Core Platform Contribution Margin is described as “profit (loss) as a percentage of core platform adjusted net revenue.” This describes the profit margins from every ride-hailing trip or food delivery, (the latter applying only to Uber). This margin falls between gross margin and operating margin.
CPC Margin is calculated by starting with core platform net revenue, minus costs like marketing research-and-development costs, and the result is the “core platform contribution (profit) loss. Divide this by core platform net revenue.
The operating profit margin is lower than the Core Platform Contribution Margin as the latter doesn’t include R&D from autonomous vehicles. Conveniently, they’ve come up with a metric to remove these investments.
I’ve written about Uber and Lyft extensively and want to expand on a few key metrics that are causing further concern. There are thousands of key metrics across the technology industry not recognized by the financial industry. Venture capitalists rely solely on these key metrics to make informed decisions around which companies they should invest in.
Popular key metrics in mobile are monthly active users, daily active users, average revenue per user, churn and retention. For cloud SaaS, net retention rate, monthly retention rate, gross revenue retention, customer lifetime value and customer acquisition cost are a few key metrics that are important.
Here’s a snapshot of key metrics tracked by a VC on a SaaS investment:
Uber and Lyft’s Key Metric:
Core Platform Contribution Margin is described as “profit (loss) as a percentage of core platform adjusted net revenue.” This describes the profit margins from every ride-hailing trip or food delivery, (the latter applying only to Uber). This margin falls between gross margin and operating margin.
CPC Margin is calculated by starting with core platform net revenue, minus costs like marketing research-anddevelopment costs, and the result is the “core platform contribution (profit) loss. Divide this by core platform net revenue.
The operating profit margin is lower than the Core Platform Contribution Margin as the latter doesn’t include R&D from autonomous vehicles. Conveniently, they’ve come up with a metric to remove these investments.
Here’s a snapshot of Uber’s contribution profit (loss) worsening quarter-over-quarter (40)% and also the decline in contribution from the core platform over the past six months (87)% with an increase in other bets.
As a percentage of revenue, the Uber’s most recent contribution margin is 8.2%. Here is what the contribution margin looks like historically:
Compared to Lyft’s contribution margin, which is nearly 5x better and has been very consistent, as well:
Negative (or very low) contribution margins indicate that Uber is becoming less profitable as it gains more customers. This could be due to Uber competing in global markets and needing to lower prices to remain competitive.
The problem for Lyft, is that due to its association as a ride-share company, it will continue to be overshadowed by Uber’s performance. From a key metrics standpoint, Uber is weaker than Lyft. Regardless, both companies are weak fundamentally and provide an excellent opportunity to hedge long positions.
Additional Reading on Uber and Lyft’s Fundamentals:
Path to Profitability is a Dead End
Uber: Q1 Earnings
Uber’s IPO Lyft’s IPO
SECTION 2: Lyft Technical Analysis
By Knox Ridley
We don’t have a full year of price action for Lyft, but we do have some information to work with. First off, if we look at the Anchored Volume Weighted Average Price (AVWAP), which is anchored to the opening high, you’ll notice that Lyft’s price has predominantly stayed below that line, which is highlighted in aqua blue. Furthermore, the recent leg down is showing significant weakness, which can be seen in the separation between the AVWAP and the current price.
This same weakness is further highlighted between the separation in the long-term trend line, highlighted in black and the current trend price. As the RSI approaches the 60 line, the price is making a much lower low, which is not even approaching this trend line or the AVWAP. The continued separation between the AVWAP, long term trendline and the price is an indication of increasing weakness in Lyft.
Institutional Buyers/Sellers:
Those massive spikes in volume indicate institutions buying and selling at specific prices. Because of this, these price points will mark significant support/resistance zones. This is noticeable in how the price bounced around the institutional price clusters, highlighted by the black lines, before finally giving way to the downside last Tuesday, September 25th. This most recent selloff not only broke with force through this support region, but also the 61.8% extension, making all time new lows.
This is notable for a few reasons. One, there is institutional money that sees Lyft as a buy at these levels, so a large amount of money is pegged at these prices. Also, these levels indicate strong support for this very reason, which now will act as resistance.
Negative RSI Reversal:
The negative RSI reversal pattern is currently playing out in Lyft. This happens when the price is making lower lows, while the RSI makes higher highs. This is an indication of fading momentum, and a great indication of further downside ahead. This pattern is highlighted with the blue circles in the chart.
Furthermore, the internal strength of Lyft is quite weak. It has been stuck in bear internals, unable to barely break the 50 line before turning back down to oversold levels. In a bear market, the RSI will not cross the 60 line. When I see a stock unable to cross the 50 line before turning back, it’s a sign of a strong downtrend in play.
Elliot Wave:
There’s a clear first leg down (A Wave), corrective move back up (B Wave), and we are now in the process of a new leg down (C Wave). I’m targeting the 100% extension of the A Wave, which puts us in the $27-$27.50 range.
Typically, we’ll see the down legs in a corrective move that are of equal length (A=C). We will see bounces along the way, but as long as Lyft stays below its AVWAP and the long-term trend line, I will be targeting this zone as a profit taking zone for my short.
SECTION 3: UBER TECHNICAL ANALYSIS
By Knox Ridley
There’s slightly less price action with Uber. For a brief period, it engaged in a slight uptrend, spending half of its time trading above the Anchored Volume Weighted Average (AVWAP), anchored to the high of its open, which is highlighted in aqua blue. However, once it broke the AVWAP, it started a downtrend that appears intact and pointing to more downside.
Negative RSI Reversal:
The RSI is showing the same negative reversal pattern we see in Lyft. This pattern is very reliable in indicating that a new leg is developing in the downtrend. I think it’s very likely that we will make new lows.
Further evidence that the price is rolling over can be found in the KST indicator. The KST is one of my favorite change in direction indicators. It’s a combination of short-term and long-term Rate of Change indicators combined into one. As you can see, the KST has moved back up to the high, while the price of Uber is making lower highs. The KST is currently rolling over hard, which I use in conjunction with the other indicators to help me determine a short.
Elliot Wave:
All corrective retraces move in a 3 wave pattern (A,B,C). The 3rd leg (C), is typically the length of the first leg (A). Now the internal structure of these corrective moves can move in a 3-3-5, pattern or a 5-3-5 pattern, but the larger pattern is usually a 3-step move. Furthermore, when a stock has very little price action, the Fibonacci ratios tend to be great sign posts for a change in trend, or an indication of a further decline.
I currently see the A-wave as complete, and then the market began an brief uptrend – the corrective B-wave. I was expecting the B-wave to be longer, which I highlighted the likely regions in blue. However, once the price action hit the long-term trend line in black, which coincided with the 23.6% retrace line of Wave A, the downtrend commenced, which is an indication that the B-wave is over.
The market likes symmetry, and 3-leg corrections will typically exhibit this symmetry. So, the length of the A-wave (1st leg) will determine the length of the C-wave (3rd leg). This final push will typically be of equal length or an extended ratio of the A-wave (first leg). So, if the C-wave will be a similar length as the A-wave, that will put us around $25.75. This is my final target for my short position before we should see a corrective rally, which will either be the start of a new uptrend, or a corrective rally in a much larger 3-wave correction.
1. Tesla to Develop A Battery That Can Last for A Million of Miles
Earlier this year, Elon Musk announced that Tesla was developing a power source that would allow electric cars to travel for up to a million miles. The claim seemed boastful at the time but now it seems that the Tesla founder was quite serious about his statements.
Battery researchers from the Dalhousie University published a paper that described ‘A Wide Range of Testing Results on an Excellent Lithium-Ion Cell Chemistry to be used as Benchmarks for New Battery Technologies’
Among the key features of the paper was a lithium ion battery that could potentially allow electric vehicles to travel for up to a million miles, while losing less than 10% of its capacity throughout its whole lifetime. The Dalhousie University team also proved that their new battery could perform better compared to all other lithium ion batteries previously reported.
Tesla’s interest in the Dalhousie lithium ion battery is motivated by two Tesla vehicles currently in development, the robotaxi and the long haul electric truck, both of which are intended to travel long distances. Such vehicles are a perfect match for the Dalhousie team’s prototype battery.
2. Facebook Developing Technology That Would Allow Humans to Control Computers With Their Brains
Facebook users may soon be able to control their accounts using only their thoughts. Social media giant Facebook announced on Monday their acquisition of CTRL-labs, a New York based start-up that is researching methods that would allow users to control computers using only their brains.
According to reports received by CNBC, the deal cost Facebook between $500 million to $1 billion, though a Facebook spokesperson said that the deal’s cost was below a billion dollars. CTRL-labs will also be integrated with Facebook Reality Labs, a Facebook division that’s working on ‘augmented-reality smart glasses.’
Facebook Vice President of AR/VR Andrew “Boz” Bosworth said that CTRL-labs’ technology will take the form of a wristband that allows people to control their gadgets. The wristband will take the electrical signals that travel through the wrists to give directions to electronic devices; effectively transforming bio-electrical signals into digital commands.
3. Cisco Partners With SingularityNet to Develop Decentralized Artificial Intelligence
Cisco has partnered with decentralized artificial intelligence firm, SingularityNET to work on applied artificial general intelligence or AGI. Unlike other areas of AI research, AGI focuses on developing AI that can mimic human mental faculties, including problem solving, planning, communication, natural language and reasoning in uncertain situations.
SingularityNet founder Dr. Ben Goertzel also reported that the initial applications of AGI will most likely be used for ‘verticalized markets’ such as advertising, medical research, computer research as well as financial analytics.
And these aren’t just speculations either. Back in May, Singaporean and Malaysian divisions of Domino’s Pizza worked alongside SingularityNET to use blockchain AI technology to supplement their supply chain processes. Furthermore, Chinese insurance company Ping AN had also collaborated with the company to research optical character recognition, computer vision as well as model training.
