR move for Amazon to be proactive on anti-trust while giving up a small amount of revenue (small for Amazon, not small for The Trade Desk)

Regarding the PR move, the motivation behind the announcement may be that Amazon is being proactive in side-stepping anti-trust issues. The Trade Desk and Dataxu are competitors to Amazon’s own demand-side platform Amazon DSP. By giving away a small piece of the Connected TV pie, Amazon protects itself from regulation. If this is the angle, it’s an incredibly smart move by Amazon and third-party ad networks stand to benefit.

2.2 The Trade Desk Financials

The income statement on The Trade Desk is solid for a company of its size. Revenue in Q1 2019 grew 40% to $120M from $85M in the year-ago quarter with positive net income of $10M. Adjusted EBITDA grew from $18M to $24M. Growth YoY has been a consistent 50-60% for over 4 years posting 52% in 2017 from $202M to $308M and 55% in 2018 to $477M.

We already discussed rampant growth in Connected TV advertising, however, The Trade Desk is also strong on mobile at 45% YoY and mobile video at 60%. Customer retention at The Trade Desk is at 95% and has been in this range for 20 quarters, according to the 2018 Financial Results (note: many ad companies claim high retention). Data spend was up 80%, cross-device up 300% and audio up 270%.

However, these numbers come with an outstretched valuation of $12 billion market cap on $500M in annual revenue and $10M in profit. The price-to-earnings ratio is 135 and the price-to-sales is 24, at time of writing.

The Trade Desk advertises that it has been profitable since 2013. This requires caution for buy-and-hold investors. There is very little R&D to be spent on ad-tech as there is no moat to protect. The ad ecosystem is capital efficient because the technology is not complex enough to require a large team of engineers. In technology, being capital efficient right out of the gate can often spell trouble long-term if the development of the product is easy for competitors to copy.

2.3 The Trade Desk Risks

Competitors will not knock The Trade Desk out of position this year, however, the future for an ad network in CTV ads, omnichannel programmatic with a data management platform in the stack, and/or with an ad ID will become decisively hard turf to protect. The early profitability reveals the lack of complexity in the ad-tech stack, and this is true for all third-party ad networks.

The ad industry is highly competitive, and the track record of third-party ad platforms performing well long-term is nearly non-existent following a year or two in the limelight (i.e. Millennial Media, Criteo, etc). This is due to hundreds of competitors globally.

Demand-side platforms are especially at risk as the supply-side controls the relationship. In this case, The Trade Desk is at the mercy of the supply-side platforms who often work with as many demand-side platforms as possible to get the most demand and the highest ad rates on their content. (It’s called supply and demand for a reason, and the supply will, of course, want to increase demand with no loyalty provided to The Trade Desk).

The Trade Desk states the company is “one of the fastest growing and most profitable software platforms in any sector.” This is false advertising. The Trade Desk is a third-party programmatic ad network and this is a very distinct category from software. This statement is especially troublesome.

The company also claims a disproportionate total addressable market as they include TAM that is shared by Google, Facebook, Amazon, all social apps, and all television advertising ($1 trillion industry). The company states a $33B TAM for programmatic, although this is also shared by dominant digital FAANG companies.

Conclusion:

CTV ads are a big enough opportunity for The Trade Desk to continue to perform well. The stable revenue segments of mobile video and desktop are diversified with the explosive revenue segment of CTV ads. There is no reason to believe The Trade Desk will miss earnings.

However, the stock is very expensive and will be penalized due to price in broader market reversals. Please see the technical analysis for buy-and-hold entry/exit scenarios.

Regarding the next 1-3 years: one key differentiator for The Trade Desk is the universal ad ID. If The Trade Desk lost the universal ad ID capability to track users, this would impact the company negatively. On the flip side, Big Tech anti-trust issues or privacy regulations could strengthen The Trade Desk’s market position. The universal ad ID should be watched closely for positive or negative product announcements.

Monitoring the competitive landscape will be essential for The Trade Desk over the next 1-2 years. I expect competitors to appear in droves with at least 7-10 new viable competitors for CTV ads in the next 24 months. If you are a Research Services subscriber, you will know of these competitors in advance.

SECTION 3: ROKU

Roku is the only pure-play CTV ad option that owns its own hardware platform and operating system. This is an enviable position that only Google and Amazon claim, although notably, Roku has more hardware players in households than either Google Chromecast or Amazon Fire TV with 40 million U.S. customers using Roku once per month. Roku also has the advantage of knowing OTT better than any other company as the original provider of set-top-boxes. Connected TV ads and OTT hardware is the company’s 100% laser focus.

