Month: October 2019

Market Update: October 29th

Posted on by io-fund

bd18aad4-63df-4273-86ed-3e074f105d44_Market-Update-October-29th.pdf

Market Update: October 29th

Introduction

The purpose of this market update will be to discuss the current risk in the market, how to protect positions, and to update you on stocks we have covered previously. We will start by looking at the risks involved in the current market to set the proper stage for a reasonable exit strategy. The second section reviews the stocks we have previously covered on our premium site.

There will be situations where great companies are misunderstood by the market – and the opposite, where companies on the decline are over-hyped. Often times, the analysis we release takes some time to play out. Our fundamentals can give you an edge on companies and stock picks; timing the analysis is the next question. In other words, entry and exits should receive equal consideration in this market.

Our goal is not to be right 100% of the time, but rather to make profits. We would rather make money than be right. If we are correct 60% of the time, yet close any positions that hit our stops, and maintain positions that are winning, then we will be profitable. The only way to responsibly do this is to manage risk. 

SECTION 1: MANAGING RISK

1.1 The Importance of Price-to-Sales

Warren Buffet recently told his shareholders that earnings, or net income, “are not representative of the business at all.”  Buffet is in essence rewording an old Wall Street adage that net income is an opinion, but cash flow is a fact. 

Using PE ratios to gauge the value of the market, especially in the era of large buy-back programs, is not as accurate as using a metric like sales. Top line revenue, like free cash flow, cannot be distorted. The problem with using free cash flow to gauge the market is that not all great companies are positive free cash flow, yet the common denominator is they all make sales. 

That being said, the Price-to-Sales Ratio (P/S) of the S&P 500 is currently around 2.2.  Anything over 1.5 has historically been considered as expensive. It’s worth noting that there are only two other times in history where the broad market was trading above two price-to-sales – in 1929 and in the dot-com era. The current P/S of the broad market has exceeded both of those time frames. 

Asset Manager and writer, John Hussman, has done some good work on this subject. In summary, he has proven that anytime the market is trading at such high valuations, the following years of returns have been historically low. 

Furthermore, Hussmen recently posted the following chart:

He further claimed that the most overvalued 10% of stocks in 2000 lost 80% of their value in the bear market that followed the 2000 peak. He then claimed that roughly 90% of U.S. equities, according to their price-to-sales ratio, are more expensive right now than they were at the peak of the dot-com bubble. 

The implication here is that the bear market we face could be more painful than the 2000-2002 bear market considering the overvaluation is not isolated to just one segment of the market.

1.2 Top Dog Phenomenon

Another point worth noting while we flirt with new highs, was made by Rob Arnott, the founder of fundamental indexing as well as the founder of Research Affiliates. He coined what he calls the “Top Dog” phenomenon.  These are companies that have the largest market caps in the world, and what happened to them after they reached this feat. 

In short, nearly every time, they had a significant drawdown and continued to perform poorly in the years to come. The below chart shows performance of these top companies leading up to the top spot, and their subsequent performance in the years that follow.

The above graph shows that this phenomenon is not just unique to American markets. Sooner or later, prices start to matter, and the risk of investing in the top companies today is higher than most investors think. To further elucidate this point, here is a list of the top 10 companies in the S&P 500 each decade going back to 1980.

Notice how transient this list is. You will notice we did not recommend Google per our PDF last earnings report in July, and we have not focused on many of these mega-cap companies with the exception of Microsoft. In fact, Beth is particularly bearish on Facebook due to reputation issues and Apple due to mobile saturation. Therefore, we are believers that top dogs are as suspect, if not more, than high-growth smaller companies.

Point being, just because a company has done well in the past, does not mean it will do well in the future. The market is complacent with the top dogs. 

1.3 Q3 Rotation

We have talked about the rotation out of growth and into value. If you owned the S&P 500 only, and held it over the last 3 months, you are up. However, if you are heavily weighted in high beta stocks, you are noticing significant losses. This is telling you that money is rotating out of cloud and high growth and into value and defense. When investors get scared and want to prepare for the worst, they sell higher-valuation companies and buy lower-priced ones.

The Leuthold Group did a remarkable piece on this shift, titled “Portraits of a Split Market.”  I encourage you to read this to see just how large of a rotation we are seeing. It warrants caution, because we see this rotation preceding all major drawdowns. 

SECTION 2: Our Take on the Market

Regarding price-to-sales, it’s worth noting that a single metric cannot be used in a vacuum to make a broad statement in finance. Today’s market is not like the markets of the past. With historically low interest rates, QE programs, and a record margin expansion with corporate companies, and higher than normal Free Cash Flow in modern companies, the extreme that Hussmen is pointing out, may not be as extreme as the image suggests, and shouldn’t be assumed across the board.  

For example, Microsoft operates with a 32% profit margin, which is sizable compared to the typical cash-burn tech companies that are hitting the market today. Furthermore, its profits have grown around 20% over the past year, with sales growth of 14%. These metrics aren’t typically what you’d find in a company trading at 8 x sales.   

However, even in the most conservative interpretation, there should be caution with current market valuations. The goal is not to ignore the data nor to become overly-confident. We are in unchartered territory. Nobody can tell you exactly how this will end, or when sentiment will shift. The market is historically expensive right now. What we can tell you is that high valuations do not cause bear markets, but they can intensify the velocity.

Some analysts have been calling for the end of the bull market for two years, many others joined in on market crash predictions this year with the inversion of the yield curve. 

We do not get involved with market crash predictions. Instead, our service has worked diligently to provide stock picks and entry/exit timing that we feel is pertinent in this market. Admittedly, it’s a little bit like playing dodgeball as we’ve already seen Amazon and Alphabet miss earnings, yet Microsoft and Intel come in strong. 