4. IBM Willing to Work with Facebook on Digital Currency
IBM executives recently said that they are willing to collaborate with other companies to carry out blockchain research, particularly the ‘tokenization’ of assets. Through such collaborative work, IBM hopes to create blockchain solutions which are appropriate for its own needs.
In particular, IBM claims that it is willing to work with Facebook in developing a digital currency. In a recent CNBC interview, IBM general manager of blockchain services Jason Kelley claimed that ‘blockchain is a team sport’ and that they ‘were ready to work with all of them (Facebook) to bring it together.”
Kelley also added that Facebook’s work on cryptocurrencies and asset tokenization gives the field a certain level of legitimacy. For IBM, however, the goal is to take the technology behind cryptocurrencies and use it to organize data, manage supply chains and create more transparency.
5. Uber CEO Claims that their Business Model is ‘Absolutely Sustainable’ Despite Losing $5 Billion in Three Months
Uber CEO Dara Khosrowshahi claimed that his company’s business model is ‘absolutely sustainable, despite losing billions in revenue for the past three months. In an interview with CNN correspondent Christiane Amanpour, Khosrowshahi said that ‘The model is absolutely sustainable,’ while also pointing out that the business is still growing by over 30% globally.
Additionally, Khosrowshahi also expressed Uber’s intention to offer higher compensation and certain health benefits to Uber drivers. “We do believe that they should get health care. We do believe that they should have minimum earnings,” Khosrowshahi said.
Despite such assurances, however, Uber continues to struggle with mounting losses. The company had lost $5.2 billion in the first three months at the end of June, its largest quarterly loss ever. Consequently, Uber’s stock fell roughly 30% since it first went public back in May, despite raising $8.1 billion in one of the largest public offerings ever made.
Although the iOS 13’s was released only a little while ago, Apple has already rolled out the next major update for its latest mobile operating system. Apple recently fast tracked the iOS 13.1’s rollout due to complaints from users about crashes and frozen screens.
The new update was specifically released to fix these problems, including issues with Mail, Siri, malfunctioning app icons as well as sign-in failures. The update was also created to address location permissions, which happens whenever users don’t want to share their location details for an app.
Finally, the iOS 13.1 was also developed to address all sorts of privacy issues found in the iOS 13, but it also adds several new features as well, such as the ‘Share ETA’ feature, which allows users to share their approximate time of arrival, and the Apple Music lyrics view feature, which allows users to see the lyrics to the music they’re listening to. So all in all, the iOS 13.1 fixed a lot of earlier problems while adding a few interesting features at the same time.
Momentum swings in both directions. Last week, we woke up to Roku at a 20% drawdown in a single trading day. In fact, within 2 weeks, Roku’s price has fallen 39% from its all-time highs. If you are new to Roku, it would be easy to panic. However, for those that have been involved with Roku from its IPO didn’t even flinch. Within 2 years of trading, Roku has had 3 drawdowns of around 50% from peak to trough. The largest drawdown has been 64.47%, and without a strong conviction, there’s no way an investor could sleep while holding Roku for the long haul.
Whenever we see the market get it wrong, again, on Roku, and the technical break significant support, as a Roku investor, I don’t get afraid, I get excited. It’s times like these that I look to add to my Roku position as I have personally outlasted every Roku drawdown since it went IPO. The point of this report is to gauge the probability of Roku’s current drawdown, which can act as a reasonable point of entry.
Elliott Wave
Roku’s impulsive chart pattern is unfolding nicely. My primary count has us completing a blow-off top 3rdwave, highlighted in the blue numbers, where the explosive 3rdwave, with peak technical momentum, pierced the upper range of the trend line. We are currently starting the 4thwave down and when we zoom into the 1-day waterfall event, we can see a clear 5-wave pattern down, insinuating a 5-3-5 correction is underway. I estimate this correction will take us to the 50% – 61.8% retrace level ($96-$77), after we get a corrective bounce.
These levels not only coincide with the trendlines developing, but they also coincide with the 100% extension and the 78.6% extension. I see this area as a strong region to expect the pullback to find support, and depending on the broad market, could be an excellent place to add to, or begin building a position.
Basic Technical Analysis
Some of my favorite gauges for market health and actionable decision making is based on basic trendline/momentum data.
First off, I anchored a Volume Weighted Moving Average (AVWAP) to the December low, which is the momentum line highlighted in pink. This moving average clearly shows that, even with a near 40% drawdown, the bulls are still in control. This moving average lines up perfectly with the 200-Day moving average, highlighted in blue. These 2 levels will act as major support as they move into the targeted support ranges, strengthening the support within this region.
Moving onto the broken support regions, you’ll will notice the 3 separate tops (one of which we are currently experiencing). Below these tops you’ll notice the line in the sand support region, highlighted in dotted black. Roku has definitively broken through the current support, after breaking a significant trend line, also highlighted in black. Notice the red arrows. There are 3, all lining up with the exact moment the RSI, MACD and price broke their respective trend lines from the December low.
I would urge you to be cautious trying to buy the dip too soon in Roku. I do believe we will see a corrective bounce from over sold levels, but I expect it to be corrective before we see the final drop into the 50% – 61.8% retrace zones. You’ll notice the histogram in the MACD, dropping to levels we have never seen with Roku. When we see such a sharp drop in the MACD, more times than not, it’s an indication of too soon, too fast, which leads to the very least a bounce. Also, you’ll notice that the RSI is right on the 30 line, indicating oversold levels as well.
However, while we are looking at the RSI, I want you to notice how many times the RSI broke the 40 line, which in a bull market the RSI will usually not break, and then dropped to the 30 line. Three times this occurred, and 2 of those time lead at least a 50% drawdown. I use this as further evidence to hold off on adding to Roku at these levels.
In conclusion, I believe the $96 level will be the next support region that Roku will react to. It’s due for a bounce, I’m expecting at minimum to the $115-$120 region, but this bounce should be corrective before we drop to the 61.6% region. I will look to add to my position around this price cluster.
Most of my readers know that I’ve been critical of Uber and Lyft since before either went public. I have a decent repertoire of analysis on these companies dating back to March 14th (see below at end of this update for quick reference). This was at the height of the IPO exuberance when many Wall Street experts predicted these IPOs would be a success.
I updated my thoughts in a new article published today on MarketWatch. I’m writing some additional analysis for my premium readers, including why I think Uber is the weaker company due to it’s contribution margin and a few other key metrics. Knox is going to publish some TA on where he thinks these companies will ultimately end up.
I’d like to point out that during the cloud software sell-off, we were working hard to provide our readers with a few good ideas. We published on Workday, Zoom, Slack and Okta. Three of these we nailed on what support would be (Zoom, Slack and Okta), and continue to believe Workday will come back to the levels in our scenarios. We were pumping out the information as we wanted to give our readers a few stocks we thought would hold support and warn on the one stock we were concerned about (Okta). Keep in mind, we wrote on Okta before anyone could have predicted the cloud software pullback.
We are not financial advisors, rather we work hard to pick the right stocks through tech industry analysis, and to follow this with the right entry. Nobody is right 100% of the time, and we won’t be either. But, it doesn’t hurt to point out when our hard work pays off. Knox especially hit a few home runs on TA this month.
To summarize:
Our chart for Zoom on Sept 5th called for a 61.8% retrace to $78.00 – the stock hit exactly this number on Sep 9th and bounced back. We stated we’d love get the stock at this price in the PDF and chatted with some readers on the forum about entry here.
On Slack, which was a blog update on Sept 4th, we called for a $25 support range or a $10-$12 billion valuation when Slack was priced at $31. On Sept 9th, we hit $24.92, and even this volatile stock that has negative market sentiment, has held support for about 10 days.
On Okta, we published a technical chart showing a retrace to $104 when the stock was priced between $127-$133. This was a bold call at the time. Alternatively, Knox suggested any Okta bulls to wait until the stock broke $142 as buying pressure was slowing down and there was higher probability the stock would go through a pullback.
Workday hit the $172 support that Knox wrote out in the scenarios on August 28th. We are still waiting to see if we can get the $190, although this is taking longer than expected due to the cloud software pullback. Workday has a financial analyst day planned for October 15th. I am curious to see if they will debrief the financial analysts on their machine learning strategy and progress there. I’m not sure the financial markets are fully aware of Workday’s strategy with ML. I’ve been seeing this at tech conference keynotes over the past few months and feel I am ahead of momentum here.
Regarding Roku, we had quite a few readers ask us about Roku when momentum pushed the price into the $160s. We encouraged them (frequently!) to wait for a better entry. I like $120 but Knox has other ideas in the $100-$111 area. He’s working on this update. In short, with the recent shift in momentum names, we want to see how price reacts in September. Anyone who has followed Roku longer than a year knows that a %10 up/down day is very normal. Stay tuned. p.s. You’re also aware this is one of my favorite trends in tech in the short-term (connected TV ads), and why I like Roku over a few of the others in the space, so keep that in mind. This is available under the PDFs for anyone new to the site.
Of course, this is anyone’s game. It could all change tomorrow. Stay nimble! We do put trailing stops on our positions right now in the event there is a sudden reversal. Nvidia at $290 is a perfect example. We were able to ride this up and take gains when we hit our stop and re-evaluate and re-enter at new support a month or so later. Note: We haven’t built our full position in this stock just yet.
I typically will lean towards a stop of 20-25% in this market environment. After that, I re-evaluate before I enter again. However, high conviction stocks like, Roku, which we’ve owned with a cost basis of $29 for over a year, we will hold with no stops, as long as the story remains unchanged.
I’m headed to a few tech conferences: AdvertisingWeek in NYC and Strata Data Conference this week and TechCrunch Disrupt the following week. AdvertisingWeek should help me understand where we are in ads, especially with connected TV ads (don’t want to miss any small caps) and programmatic. Strata Data Conference is all about machine learning and big data. Lastly, TechCrunch is second to none for the startup ecosystem, which eventually grow into successful IPOs.