Many investors over-estimate original programming and subscription services. According to Nielson, only 20% of time is spent on original programming while 80% of time is spent on catalog content. Meanwhile, Netflix is spending $8 billion per year to produce original programming. Many ad-supported choices have subscription fees, such as Hulu and YouTube TV, which forces consumers to pay for subscriptions while still seeing ads.

Overall, there is subscription fatigue in the OTT space with individual channels charging $8+ for single channels to $45+ for YouTube TV. These fees add up to more than a cable bill, in some cases. Roku’s growth has come from executing well on a channel that is entirely free and supported by ad dollars – a welcomed business model compared to the competitors.

Pay TV attrition funnels into Roku’s addressable market. For every dollar AT&T and Comcast lose, Roku is situated to gain. In 2011, pay TV subscribers fell by 8,000 in 2012 and the losses accelerated to 164,000 in 2014. Three years later, the losses grew 20x to 3 million subscribers. By 2023, live-linear OTT video subscriptions will surpass traditional broadcast TV.

Beyond Connected TV ads, Roku is a hardware player and operating system. In Q1 2019, the company estimated that one-in-three smart TVs sold in the U.S. were Roku TVs. I originally covered Roku’s partnership with smart TVs in early 2018, and why being vendor agnostic would be a boon for future growth. In other words, in the arena where Apple, Amazon and Google compete, Roku is a neutral party. TCL, RCA and Samsung/Tizen chose Roku.

The global OTT devices and services market is expected to reach $165 billion in 2025 compared to $29 billion in 2015. As stated in the introduction, there is phenomenal growth being reported across CTV ads with triple-digit and even four-digit growth percentages. As a pure play option, the majority of Roku’s revenue comes from capitalizing on this opportunity.

Notably, Roku has a significant amount of proprietary data for advertisers to leverage. By owning the viewing platform, Roku is able to collect data across OTT apps.

1.1 Roku’s Global Potential

I first covered Roku’s global potential in May of 2018, and we have yet to see Roku’s global expansion. I believe Roku will become a large cap stock with global execution and could reach a $100 billion valuation from the cheap hardware proliferation in global markets combined with the free-supported ad channel and primary driver of platform revenue.

The low price point for the hardware coupled with the free content should be very desirable in emerging markets. Roku’s OS has 3,000 channels compared to the next competitor with 1,300 channels. This variety will do well for global audiences who have varying tastes in content. Roku also has a free mobile app that can reach the 3 billion smartphones in the world, 80% of which are Android due to the cheap average sales price.

The bottom line is that Roku has maintained the lead in the United States as the top streaming media player by helping reduce costs for cord-cutters. Their business plan is to keep costs very low for their customers. It’s only a matter of time before they bring this to the billions of people overseas who want to reduce the cost of television.

2.2 Roku’s Financials

In 2017, as a newly public company offering investors transparency, Roku revealed lackluster revenue growth leading up to its IPO. In 2015, annual revenue was $319M, and in 2016, the annual revenue was $398M. This is why some investors had a hard time buying the stock when it listed in September 2017.

The revenue turnaround is easy to understand when compared with the trajectory of CTV ads as analyzed by this report. CTV ads were nascent in 2017 and started gaining traction in 2018. Roku soon began posting revenue growth of $512M in 2017 and $742M in 2018.

Most recently, Roku reported 79% growth YoY in Q1 2019 on its ad platform revenue with total revenue at $134M.

Roku is not profitable with net income of negative $10M. Adjusted EBITDA is positive $10M.

In order to lock-in market share, Roku offers its hardware players at low prices, which eats at margins. In Q1, Roku lowered prices of its hardware by 4% YoY. Roku spends heavily on R&D at $55M in the last quarter to help maintain its lead as a top OTT player and ad platform. That’s nearly 40% of revenue spent on R&D. In Q1 2019, Roku had $265 million in cash and short-term investments.

This quarter, Roku’s outlook calls for 42% year-over-year revenue growth to $223 million at the midpoint. Adjusted EBITDA will be a loss of roughly $7.5 million in Q2 at the midpoint. This is due to product development and a new lease. Keep an eye out for Roku beating on revenue and missing on net income or adjusted EBITDA over the coming year as the company fiercely protects its turf with R&D during this time of golden opportunity in CTV ads.