I’ll drop the Uber and Lyft PDF by Monday at the latest. We are working on a new Roku chart too.
The ride-sharing companies are subsidizing rides and overspending on technology, and soon their very business model may be upended in California.
Ride-share company earnings prove that if you lower the bar to the ground, it’s easy to leap over.
Uber UBER, -1.28% and Lyft LYFT, +1.42% each reported staggering losses recently, yet the reports were delivered with positive spins.
Lyft released “record second-quarter results” while losing roughly the same amount of money as in previous years. Lyft’s improving loss guidance was meant to look attractive at $850 million to $875 million per year, compared with the $1.15 billion-$1.175 billion previously forecast. But that amount is higher than in both 2016 and 2017.
Uber had an epic $5 billion quarterly loss, which is about $1.3 billion when adjusted for certain items. In what universe does a company with a $58 billion market cap report any losses at all, let alone what’s projected to be $4 billion for a full year.
Below, I look beyond the earnings reports to review a few of the systemic issues that affect Uber and Lyft. It’s important to look for the cause of the losses.
1. Ride subsidies destroy potential profits
The S-1 filings disclosed a risk that overshadows the path to profitability for both companies. An excerpt from Lyft’s S-1 filing says:
“We grow our business by attracting new riders to our platform and increasing their usage of our platform over time. … We also offer incentives for first-time riders to try Lyft, as well as incentives for existing drivers and riders to refer new riders. … We often also provide incentives to existing riders to encourage them to expand their use of our platform. If we fail to continue to attract riders to our platform and grow our rider base, expand riders’ usage of our platform over time or increase our share of riders’ transportation spend, our results of operations would be harmed.”
In 2017, Reuters published that Uber passengers pay only 41% of the actual cost of their trips, citing research from transportation consultant Hubert Horan. At the time, Reuters warned that this creates an “artificial signal about the size of the market” after Uber had released limited financial data as a private company that showed losses of $708 million per quarter. Four years later, with a $1.3 billion quarterly loss, there’s no evidence anything has changed.
The problem with subsidizing rides is that investors aren’t able to determine what would be required for profitability, how much the cost of a ride would have to increase to cover expenses, and if increasing prices would negatively affect demand. Therefore, the real-world revenue is unknown, and the losses reflect the effects of subsidies.
2. Business model under threat in California
Lyft and Uber have scaled their companies, but it comes with the variable cost of human labor. Ideally, you want fixed costs for R&D on platforms, software, hardware and other products to create the margins that technology is known for.
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 now, regulations due to independent contractor classifications.
The systemic issue is that the mobile app holds very little intellectual property, with the primary value of the product resting in the mobilization of a massive workforce of nearly 1.9 million people, per Lyft’s S-1 filing, and 3.9 million drivers with Uber. We know there isn’t intellectual property in ride sharing, as there are many such companies globally: China’s Didi, Singapore’s Grab, India’s Ola, Europe’s Bolt (previously Taxify) and MyTaxiApp, and Dubai’s Careem (which is being bought by Uber).
Therefore, the value of the companies is in the workforce, not the technology. This also happens to be the biggest risk.
Uber and Lyft face legislation in California that may require them to reclassify independent contractors as employees. The ride-share companies maintain they are exempt from the law, which is set to go into effect in January. That could lead to a statewide ballot initiative in 2020.
It’s a stretch to think California taxpayers would side with Uber and Lyft. California is especially burdened by workers who make less than minimum wage in a state with high living costs. The lack of health care, and Social Security and tax withholdings from a workforce the size of Uber’s and Lyft’s means costs must be absorbed by taxpayers. Meanwhile, hundreds of Uber and Lyft drivers have organized protests in the state, which doesn’t help for voter sentiment.
Most importantly, these companies have no profits to absorb a change in the business model, such as being required to pay minimum wage or health care. Uber is offering $21 per hour as a compromise, instead of facing the overhead of becoming an employer, but it’s unclear how much Uber pays per hour now to calculate the impact. This would also set a precedent for workers in other states, who might pursue a similar arrangement.
On the one hand, the companies are subsidizing rides up to 60% to lure customers, and on the other, workers are protesting. That is not a good formula.
3. Autonomous vehicles are farther away than they appear
This leads us to the only hope for ride sharing to become profitable: To remove the human driver through autonomous vehicles (AV). Over a year ago, I wrote that regulation hurdles between levels 2 and 3, and delayed deployments, will put immense pressure on stocks that are overvalued based on AV speculation.
For background, we are at Level 2 for commercial purposes. Audi was set to be the first company to release a Level 3 system, which was denied by regulators in early 2019. To remove the driver, we will need to be at Level 4 or Level 5. (See this article for AV levels.)
ABI Research, an advisory firm that reports on market-foresight trends, predicts 8 million consumer vehicles with Level 3 to Level 5 autonomy will ship in 2025. Compare this to the 94.5 million vehicles sold in 2017, which equates to 8.5% of sales.
This is a small and fairly insignificant percentage of market share to be chasing six years ahead of deployment. Yet, headlines are a continual churn of autonomous vehicle “moments” — every partnership, every mile driven, every make and model that adds another feature. The headlines don’t make it clear we are not able to commercially release Level 3 AV right now — and that includes Tesla TSLA, +1.28% and Google’s GOOG, +0.51%GOOGL, +0.49% Waymo.
It’s surprising Uber and Lyft would attempt to fund autonomous vehicles. After all, they’re not high-tech companies with robotics and artificial-intelligence experience. They certainly don’t have the reserves to fund R&D, as Google/Waymo do, or the talent to compete with AV specialists that have been working on this problem for over a decade, such as Torc Robotics, which works with industrial systems for companies including Caterpillar CAT, -0.72% and Daimler Trucks.
Keep in mind, Tim Cook of Apple AAPL, -0.81% has called autonomous systems one of the most difficult AI projects to work on. Ideally, there is a successful, core business funding autonomous R&D — as Google has operated at a loss on its AV projects for a long time. Instead, Uber is losing $1.3 billion from the core business, yet has the resources to pursue flying taxis.
From an investment perspective, the better bet is a successful core business that can absorb the R&D on other projects.
4. Uber lockup expiration is looming
In July, Lyft’s stock was trading at $67. After the Aug. 19 lockup expiration, in which early investors could sell their shares, it’s now at $48.
Early investors have lost a lot of money on Lyft, whose shares traded at $79 the day the company went public. On March 14, I warned my readers two weeks in advance of the IPO that these weak fundamentals and product-market-fit issues were insurmountable, even when Wall Street analysts predicted the stock would reach $100.
My next warning is the Uber IPO lockup, which expires the first week of November. While I don’t expect an immediate dump on day one of the lockup expiring, there should be a noticeable unwinding in the months that follow. This is a possibility for all IPOs, even ones with solid financials. So one can only imagine what might happen to a large-cap stock that’s losing $4 billion per year while potentially facing deeper losses from California legislation.
This article appeared on MarketWatch September 20th, 2019.MarketWatch September 20th, 2019.
1. Amazon Altered Search Algorithms to Promote Certain Products
Amazon.com Inc. reportedly altered its product search system to better feature items which are more profitable for the company. According to reports, Amazon had apparently optimized its search algorithm late last year, so that instead of showing the most relevant and best selling items, it will instead promote items which are most profitable to the company.
The move to change the search algorithm was the result of several years of discussions with Amazon’s Seattle retail interests, which supported the changes, and the company’s California-based search team, who opposed it.
Any changes to Amazon’s search system will greatly affect many businesses because of how shoppers use the search bar to find items online. According to marketing analytics firm Jumpshot, nearly two thirds of all product traffic comes from first page results. So the introduction of the new search algorithm will therefore shift priority from best-selling items to items which are most profitable to Amazon’s profit margins.
Apple recently launched the Apple Arcade app on September 19. This new app will allow players to play games that were developed over the course of several years.
According to the official Apple site, the Apple will include several interesting games with rich and subtle stories. One game, called ‘The Enchanted World,’ takes place in a magical fantasy setting, where a fairy is given the task of solving various puzzles in order to save her world.
Another game is ‘Patterned,’ and it involves coloring various puzzle pieces in order to complete a new canvas. Nate Dickens, who developed the game, claimed that he developed it as a way to ‘find calm.’
Two other popular games include “Overland,” a post-apocalyptic road trip type game and ‘Card of Darkness,’ a game that involves various card-type puzzles. Interested gamers can find more information on Apple’s app store.
3. Elon Musk: Tesla Expanding Services at ‘Max Speed’
Tesla CEO Elon Musk recently reported that Tesla is now expanding its services at “Max Speed.” The new policy was intended to help Tesla balance its service capacity with its production capacity and fleet size, both of which grew significantly over the past two years. In contrast, Tesla’s service coverage lagged behind other aspects of the company, a problem that Musk admitted was a ‘foolish oversight.’
Now, the company is expanding the number of services centers that it has all over the world. In fact, Tesla announced last month that it will be opening more than 30 new service centers, and several more in the coming months. Some of the new service centers are also intended to complement the arrival of the new Model 3 in Europe.
4. Oracle and Intel Collaborate on Next Generation Oracle Exadata X8M
Intel and Oracle recently announced that Oracle is incorporating the capabilities of the Intel Optane DC persistent memory into its new Exadata platform, the Oracle Exadata X8M. The new integrated platform will be used to support and power the Oracle Autonomous Database, Oracle Cloud Applications as well as the database infrastructure of several major banks, retailers and telecoms.
The Oracle Exadata X8M was designed to perform several tasks, including support for Online Transaction Processing (OLTP), database consolidation, machine learning as well as analytics and mixed workload database requirements.
The new integration is also expected to provide superior services activities that require sensitive latency, such as stock trading, data processing, security detection, financial trading and real-time interaction apps.
Ecommerce giant eBay announced earlier this week that it recently launched Managed Payments in Germany. Managed Payment is a payment processing system that allows buyers to pay eBay for the items they buy instead of the sellers.
So far, there are ‘thousands’ of sellers in the US who are now integrated into the new system, but eBay plans to shift most or all of its sellers into the new system by 2021, which is intended to drive ‘significant efficiencies’ that will benefit both buyers and sellers by providing more payment options to buyers and giving sellers a more ‘streamlined’ way of managing their eBay accounts and businesses. eBay’s expansion of its Managed Payment Option is another step in its drive to transition buyers and sellers into the new payment system.
6. Cisco and Apple Team Up to Make the iPhone 11 More Wifi-Friendly
Apple and Cisco are teaming up to enhance the iPhone’s performance across different wireless networks. Their latest goal is to integrate the iPhone 11 with the WiFi 6.
However, Cisco and Apple’s partnership is nothing new. The relationship was originally established back in 2015 with the goal of integrating Cisco ‘enterprise environments with iPhones and iPads. The partnership was driven – in part – by the growing role that smartphones and other similar devices played in modern commercial and entrepreneurial environments.
Cisco estimates that a total of 111.4 exabytes of mobile data traffic will be offloaded to Wi-Fi, and that a total of 8.4 billion mobile devices will be used all over the world by 2022.
7. Hewlett Packard Prepares for Post-Brexit Scotland
Hewlett Packard Enterprises is committed to a post-Brexit Scotland, regardless of how negotiations with the EU turn out. HPE’s Ray McGann said on a radio interview that “The lack of clarity maybe over the last three years has meant that nobody was taking any particular outcome for granted, therefore the planning would have taken the worst case.”
Furthermore, he also added that Hewlett Packard is working with several European partners on issues of logistics and shipments to make sure that they can withstand a hard Brexit scenario. “We’re confident we have the expertise, the knowledge to support the eventual outcome,” he added.
More importantly, Hewlett Packard also expects certain changes in how IT customers operate both in and outside of the UK. HPE’s Renfrewshire site, located at Erskine, is already prepared for the looming effects of a post-Brexit UK, and is ready to expand operations regardless of how negotiations turn out.
We have a few years before Nvidia will show the market it’s true earnings potential. When a thesis is not reflected in the revenue segments yet, there are typically lower entry points and ongoing volatility. You’ll see in the technical analysis that although I could not be more bullish on this stock long-term, there is weakness in the semiconductor sector and we hope this translates to a lower entry point for our readers.
The market is also in a fierce debate between AMD, Intel, and Nvidia and is also distracted by other chips, such as Micron and NXP. In my analysis, I look for growth. How big is the market relative to how big the company is now?
You can ignore Nvidia’s gaming revenue and other segments for the main trajectory that we are focused on. Gaming is great for stability and earnings reports, but the growth will not be from gaming (a market where Nvidia is already a mature, market leader). I’m also not focused on PC sales or the CPU-powered cloud, as the first is not a growth market and the second is not the piece in the cloud stack that will accelerate future technologies.
I’ve written at length about the Mellanox acquisition and it’s a great reference for Nvidia’s long-term strategy. In this report, I’d like to break down what the GPU-powered cloud is capable of and why it’s important to differentiate Nvidia’s strategy from the competitors (and some competitors to keep an eye on).
I’ve covered Nvidia a few times on my free blog, however, it would be a disservice to my premium members to not formally initiate coverage and provide critical updates to the GPU-powered cloud and AI economy as it’s built out. I believe Nvidia will be on my short list in a decade from now.
To be bold – I believe Nvidia will be one of the world’s most valuable companies by 2030. The research below organizes my investment thesis for the GPU-powered cloud and why I believe Nvidia will emerge as a clear leader.
The question is how long can you have your money in a stock? This is a long-term play that requires a 10-year hold for the full return. Like Amazon, Google and Netflix, it requires ten years before emerging technology goes from a moonshot, to a viable company, to a less volatile company – and finally, to a profitable machine. Nvidia is a viable company that is volatile, proven during the crypto surge. Investors should see the crypto bust as an opportunity as the issues were not based on Nvidia’s core business. The trade war certainly hasn’t helped the stock price, either.
We have a few years before Nvidia will show the market it’s true earnings potential. When a thesis is not reflected in the revenue segments yet, there are typically lower entry points and ongoing volatility. You’ll see in the technical analysis that although I could not be more bullish on this stock long-term, there is weakness in the semiconductor sector and we hope this translates to a lower entry point for our readers.
The market is also in a fierce debate between AMD, Intel, and Nvidia and is also distracted by other chips, such as Micron and NXP. In my analysis, I look for growth. How big is the market relative to how big the company is now?
You can ignore Nvidia’s gaming revenue and other segments for the main trajectory that we are focused on. Gaming is great for stability and earnings reports, but the growth will not be from gaming (a market where Nvidia is already a mature, market leader). I’m also not focused on PC sales or the CPU-powered cloud, as the first is not a growth market and the second is not the piece in the cloud stack that will accelerate future technologies.
I’ve written at length about the Mellanox acquisition and it’s a great reference for Nvidia’s long-term strategy. In this report, I’d like to break down what the GPU-powered cloud is capable of and why it’s important to differentiate Nvidia’s strategy from the competitors (and some competitors to keep an eye on).
SECTION 1: Artificial Intelligence
Artificial intelligence is a collection of categories, including computer vision, natural language, virtual assistants, robotic process automation and advanced machine learning. The AI impact will not be linear, rather adoption will resemble an S-curve pattern with a slow start due to the substantial costs and investment required for applications. The slow start will be followed by an acceleration that is driven by competition across capabilities and innovations. The penalty is steep for laggards, as pointed out below.
The slow start to AI will cause many investors to become complacent, not realizing the artificial intelligence boat will quickly leave the shore, metaphorically speaking, once it is closed to new entrants. If you add in the inevitable recession that will follow this long bull market, we could see many investors rotate back to growth stocks too late to realize the full gains from AI.
As noted in the graph below, we should see an AI acceleration around 2022-2023. The last call for decent gains in AI will be in 2025, although by then, the gains will be somewhat diminished compared to investors who choose their AI stocks by 2021/2022.
Basically, weigh the costs adding artificial intelligence to your portfolio earlier as opposed to later in the tech cycle as it’ll be one of the biggest economic growth drivers in history (more on this below).
Nvidia’s acceleration may happen one or two years earlier as they are the core piece in the stack that is required for the computing power for the front-runners referenced in the graph above. There is a chance Nvidia reflects data center growth as soon as 2020-2021.
Between the years 2025 and 2030, the stage after AI infancy, artificial intelligence is expected to add $13-$15 trillion to global economic activity, or 1.2 percent additional GDP growth per year. Compare this to the spread of information technology (IT) in the 2000s, which added 0.6 percent. Also, compare this to 5G technologies, which are expected to add $2.2 trillion over the next 15 years.
McKinsey points out that front-runners, who are currently investing in artificial intelligence, will reflect an increase in positive cash flow of up to 120% from their AI investments. The capital required to invest in AI, however, is negatively affecting cash flow right now and will continue to do so throughout the next year or two. Laggards are expected to lose at least 20% of their cash flow from the negative impact of investing in AI too late (or not at all).
Most investors today are well aware of what mobile and cloud did for tech stocks. These gains will seem minor in comparison to what artificial intelligence will do for your portfolio by choosing the right companies.
Today, Nvidia is my top pick for AI. I will also be providing more AI stock picks throughout the next 1-3 years to ensure my readers are well prepared for the massive gains AI will deliver by 2030. I believe this report is being delivered before at least one more pullback in Nvidia’s future due to broader semiconductor weakness.
It is too early for the data center to make an impact and this trajectory (data center) is what we are targeting. When I deliver information well before momentum, it helps to be patient with an entry and one of the main benefits of my reports is to give you that time, when possible.
SECTION 2: Competitive Positioning
Desktop GPUs is not the growth category that I am targeting for this investment thesis, which is why many oftcited statistics are irrelevant. For example:
“AMD shipments increased 9.8%, Nvidia was flat and Intel's shipments, decreased -1.4% as indicated in the following chart.” -John Peddie Research
Many financial analysts and authors on Seeking Alpha (etcetera) are quick to think this means AMD is the better investment, whereas this statistic refers to a mature market. To cut through the noise, it’s important to remember this thesis is about the GPU-powered cloud.
I’ve already covered why AMD is not as big of a threat to Nvidia as Wall Street believes. AMD has its hands full competing with Intel on the CPU-powered cloud and does not have the CUDA programming platform (more on this below). The two are competing in other segments (gaming, PCs) but those are less of a concern to the buyand-hold thesis in this report (data center). I can’t stress enough to separate these segments if Nvidia is of interest to you as a growth story.
Competitors to watch for at this layer in the data center stack are:
• Xilinx’s FPGAs,
• Intel’s FPGAs (through the acquisition with Alterra),
• Google’s TPUs (essentially an ASIC on the efficiency/flexibility spectrum).
FPGAs have distinct advantages over GPUs as they offer a higher amount of on-chip cache memory to help reduce the bottlenecks from external memory, and are flexible enough to be reconfigured for various data types, such as binary, ternary, and custom data types, whereas GPUs must be modified at the vendor level.
FPGAs are also known for power efficiency and test at 10x better in power consumption than GPUs and also 4x better than GPUs for general purpose compute. Reconfigurability for FPGAs help provide efficiency beyond deep learning for a large number of end applications and workloads.
The architecture of FPGAs are very adaptable as the chips allow a user to address all of the needs of a workload with the resources provided by FPGAs. Meanwhile, GPUs are restricted as the architecture is a Single Instruction Multiple Thread (SIMT), which provides an advantage over CPUs but can result in lower performance efficiency.