2.3 Roku’s Risks

The majority of time spent on OTT is on Netflix, Amazon Prime Video, Hulu and YouTube. These channels comprise 75% of viewer time. In addition, the OTT market is heating up with the entry of Disney as a major player. Although most of these subscription channels do not directly compete with Roku for brand ad budgets (they are subscription channels), they do compete for time spent on Connected TV. Please keep in mind, these are viewing habits for the United States and global markets will change the trajectory of subscription vs ad-supported — with ad-supported being favored.

On hardware, Google Chromecast and Amazon Fire can reduce prices to lock-in users with little effect on the mega-cap companies’ bottom lines. Roku may need to continue lowering prices on the hardware player to remain competitive. Amazon’s DSP remains Roku’s biggest competitor.

Conclusion:

Investors do not need to choose between The Trade Desk and Roku. Rather, investors need to get these companies at the right price for the highest returns. The Trade Desk has potential over the next two years and requires monitoring for a buy-and-hold strategy beyond this. Roku has potential for the next five years and may have a sudden, upward trajectory with global expansion.

From a tech analyst perspective, Roku has a better moat than TTD. Amazon and Google have not been able to shake Roku — and there is no evidence that this will occur in the future.

Roku will likely report strong revenue growth into the foreseeable future. The profitability could spook Wall Street, and there may be surprises in the operating expenses, but subscribers to Research Services should use this to your advantage as you are now well aware of the CTV ad opportunity.

Connected TV advertising is going through a lucrative and important transition right now that will remain stable during economic downturns due to the free price point and the CPG brands who buy TV ads. I do not believe Roku is expensive relative to its growth potential. However, the technicals show weak internals and there may be better buying opportunities with patience. Please see the technical analysis for more information.

How Roku and The Trade Desk Compare:

• The Trade Desk has the same market cap as Roku with nearly 35-50% less revenue.

• Notably, TTD has better cash flow and is marginally profitable.

• Roku’s Cost of Goods Sold is bloated at 50% or more of revenue, which is a negative. Roku has thin margins on the hardware player revenue as it’s cheaply priced to get people locked into the ad platform.

• Roku does spend 2x more on R&D than TradeDesk, which is a positive as they should be investing to maintain their lead.

• I favor Roku between the two but CTV ads are a big enough opportunity to add both to your portfolio at the right price and/or to buy calls.

SECTION 3: Technical Analysis

Provided by Knox Ridley

Section 3.1: The Trade Desk

The Trade Desk has traded in a relatively uniform bullish channel. I currently see it finishing 5 waves up from the December low in a larger degree 5 Wave count. The larger degree 5 wave count has us completing a wave (3), which I believe is playing out now. Below $226, and we will likely see this Wave (4) retrace fall somewhere into the green box – $174-$108. This will be our target to ride Wave (5) to new highs and beyond. If you are not invested in TTD, around $150-$135 will be a good entry.

It should be noted the strength of TTD’s uptrend. It is currently above its 8-Day EMA and-21 EMA. The Trade Desk, like many stocks in the tech sector right now, are making higher highs with decreasing buying pressure. This can be seen in the Pink Arrows, and if you’ve been keeping up with my analysis, you’ll recognize I’m using the term negative divergence frequently. This is when the RSI/MACD is making lower highs while the stock price is making higher highs. This is a sign of weakening buying pressure and an unhealthy uptrend. It typically leads to a correction, unless new material information is released to justify increasing buying pressure.

Another pattern to note is that TTD formed a classic candle stick pattern known as a 2-day reversal. This is when a trend is interrupted by a massive spike up on higher than normal volume, and then the next day reversed in full on even higher volume. This is a signal of exhaustion, and can signal a trend reversal.

You’ll also notice how the 50-day EMA acted as a major support in the picture above. If we break this trend, we will likely find our entry in the green box targeted on the chart. For now, let’s see what TTD gives us.

• Most likely scenario: TTD breaks support at $224, and we wait for a bottom to form, followed by a renewed uptrend to enter a long position.

• Less likely scenario: TTD breaks out to new highs on high volume to $285. If this happens, we will also initiate a position with wide stops.

• Notably Beth is bullish on TTD and does not foresee any fundamental issues. Rather she sees Connected TV ads as an opportunistic trend with a long runway. Keep this in mind for earnings.

Section 3.2: Roku

Since its IPO, Roku has been trading within a well-defined trend channel (in solid blue lines). It has bounced multiple times from the top of the trend line to the bottom channels, trading within a uniform fashion within this band. As you can see, Roku is at the top of the trend channel again, and has been bouncing around the ceiling, trying to break through. It’s worth noting, the more a support/resistance level is tested, the weaker it become – this holds true for the $114 level, which would make a new high, and the $88 support, which is the line in the sand for Roku’s continued advance.