Today, FPGAs require knowledge of machine learning algorithms at the hardware level, in addition to the software development, and this is the barrier to entry for FPGAs.
As readers of mine know, I like Xilinx and this will be a stock I cover in the future with a full-length report. The company operates in a niche, is the inventor of FPGAs and has the ability to attract developers to its ecosystem. The challenge with FPGAs is they are hard to program as most software developers are not able to program hardware. Xilinx is working on becoming more of a platform company to solve this issue, and if the company succeeds, it’ll be a worthwhile investment.
Intel will face headwinds with developers, who are the ultimate decision makers for any ecosystem. Even now, you will be hard pressed to hear much discussion on developer forums and news feeds about Intel/Alterra’s FPGAs. Developers tend to avoid overly-corporate companies and cultures, and Xilinx has a serious shot of overcoming Intel if they execute correctly.
AMD also has a decent chance of eating away at Intel’s market share on the CPU-powered cloud. Overall, I prefer pure play options, when possible, and most of my tech stock coverage focuses on this. In my opinion, Intel is not the growth story in these categories.
This brings us to Google’s TPUs. TensorFlow is rising in popularity as a machine learning language and TPUs primarily run TensorFlow models. This is one of Google’s more successful experiments. They are cheaper and use less power than GPUs and are specifically focused on machine learning.
TPUs train and run machine learning models and power Google Translate, Photos, Search, Assistant and Gmail – i.e. image recognition, language translation, speech recognition and image generation. TPUs do not compete with GPUs in other areas of artificial intelligence.
It’s also important to remember that Nvidia and Xilinx are hardware companies that offer platforms for software developers. This is a distinct advantage compared to software companies (Apple, Google and Facebook) trying to release hardware chips. The market is so valuable, that they will most certainly try, but I think there are a lot of technical hurdles for a software company competing in the chip space other than Google. Workday’s cloud financial management solutions have less traction with 8 companies in the Fortune 500 and 530 customers overall.
SECTION 3: Developer Ecosystem
In November of 2018, I wrote about Nvidia’s developer ecosystem as a primary moat. GPUs are hardware which require software to write applications and utilize GPUs. Nvidia has a special language called CUDA that is universally known due to a first mover advantage in GPUs.
This ecosystem is not apparent to the public markets right now because new technology is developed in waves, and funded by venture capitalists in cycles. We are seeing the last of the mobile era of venture-funded companies with the IPOs of Uber and Lyft, — which began with Twitter, Yelp, Spotify — and was also reflected in Facebook’s epic rise from mobile native app revenue.
We are in the later stages of the venture-funded cycle for cloud software, hence a string of newly public companies over the last two to three years with some runway to go in this category before the majority of use cases are claimed. For artificial intelligence, it is so early that it’s essentially invisible right now to the public markets as development teams are beginning to form.
The strength of the developer ecosystem is what propelled Apple to become a $1 trillion company. While many investors look at iPhone sales, and Mac sales, the ecosystem that created by application developers is why Apple had an impenetrable moat. If the iPhone only had applications from Apple on the device (iTunes, iOS Maps, Safari browser), then many device manufacturers could have competed with Apple. The moat that Apple has enjoyed was created by the third-party developers who created iPhone applications in C and C++ with XCode, which made the device more attractive due to the mobile app ecosystem.
Android then became the second operating system in the mobile duopoly. Due to the friction of learning too many languages, the mobile ecosystem did not entertain any further competitors. This is despite there being 5 billion smartphones globally (i.e. it’s certainly feasible from a consumer supply/demand view point to entertain more operating systems and app stores), yet the limitation came from the number of languages developers are willing to learn. Microsoft Windows failed because it launched too late, and developers had already chosen the two languages they were willing to work with.
This is what is meant by developer ecosystem. Devices themselves do not have moats. The developer ecosystem creates the moat as third-party developers favor developing on certain operating systems and there is a limit to the programming languages they will learn before it impedes progress for the developer and the company the developer works for.
This is what is happening with Nvidia’s CUDA. The chips themselves do not create the moat. The compute platform creates the moat. Due to the need for a universal language to build GPU-accelerated applications, universities are teaching CUDA, and students are graduating knowing Tesla/Volta chips over competing chips, such as AMD’s Radeon or FPGAs or TPUs.
Here’s a quote from Marc Andreessen of Andreessen-Horowitz, one of the most successful venture capitalists in Silicon Valley: “We’ve been investing in a lot of startups applying deep learning to many areas, and every single one effectively comes in building on Nvidia’s platform. It’s like when people were all building on Windows in the ’90s or all building on the iPhone in the late 2000s.”
Here's another quote from a developer on Reddit:
“Nvidia, thanks to the CUDA software stack (which AMD cannot match), has a much more unassailable position than does Intel with Xeon CPUs (where an X86 application just runs on either a Xeon or an Epyc).”
– software developer on Reddit
SECTION 4: Financials
In this case, I began with the investment thesis rather than the financials as the two do not sync up today. Gaming is Nvidia’s strongest revenue segment with $1.3 billion per quarter. Data center revenue has been flat to declining for three straight quarters, ranging between $634 million and $679 million.
The market is encouraged, yet cautious, with revenue of $2.58 billion in the most recent quarter fiscal Q2 2020, up 16.2%, yet down about 17% from $3.12 billion in the year-ago quarter.
GAAP earnings was $0.90, compared to $1.76 a year ago, and $0.64 in the previous quarter. Non-GAAP earnings of $1.24 in the current quarter, compared to $1.94 a year earlier, and $0.88 in the previous quarter.
Similarly, net income was down 50% year-over-year but up 40% quarter-over-quarter at $552 million.
Next quarter, Nvidia is expecting $2.90 billion, plus or minus 2 percent, with gross margins of 62%.
The bigger story this quarter was Nvidia’s gaming growth, which reflected 24% growth sequentially, with revenue of 1.31 billion compared to estimates of 1.29 billion. There is also evidence that inventory is normalizing with an inventory ratio of 50% and on track to lower to around 40% in fiscal Q3 compared to the previous ratio of 71%.
As stated, the current financials do not reflect the growth expected from AI.
SECTION 5: Technical Analysis
By Knox Ridley
5.1 Trend Lines and Internal Strength
Focusing on the black trend lines, you’ll see three sets. The upward trend in price, which coincides with the upward trend in momentum in the RSI, tracks two recent topping patterns in Nvidia’s price action.
The trendlines coincide with each other. When both momentum and price roughly trend together, it can show a healthy trend in place. Using these corresponding trends can also offer reasonable warnings, as well.
By following the approximate time at which both the RSI trend and price trend broke to the downside together, we can see safe and effective exits that allow you to side-step pull backs.
Further information can be found by looking at the set of green and red arrows. Notice that just before the last top in Nvidia, before the May correction, as the price of Nvidia climbed higher, the momentum in the RSI was decreasing. So, when I see a divergence like this coupled with trendlines being violated, it’s a warning of a correction on the horizon.
This exact pattern is unfolding today if we look at the last set of trend lines in the price and RSI. With Nvidia’s RSI closing just below oversold levels and pointing down towards the black trendline, this same negative divergence pattern is unfolding in real time, signaling a weakening of momentum. A break in this trend on both the RSI and price, and we can expect more downside to follow.
5.2 Elliot Wave Analysis
If we are forming a double top pattern, and Nvidia fails to break out above the $200 barrier, we can look at the retrace levels and expected extensions to gauge the likely targets for entry. First, if we zoom into the internal structure of Nvidia’s 3-month drop, which is highlighted by the light blue roman numeral count, you’ll see a very clear 5-wave drop.
It’s hard to see anything other than 5-waves in this move, all of which line up with internal Fibonacci ratios. The first pattern in a correction being a 5-wave drop is a strong indication of a 5-3-5 corrective pattern, which is highlighted in purple.
So, the Purple A was a 5-wave drop, while the purple B was a 3-wave correction, which touched the 50% retrace of Wave A before falling. If this count is correct, we are just now completing the 2nd wave in the final 5-wave pattern.
It’s always worth noting how the stock price reacts to these extensions. The stock found major support at the 61.8% retrace, testing this level before meeting heavy resistance at the 38.2% retrace. If Nvidia cannot break through the 38.2% retrace, the analysis is suggesting that we could see the final C wave play out, which will have Nvidia retest the 61.8% retrace level and likely make new lows.
However, I want to be clear with our convictions in this position. Anywhere between $125 to $160 is a great entry. Even though the analysis in this count is suggesting that we could see lower lows, and correction will be welcomed for a long-term entry. Thus, we will update any entries if the pull-back scenario takes hold.
Due to Nvidia’s fundamental strength, we will now look outside the individual stock for the cause of a sentiment shift. Please also refer to the bullish scenario below.
5.3 Global Semiconductor Sector
Like most semiconductors, Nvidia is a global company that is manufactured overseas (mainly from Taiwan) with 44% of its sales coming from China. Semiconductors are cyclical and sensitive to economic cycles. This is why we must look holistically at this sector when guiding an entry.
The Korean KOSPI Index
South Korea is an economy that is fueled by some of the world’s largest semi-conductor companies, as well as many mid-level players. Companies such as Samsung, and SK Hynix supplied over 60% of the components used in memory chips sold globally in 2018. So, the KOSPI can provide more information about the global health of semiconductors.
Since 2011, the index has been in a long-term uptrend, which it respected until very recently.
The KOSPI broke through this trendline, highlighted in black, which coincides with the 61.8% retrace. This level is now acting as resistance as the KOSPI is showing a negative RSI reversal pattern, which is indicating more downside is likely to follow.