The upper trend channel has been significant resistance for Roku, marking a short-term top twice before, followed by a decline in price. Today, we are, once again, testing this trend line with some notable differences:

• Roku is staying on the trend line for an extended period. It tried to turn down, found support around $88 and is back on the trend channel again. This is a show of strength, which needs to be factored.

• Negative Divergence: as Roku’s price increases, its RSI is decreasing, signaling a weakening buying pressure (note the pink arrows’ divergences). The same can be seen in the MACD’s peaks – as the price of Roku increases, the MACD is making lower highs. This is a show of internal weakness, which usually precedes a pull back.

• The Volume is decreasing as the price advances. In a bull trend, we want to see volume expanding along with the price. This is a signal that the buying pressure is thinning out.

• The MACD has rolled over from a high point and is pointing down. This is a sign of weakening internals, and usually precedes a pull back.

• Roku has broken the 21 Day Moving Average and is touching its 50 Day (orange).

• Notably Beth is bullish on Roku and does not foresee any fundamental issues. Rather she sees Connected TV ads as a very opportunistic trend with a long runway. Keep this in mind for earnings.

One final point, if you look at the chart below, you’ll see an outside reversal pattern (or bear engulfing pattern). This is when the high and low of the day is at greater highs and greater lows than the day before. What makes this pattern strong is: (1) the more days it engulfs the stronger (2) the larger the engulfing pattern vs the days prior is a show of strength (3) the engulfing pattern happens on higher than normal volume.

This pattern engulfs 7 prior trading days on higher than normal volume. I’d consider it a relatively strong indication of a trend reversal.

Technical Analysis operates within probabilities. The weight of evidence supports lower prices for now. Let’s see how it performs around this area. If it breaks through the $88 range, we could easily see it trade between the $60-$45 rather quickly (green box in the graph). On the other hand, if it can break through the long-term uptrend channel with heavy volume, this will be a bullish reversal.

Conclusion:

(1) With this being one of our highest conviction ideas, we want you to get the best price possible to hold for the long haul. We believe you have a chance to secure Roku in the high $50s to low $60s with patience. For now, we need more information on how the stock trades between the $88-$114 range to improve the odds of the gamble.

(2) Notably Beth is bullish on Roku and does not foresee any fundamental issues. Rather she sees Connected TV ads as an opportunistic trend with a long runway. Keep this in mind for earnings. Roku’s pullback will likely require a broader market sell-off.

August 5th Update – Seeing Red

Posted on August 6, 2019June 30, 2026 by io-fund

Information Technology led the losses today with XLK down -4.17% compared to other sector ETFs down 2-3%. Losses in the NASDAQ of 3.47% outpaced the Dow and S&P 500 at 2.90% and 2.97% respectively. Futures are trading at negative 2% on news that the U.S. declared China is a “currency manipulator.”

The market closed on its 200-day exponential moving average. After hours, it broke through and will likely gap down to open tomorrow, while futures are currently showing the market trading into the 2790 region. The market is over-sold based on the RSI index and we are approaching key supports. A bounce is likely. The RSI is currently (as of the close today) lower than the RSI low in the May/June correction of this year. Furthermore, we are approaching a major price cluster (red dotted lines). This has acted as major support and resistance in the past.

The list of Huawei suppliers provided on Research Services is a decent list to hedge your long positions. It’s unlikely there is a resolution with Huawei for some time. I had written this in the Apple update, as well. The damage done to Huawei suppliers over the current trade war news should exceed what we saw in May.

Most investors can agree that technology stocks are expensive right now. Our most likely scenario on the MongoDB report was an entry below the $141 support between $95 and $128. We will keep you posted on this.

Snap is likely to break the final support on our most recent trade at $16.20 and we will be releasing information on entry for this stock again for anyone who exited. I’ve chosen to keep some of my position as there is room for a bull run on Snap due to monetization through Audience Network.

We also have a lengthy 12-page report coming out tomorrow on one of my favorite trends for the next 2-3 years – Connected TV Advertising. We will be guiding premium subscribers on entry for TTD and Roku. The latter is a stronger pure play, but this trend is critical to have in your portfolio, and there is room for both stocks to perform well in the near term of 2-3 years. TTD and Roku report earnings this week.

Uber and Lyft also report earnings this week – my two least favorite IPOs this year.

Regards, Beth