This pattern is highlighted by the blue circles. In short, as the price makes lower highs, the RSI is making higher highs, indicating that the buying pressure is not sufficient to reverse the trend as it reaches oversold levels. This chart is anything but encouraging.
Philadelphia Semiconductor (PHLX)
The Philadelphia Semiconductor index (PHLX) will have some international exposure, such as NXP Semiconductors and Taiwan Semiconductor Manufacturing Company, but it is populated with mostly US companies. Nvidia accounts for nearly 9% of its total value.
Looking at the weekly chart, we can get a glimpse of the bigger patterns at play, which I believe are pertinent for where we are. If we start with the first long term trend from 2013 – 2015, you’ll notice that the price respected the first long-term trend line in magenta.
The black arrows indicate the moment when the RSI and price broke their respective trends. This trend broke first on the RSI, then fell to a lower long-term trend highlighted in black. Once this trend broke along with the black trend in the RSI, the index gave way to a significant correction. When these long-term trends break together, both in momentum and in price, it’s a warning to step aside.
Further evidence can be found by the descending red line in the RSI leading up to the drop. There is a negative divergence with the price and momentum. As the price action increased leading up to the sell-off in 2015, the RSI made significantly lower highs, failing to break out multiple times. When you see negative divergence that is followed by the RSI and price trend lines breaking, this is where technical analysis can help you avoid downside risk.
Today, the price has managed to find a bottom, and has resumed a new trend, which is also highlighted in black, and appears to be trading in a diagonal pattern. The RSI is showing a divergence between the RSI, making lower highs while the price makes higher highs, just like we saw leading up to the 2015 correction. Furthermore, just like in the prior run-up before the correction, the RSI’s momentum keeps failing to break out of the descending trend highlighted in red.
Taking what we are seeing today, the evidence is leaning towards a more cautious stance. The intermarket divergence we are seeing between the KOSPI and the PHLX, coupled with the weakness we are currently seeing in the PHLX, leads me to conclude that the KOSPI is a possible leading indicator of the semiconductor sector.
Nvidia, being a major global player in the semiconductor space, is not immune to this broad market weakness. With the weakness we are seeing with Nvidia’s chart as well, I think letting these patterns play out, will allow a safer and more optimal entry price.
5.4 The Bullish Scenario
I attempt to approach each chart from a blank slate. I let the data and analysis lead me with as little bias as possible. However, especially in a late cycle bull market, I always ask myself where I could be wrong, and what it would take for me to invalidate my primary thesis. The below chart is my alternative invalidation thesis.
From an Elliot Wave Count, the primary Wave 4 correction, which is highlighted in yellow, unfolded in an A-B-C pattern, highlighted in purple, and ended at the December low. This would mean that we are currently in the final 5th Wave push of the larger yellow count. This final 5th Wave will be an impulsive move, so its structure will have its own 5 waves. This means that we have completed the Wave 1 and Wave 2, highlighted in purple and are currently in Wave 3. If we look one degree lower into Wave 3, we have completed waves 1 and 2 of 3, and are about to breakout to the upside.
I have some issues with this count. Specifically, when you zoom into the lower degree structure, we can see a 5wave structure down, who’s ratios line up like we want to see, and we can also see 3-waves up. However, if we see a break above $200, this strongly implies that the Wave 4 in yellow is over, and that the bull trend can continue.
I will need to see the RSI divergence forming to be invalidated by the RSI breaking through the red trend line as well as the price of Nvidia break through the $200 level. At $200, we may have left some minor gains on the table, but it is a much safer entry than where the stock is trading right now and worth the insurance.
1. Uber Announces New Layoffs Amidst Financial Difficulties
Uber recently announced another round of layoffs this Tuesday. The multinational transportation network company plans to let go of 435 people from its product and engineering team, or 8% of the total workforce.
The layoff was the result of Uber’s poor second quarter performance, which included around $5.2 billion in net losses.
“While certainly painful in the moment, especially for those directly affected, we believe that this will result in a much stronger technical organization,” an Uber spokesperson said.
The planned layoffs will not only affect Uber personnel in the United States, however. Regional offices in Europe, Africa, the Middle and the Asia-Pacific region, will also be affected.
According to Uber, 85% of the personnel to be laid off are in the United States, while 10% are in the Asia Pacific region. The remaining 5% will come from Europe, Africa and the Middle East.
2. Nvidia fights AMD’s GPUs with the GTX 1160 Super
According to rumors, Nvidia is planning to launch a new and improved variant of the GeForce GTX 1660 graphics card. Although the company has yet to release any concrete information about their new product, it is expected to have a transfer rate of around 14Gbps as well as better memory. It is also expected to cost around $300.
Nvidia’s new graphics card is also rumored to be part of their new strategy against AMD. When released, the new GTX 1660 is expected to compete with AMD’s Radeon RX590 and other similar graphics cards. More importantly, it will also draw in the ray-tracing fans, which AMD does not seem interested in, and allow Nvidia to take back certain portions of the budget gamer market.
3. German Government to Invest in IBM’s Quantum Computing Research
IBM is about to receive $717 million dollars worth of investment from the German Government. IBM announced that it will install a new “Q System One” quantum computer (the first of its kind in Europe) at one of their German facilities, and will partner with the Fraunhofer Gesellschaft research institute to ‘support the transition of quantum technologies from basic research into market ready applications.’
Quantum Computing has the potential to be used for molecular modeling, physics, machine learning, chemical simulations and data recovery. According to reports, the goal of the new partnership is to develop a ‘research community’ for quantum computing in Germany, and to act as a catalyst for “Europe’s innovation landscape and research capabilities.”
4. Facebook and Google’s Growing Anti-Trust Problems
Last Friday, the Attorney General of New York announced that she and seven other states as well as the District of Columbia will join together to launch new antitrust investigations into Facebook.
The announcement was soon followed by 50 attorney generals from 48 states, including Puerto Rico and DC, announcing that they will soon join Texas Attorney General Ken Paxton in investigating Google.
Presently, two of the biggest tech platforms in the world are now facing 2 Congressional, 6 state and local, and 8 federal anti-trust investigations. While the reasons behind the investigations may vary(political bias and privacy issues among them), anti-competitive behavior seems to be the unifying theme for most of parties.
Facebook and Google have been accused of bias and anti-trust violations before, from accusations of Russian collusion to political censorship, and they have managed to survive such accusations relatively unscathed. However, these recent developments may prove devastating for the two tech giants.
Apple recently unveilied the iPhone 11 Pro, the 11 Pro Max and the iPhone 11 itself. The new iPhones boast several impressive improvements over their predecessors (the iPhone XS, the XS Max and the XR respectively), including better battery lives, improved camera systems as well as optimized hardware. The 11 Pro and 11 Pro Max also feature better cameras, including three cameras on the back as well as better battery life compared to older models.
Apple CEO Tim Cook also reported that the new Pro Models are the “most powerful and most advanced iPhones we have ever built, with a stunning design.”
The downside? They are more expensive than their predecessors. The 11 Pro starts at $999, while the 11 Pro Max starts at $1,099. Only the iPhone 11 is cheaper at $699 compared to its predecessor (the iPhone XR costs $749).
The new phones will be available for pre-orders this Friday and available for sale on September 20.
6. Verizon’s 5G Ultra Wideband Network to Be Used for Testing Driverless Cars
Verizon is working with Mcity at the University of Michigan to explore and enhance transportation safety and automated vehicles. The partners are developing 5G solutions for automated and connected vehicles.
The new technology will also be used on traffic lights, cameras and intersections in order to enhance traffic safety and prevent various kinds of accidents.
Verizon also chose 5G for this project because it offers great bandwidth, super-fast speeds as well as low latency, all of which are ideal for automated vehicles and traffic technology.
The resulting applications will be tested on the Mcity Test Facilities 32 acre site. Outdoor laboratory equipment will also be used to simulate different problems and contingencies that vehicles often encounter in urban and sub-urban environments.
7. Netflix No Longer the Leading Bandwidth Consuming Application
Netflix used to be the biggest application in terms of bandwidth consumption however, it was recently dethroned by web based media streaming apps. The report comes from the 2019 Global Internet Phenomena Report from Sandvine, a company which specializes in bandwidth-management systems.
According to the report, HTTP media streaming services represented around 12.8% of all downstream internet traffic in the world during the first half of 2019, while Netflix only accounted for 12.6%.
Despite these numbers, however, Netflix’s declining share of bandwidth consumption does not mean that people are consuming fewer Netflix videos. It simply means that the relative share of traffic delivered over internet networks has changed. Moreover, there’s also the fact that Netflix’s video streaming services are becoming more and more efficient, which means that it is consuming less bandwidth per stream compared to other services.
Cloud software stocks suffered a reversal that has produced losses of close to 50% from record highs.
The story for those stocks hasn’t changed, but the valuations have, and that could be a good thing for investors who know what they own.
The biggest risk for investors in cloud stocks isn’t the losses that have pummeled prices over the past two weeks, but rather the big reversal that may scare them away from the sector. It’s painful to watch large declines in stocks, yet nobody wants to miss out on a potential 10-bagger either. When the market rewards, and penalizes, all cloud software stocks equally, with little differentiation, it’s prudent to choose a select group that has compelling stories for a buy-and-hold strategy.
An investing adage is to buy when others are fearful. I would say to buy when others can’t differentiate among companies. Clearly, from what we saw over the past two weeks, a broad range of companies are being lumped together, with little recognition as to which are the winners.
To put it simply, this is a great time to know what you own as the story for these stocks is much deeper than the simple descriptor of “cloud software.”
In the graphic above, the orange line represents the First Trust Cloud Computing ETF SKYY, +0.12% which holds about 60 positions, all of which dominate the cloud space. The light-blue line is the Consumer Staples Select Sector ETF XLP, +0.41%, which tracks the consumer staples sector, a group that’s thought to be impervious to recessions. Those have historically been the laggards in this long, growth-driven bull market. The dark purple line is the benchmark S&P 500 Index SPX, +0.29%.
Before the stock market correction in May, cloud stocks were the leader in the market, while the staples were trailing. However, since that first correction, and up till today, there’s been a reversal. Over the past week high-growth leaders in this bull market, mostly cloud, have taken big hits.
For example:
Workday WDAY, -1.26% is down 25% from its high. Twilio TWLO, +3.08%, down 26%. Okta OKTA, -0.20%, down 22%. Zoom ZM, +1.02%, down 27%. MongoDB MDB, -1.57%, down 29%. PagerDuty PD, -0.38%, down 47%. (All prices are current as of 2 p.m. Eastern time Sept. 11.)
Cloud software categories
To start, cloud software needs to be broken up into categories to look more closely at the markets they serve. Here are some examples:
• Twilio is at the intersection of communications and mobile.
• CrowdStrike CRWD, +0.80% and Okta are security companies.
• PagerDuty simplifies operations, and Workday simplifies human resources and the finance department.
• Alteryx AYX, -0.74% and Splunk SPLK, +0.02% are big data analytics.
• Salesforce CRM, +0.43% is customer relationship management (CRM), but the market it serves is the sales and marketing industry.
• Zoom simplifies communications for enterprises and business-to-business (B2B), as does Slack WORK, +1.47%.
• Veeva Systems VEEV, -0.08% serves the life sciences and pharmaceutical industry.
Twilio has more in common with Skype, and even Verizon VZ, +0.50% and AT&T T, -0.93%, than it does with Okta. Workday has more in common with SAP and Oracle ORCL, -4.26% than it does with Alteryx. Yet, cloud stocks experienced a categorical black swan as if they all serve the same markets.
What this means is that some investors don’t understand these companies. The viability of a company’s product and how it fits the market is not factored into the investments, and this is creating a window of opportunity for investors who take the time to study individual stocks.
Valuations
The more logical explanation is that there was a clearance sale for overpriced stocks, and the common denominator in the sell-off was high valuations. However, the issue with this theory is that some of the companies will go on to be big winners, and higher price-to-sales (P/S) or enterprise-value-to-sales (EV/S) ratios are warranted because of the enormous markets they serve in contrast with their small size.
For instance, Zoom’s P/S and EV/S are gut-wrenching (no argument there), but the company’s revenue growth is unusual. You’d be hard-pressed to find triple-digit revenue growth for eight straight quarters in the stock market. The prospects of disrupting Cisco and other enterprise telecommunications at a $22 billion market cap is worth more than other companies that are serving smaller, more saturated markets. Zoom’s rapid growth, which is unprecedented, makes it hard to pinpoint a fair valuation.
Workday is another example of a company that carries high P/S and EV/S ratios, in this case twice as high as its large competitors, Oracle and SAP. In this scenario, you get a pure-play option that is moving quickly on machine learning to reduce the overhead required in human resources and finance departments. What Workday’s software aims to do, which is to reduce the number of employees needed in those departments, delivers a value that is worth many times over the cost of the software. If Workday is successful, the company will be worth much more than two times its current market cap, whereas, Oracle and SAP are essentially defending territory.
See: Beth Kindig runs a forum on tech stocks where she answers readers’ questions.
Splunk has P/S and EV/S ratios of eight compared with Alteryx’s 24 and 22, respectively, yet both were affected by the sell-off despite being in similar markets. Splunk should have held steady if this was a clearance sale on high valuations.
The evidence doesn’t point to a rational reason for the sell-offs. Some stocks are priced high, but knowing which ones deserve to be is going to be more important than ever.
• The larger the market, the safer the investment. Can every enterprise employee in the world use the product for maximum scale? Does the product solve a pain and reduce overhead for businesses? These will outlast the more niche markets and products that are considered a convenience. To illustrate, if you are providing software for office communications that replaces office telecom equipment, not only is your product a necessity but it will be the solution to high telecom bills during a time when costs are being cut. There are numerous examples of fulfilling a (non-negotiable) necessity while reducing costs in the cloud software category.
• Ignore earnings estimates. Many estimates were lowered this past year, and when companies “beat” earnings estimates, they were actually declining year-over-year, sometimes substantially. Apple AAPL, -0.23% is a prime example of this. The stock continues to reach all-time highs and “beat earnings” despite two straight quarters of negative growth and mere 1% growth in the most recent quarter. That may work for Apple, but smaller-cap companies that are declining won’t last long, especially in a value rotation. Another example is Okta, which I believe had weakening fundamentals yet beat earnings estimates. Okta is now one of the hardest-hit cloud software stocks over the past two weeks, with a 22% drop since the end of August.
• We hear a lot about competitive moats, yet high switching costs is a protective buffer that serves two purposes: It locks in subscription revenue and staves off competitors. Often, switching from a cloud software provider will cost a customer time and resources. Look for companies that have high switching costs.
My prediction is this may be one of the last cycles when tech is considered less safe than value stocks. As the market will find out (the hard way), cloud software is actually very safe. It is insulated from trade wars and overseas manufacturing issues. It reduces costs for enterprises, which is ideal for a recession. Lastly, cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech — such as mobile, e-commerce and advertising — which are reaching saturation, are finding themselves in the cross hairs of anti-trust and are susceptible to consumer spending changes.
The best companies in the category of “cloud software” will continue to post rapid growth regardless of economic conditions, and the investors who run from this sector will suffer bigger losses from missed opportunities than investors who know their winners.
This article appeared on MarketWatch September 12th, 2019.MarketWatch September 12th, 2019.
We have a very thorough market update for you that covers the rotation in cloud stocks, bullish broader market scenarios, bearish broader market scenarios and an update on the stocks we've covered over the last 60 days or so.
We had quite a few inquiries in our inbox and also a few on the forum and thought it best to consolidate our thoughts for reference. We will issue market updates at minimum every quarter.
The orange line is a cloud computing ETF that holds around 60 positions, all of which dominate the cloud space. The lite blue line is an ETF that tracks the Consumer Staples sector, which consists of your big, boring companies that are, in theory, impervious to recessions. These have historically been the laggards in this long, growth driven bull market. And, the dark purple line is the S&P 500.
You’ll notice before the June correction we had this year, the growth names within the cloud space were the clear leader within the market, while the staples were lagging. However, since that first correction, and into today, the staples have become the leaders of this market, while cloud, and growth have sold off.
Over the last week we have seen the high growth leaders in this bull market, mostly cloud, take significant hits.
Workday – down 25% from high
Twilio – down 26% from high
Okta – down 22% from high
Zoom – down 27% from high
Netflix – down 23% from high
Mongo DB – down 29% from high
Roku – down 8% from high
Shopify – down 13% from high
The question remains – is this a much-needed correction before making new highs, or is this the beginning of a much larger shift?
What we will need to watch is how the generals perform – i.e., Microsoft, Apple, Amazon, Facebook, Google. If the cloud players are thought of as the infantry, they can take a beating, and the generals can hold up the market. However, if we see funds rotate out of the generals, that is a major warning that the market is beginning the process of aligning with the negative divergence of economic indicators, as well as the bond market.
This pattern played out in late 2018, which preceded the swift sell-off into December, so it’s worth watching as the market proceeds.
SECTION 2: Big Picture
Long Term RSI and what it’s telling us ….
2012-2015 2012-2015
This chart shows the S&P 500 (SPX) going back to 2012. It’s a weekly chart, so that you can see the long-term trend as well as the slower moving momentum behind this trend in the RSI. In 2012, you’ll notice the RSI moved into a bullish range.
The green arrows show that the pullbacks during the 2012-2015 trend were shallow, and never crossed over the 50 line, while the peaks regularly crossed over the 70 line. However, notice the negative divergence between the RSI’s peak, highlighted in the descending red line in the RSI, which coincides with the price of SPX increasing, highlighted by the green line.
This is a warning of deteriorating momentum; however, the trend of negative divergence, in this case, lasted for over a year before the price finally gave way to the downside. It’s worth noting how long this pattern can play out before giving way to a larger correction.
2015-2017 2015-2017
In 2015, the RSI broke through the 50 line and continued through the 30 line, which is an initiation move into bearish momentum. When the RSI enters a bearish range, it spends most of its time below 40 and will not cross the 60 line. This is what we saw while the market pulled back. You’ll notice that the RSI in 2016 made a higher low, while the market made a lower low. This is an important indication of a trend change, known as positive divergence, which occurred when the RSI broke through the red trend line, and into a bullish range through-out 2017.
2018-2019 2018-2019
Today, what should be noted is the red trend line in the RSI is pushing momentum down. Eventually, it will collapse into bearish momentum, like we saw in 2015, or it will break the trend line and push price back into a new uptrend.
You’ll notice the red arrows show that 3 times the RSI attempted to break to the upside, and each time it failed. Furthermore, the price of SPX is trending up, while its internals are slowing down. As noted before, this negative divergence trend can last for quite some time, but eventually, the price will give way, or the pattern will invalidate by the RSI punching through to new highs.
Today, until proven wrong, I take this as a warning rather than an established downward trend. We expand on both bearish and bullish scenarios below and revisit the stocks that have been covered over the past 60 days.
SECTION 3: Bullish Scenario
Elliot Wave Count
In the bullish scenario above, the market hit its primary Wave IV in the December 2018 lows. Thus, we are currently in the beginning stages of Wave V, which would lead to a S&P 500 of 3800, at minimum.
In this scenario, we have completed Waves 1 and 2 within this larger degree Wave V, and also just completed Waves 1 and 2 of Wave 3, within a larger degree Wave V. If the market can break 3120, and close above this position, we will likely see the market take off, which is typical on the final leg of a bull market. My minimum target for this will be 3800, and we will likely see growth take over once again to lead us up.
Even though the market has taken back the short-term moving averages, indicating strong momentum, you’ll notice that it has broken the trend line in dotted black. It’s still trading below this trend line, and I’d like to see this trend retaken to further validate this scenario.
Remember, price is king. Today, the price in the market, though a shift in leadership is underway, has us trading to near all-time highs. If we close above 3120, that will be an indication that a final surge is underway. This can, and usually does, happen when the fundamentals in the economy and market are deteriorating, so it’s a final euphoric push that’s driven by sentiment.
Sentiment at bullish lows
Furthermore, what supports this thesis is the CNN Fear & Greed Gauge, which has been a fantastic contrarian indicator. Right now, we are not seeing any extremes, with a tilt towards the fear range. However, note the extremes we saw last week – 23. This typically does not precede a bear market. In fact, the sentiment is recovering from levels we typically see towards a bottom.
It’s worth noting, sentiment was at a bearish extreme in early 2008, as well as a bullish extreme in early 2017. Just because sentiment is at an extreme doesn’t always mean that it’s a contrarian indicator. However, more times than not, especially over the last decade, it has been a fabulous contrarian indicator.
With the level of fear we saw in August, and just about every analyst/talking head predicting a recession and market crash, we could, in fact, get the opposite. This is a possibility our readers should carefully weigh.
A Bullish Anomaly
Also, we are witnessing a very rare anomaly in the market. Currently, the 30-year treasury is yielding less than the yield on the S&P 500. This has only happened two other times in just about 40 years – in late 2008 and 2016.
Both times, we saw the market explode higher over the following year. Here is an article by CNBC explaining this further.
There is a saying in finance that money will flow where it is treated the best. Currently, with over $17 trillion in negative yielding sovereign debt, and the yields on US treasuries unable to keep up with inflation, there is a probability (worth mentioning) that we could see a sizable flow into US equities.
Based on the history of this long bull market, I favor giving it the benefit of the doubt by staying long for now. However, it would be foolish to ignore the weakness and warnings that are also out there. That being said, we recommend that you increase your insurance by shorting weak companies, while maintaining/building positions in beaten down high-flying growth companies, just in case the bullish scenario plays out.
Keep a stop on these positions – we recommend 25%, considering how far they’ve already retraced. We will look to add to our positions in strength or as the market bottoms and begins a new uptrend.
SECTION 4: Bearish Scenario
Elliot Wave Count
The weight of evidence within the economy, is leaning towards this being the higher probability scenario, which has us currently in Wave 4 from the 5 Wave push off the March 2009 lows. Here, we have completed the A Wave, had an exaggerated B Wave to new highs, and are just beginning the C Wave down. This C wave will unfold in 5 waves, and the green count has us completing the 1-2, just before the 3rd wave begins.
As you’ll notice, the market is trending in an expanding wedge shape pattern. If this pattern holds, then we can see the market trade as low as 2200 before finding a bottom. If we see the market close below 2700, this scenario will become much more probable.
I consider 2700 the first line in the sand, with the 2600 region as the final limit before closing winning positions. It should be noted that this is a Wave 4 pull back, which will give way to a larger degree Wave 5 push before this primary trend completes from the 2009 lows ends. So, I will look to be a buyer on any significant drawdown.
It’s worth noting, the market has repaired the technical damage from the most recent selloff. We are trading above the 21 and 8-day exponential moving averages, and closed above the 2955 region, which is a show of strength. The likelihood that we will trade to the 3100 range is increasing, and how the market reacts here will determine if we are going to witness a bull trap, or if the market will punch through the 3120 range, and begin a blow-off top to the 3800 region. The takeaway being, don’t get too exuberant if we hit the 3100 range – rather watch this region closely.
Intermarket Divergence
Here, we can see the S&P 500’s performance against multiple risk-on assets – oil, rates on the 10-year treasury, and the Japanese Yen to US Dollar exchange rate. You’ll notice how there is currently a wide separation, showing noticeable divergences amongst the risk-on assets and the market.
In short, all of these metrics are signaling, while the market keeps rising. This is a warning for the market. However, keep in mind, divergences can last for a long time. This chart is something I watch daily, and until the economic indicators reverse up to join the market, I stay hedged and hold my positions with tight stops.
SECTION 5: Market Updates
Zoom, one of our highest conviction stocks, has blown threw the 50% retracement and is holding steady at the 61.8% retrace level, around $78. This completes the 3-step correction, and we suggest buying a small position, which we will add to based on the decision the market makes. We are due for a bounce, and the structure of that bounce (5 waves vs. 3 waves) plus whether we can make new highs will determine if we have more downside vs. a new uptrend.
Below $78, and we will target the 76.4% retrace around $69-$68. We recommend holding a 25% trailing stop on this position.
Slack, also a high conviction position that wall street does not fully understand (i.e. we are ahead of momentum on this stock), is trading and holding around the $25 support. This puts Slack at a $12 billion company, which falls in the high range of our fair value – ideally, we’d like to cost average around the $10 billion market cap range, which is around the $20 range. We are comfortable with pre-momentum (this can take 1-2 years to play out yet has more gains than post-momentum), and have added 1/3 of Slack to our portfolio at the $12 billion market cap.
Now is not the time to build your entire Slack position. Start small with wide stops – 25% – and add as the company reaches mile markers. There will be a minimum of 6 months before the market sees the potential here. With positive divergence in the RSI, we believe Slack is due for a corrective bounce at minimum.
Mongo DB: MDB has shot through the $135 support, making lower lows and confirming an intermediate downtrend. I have exited my position, and will regroup as we enter a new uptrend. If MDB continues its downtrend, I see the $90-$85 region being strong support. This coincides with the 31.8% retrace as well as the 161.8% extension.
Wday: Wday is witnessing a slower bleed than the above, yet it still trades in a weak spot. The lowest I see WDAY trading is between $140-$120, which would be a gift, based on expected future growth. The market is unlikely to understand the machine learning story at this time.
If you have a position around $180-$170, hold with stops and look to add. However, WDAY has entered the upper region of my expected pullback region – $168. If you have not opened a position in WDAY, a recommended scenario is to buy a small amount at these levels.
Alibaba, is having trouble breaking through the $180 resistance. If it cannot break through this price, the $165 support will be crucial for a continued uptrend. Below this support and we can see Baba trade to $130 rather quickly. We could see a deeper pullback based on geo-political events, but not based on cloud growth.
Bitcoin: BTCUSD broke its wedge pattern down, and entered an even tighter trading range. Our expectation is to see it trade in the low $8,000 – high $7,000s. We currently have 1/3 of our position as $10,000 cost basis, and will look to go all in as we retrace deeper to the above targets. (Beth has been in bitcoin since circa 2015). BTC is volatile, and can shift on a dime, so make sure you have an exit strategy in place.
ChainLink: Link broke through the $1.95 support and has entered the upper region of the targeted trading region – $1.70-$1.25. We recommend adding to your position at $1.70, and layering in as we approach $1.25, if we even go that low. So far, Link has confirmed the next leg in the downtrend, and should find strong support just above the region it is currently trading.
Snap: We believe Snap will surprise to the upside. As long as it remains below $16, we consider it a buy. Put a stop in at $13.35.
Roku: This is the stock that Beth has written about the most, preceding nearly every other analyst on the market. We try to be pre-momentum. When the momentum shifts and sell-side analysts pile in without fear of losing their job over a bad recommendation, like what happened with Roku when a herd of analysts went from claiming the stock had too much competition and not enough IP, to a sudden reversal and steady string of buy recommendations after the last earnings report, we see the stock shoot up. I personally own Roku at $29 from December 2018 from following Beth’s early analysis, which occurred after the stock hit $60 (50% drop), and am holding without stops. The price points in the current PDF have an ideal target of $88. Due to the sell-side analysts piling in, something that could not be foreseen prior to the last earnings report, this target has to be adjusted. We will update you on the forum once we have more trading history in the region where Roku is currently trading.
Uber and Lyft: Starting pre-IPO, Beth covered the weak financials of these companies on her free blog. One of the risks she stated was the classification of the drivers. We believe these companies will continue to bleed with a new labor law that is close to passing in the State of California. You can read about this here.
Due to the sheer number of immigrants and H-1 visas in the state (who are easily exploited), California is historically very tough on companies who hire contractors that are treated as employees. This is a common loop hole that is exploited in California, forcing the state to pay for the health care of the uninsured individuals. There is also no social security tax being taken out, and state taxes are often evaded in these situations, weighing very heavily on the state as a whole. California has a long history of pursuing the misclassification of contractors, and this is not ride-share specific.
Quick note:
Historically, central banks react to bear markets, which mostly precede a recession. Today, they are reacting globally to prevent a recession. Their commitment to keeping the expansion going is something to watch closely.
The chart below shows how the market performs one year after a rate cut in two scenarios. The light blue shows how the market performs one year after a rate cut, and within that year after a recession hits. The dark blue line shows the market performance one year after a rate cut, and when within that year, a recession does not hit. In short, the market has had a 100% win rate after a cut where a recession is avoided.
However, with that said, we leave the Federal Reserve commentary and political discussions to the slew of analysts who take this on. We prefer to not get bogged down in the headlines and rather to be solely focused on a combination of strong fundamentals and the predictive guidance of technical analysis. We have found it incredibly hard to perfectly time a crash, or a bull market surge, and there are many losses on both sides of the fence when engaging in this (i.e. losing gains by staying on the sidelines or becoming too exuberant).
It’s always a good idea to have positions in companies you believe in and to short companies that are egregious in their financials or too early/too late in their tech market positioning and product development. In the event of a downturn, we will provide PDF reports on short hedges as you can make money on the down, as well.
As you know, we don’t control the state of fiscal policies or market sentiment. The scope of our analysis is to provide best of class tech industry research and to provide information on recommended entry/exits that we use for our personal portfolios. We are not financial advisors.