The risks in today’s market should cause one to reflect on their strategy. We could see the market rise 30% from current levels, or retrace 30% from current levels; no one really knows. The historical data presented coupled with the frenetic behavior in the IPO market warrants all investors to take note of a few key points: 

(1) Proper position sizing: how much risk are you taking on? When the market is down 0.5% and your portfolio is down 5%, you may want to consider the level of risk you are taking. We personally don’t put more than 5% in a single position during market extremes. 

We are not in a buy-and-hold environment for new positions, thus 5% is the maximum for allocation that we personally follow. (We’ve mentioned on the forum that we plan to increase this to 10-15% after a pullback for our top two to three positions).

(2)  What’s your exit plan when the market turns? We have stops on our positions, which we follow. Losing 50% in a position requires that position to go up 100% to break even. And, the space we are participating in can see 20% plus losses in after hours – Facebook, Twitter, Grubhub are all examples. Stops prevent catastrophic losses that you can’t recover from. We place stops based on tight support zones, and will move them up as the position increases to protect our gains and minimize risk. 

3) How much cash? The most gains will not be made at the top of a market, so having cash if we see a meaningful pullback is important. We are personally at 40% cash right now. Our plan is to play momentum now and build a sold buy-and-hold portfolio to capture the last of the cloud cycle and to get far ahead of momentum on the AI economy.

4) Are you hedged. We provide short ideas as well as long. Uber and Lyft – both of these ideas returned around 30% on the downside from previous ideas. We still believe in all of these companies as hedges for your portfolio.  Make sure you have a short position or two. Possibly look into buying long dated puts on weak companies. Think of it as insurance. But, if you do hold a short, we recommend a 25% trailing stop on those positions.

We realize that some of our favorite companies have very high price-to-sales; such is the challenge of tech-specific analysis. The only way either of us have been able to do well in tech no matter the market conditions is with trailing stops. 

Many of our best performing tech stocks have lost 50% of their value very quickly. Within 3-6 months, these stocks are in the black, often by triple digits. We work hard to make sure you don’t buy high and sell low – especially with TA on Shopify, Roku, The Trade Desk, etcetera, which fluctuate wildly. 

You’ll notice that even though we held some of these positions, we pushed for patience and a lower entry that materialized fairly quickly. We don’t see many premium services provide this level of dedication to guide you for the best possible returns after the portfolio manager or analyst has initiated coverage. Typically, the portfolio manager or analyst continually hypes the stock after initiating a position and/or aggressively raises price targets. This is not our style. We will always strive to guide entry at the lowest price possible, and we believe it will serve our readers especially during a choppy market.

We like bitcoin and Chainlink per our August PDFs. We’ve included updates on these below. We feel it is to your advantage to weigh Beth’s opinion heavier than those who are not from the tech industry on disruptive tech trends and product positioning. 

It is nearly impossible to predict futuristic tech trends, and to sift through the noise, if you are not experienced in the tech industry. We saw this with her call on Facebook’s Libra, which was bold to state it would fail the day it launched. China recently announced a strategic move into blockchain, which should not be surprising with Beth’s thesis on bitcoin (i.e. that the pressure would come from overseas). In addition to the PDF on bitcoin and Chainlink, there is  additional free analysis on bitcoin from June on her free blog.

SECTION 3: 

Technical Analysis of the Market/Game Plan

By Knox Ridley

The game plan, which I’ve highlighted in the prior market update in September, and have slightly updated in this report, is straight forward. Bull markets rarely die in a whimper and high valuations do not prick the bubble. They are usually preceded by euphoric buying that makes no sense in retrospect. There’s a chance the many “market crash” predictions of 2019 are wrong and we have a final push to new highs and beyond. 

Recently, we have seen the market pushed to new highs by Staples, Utilities and Semiconductors. In order to sustain this move, and push us beyond, we will need to see growth, specifically tech, resume a leadership role, which we are starting to see. 

Not only has tech broken its resistance at $82.50 (IYW), but so has the financial sector and healthcare. These are positive signs for a continued push higher. However, if these levels cannot hold, we could see a reversal. This is something we monitor closely.

Simply using technicals, if the 2725 level is broken, that is a major warning to the long side of the market with potential to reach 3150. If 2600 is broken, I expect the bear case to be more likely, which can see us go much lower (some forecasts call for 2200 if 2600 is broken). 

This view has not changed since September; although to the frustration of any technical analyst, we have continued to trade range bound for a sideways market throughout most of 2019.  This is why many market forecasts have been wrong this year. We’ve seen little progress in either direction. Fortunately for us, we are not market forecasters and our readers have been able to make gains in small pockets of the market.

Most important, if we close above 3150 in the S&P 500, I will view that as the indication that the final bull push is here, and I will personally allocate more into high beta stocks with very tight stops.  

In conclusion, and most importantly, as tech investors, this is not the market that you establish a buy and hold position, in our opinion. This is the market where you play the momentum in the market, with tight stops – i.e. a rules-based and well-defined exit strategy. Please keep this in mind with your positions – check position sizing and exit strategies with your financial advisor well in advance of needing to execute on them. 

SECTION 4: Portfolio Updates

Snap:

Fundamentally, Snap is much weaker than during Q2 earnings. The market has not penalized Snap, however, and it’s trading above $14 after breaking this support briefly. If we see Audience Network announced, the company will become much more interesting on a fundamental level. 

Roku:

Roku is one of our highest conviction long term plays. Anyone who has followed Beth for a while has made out nicely in this trade. Recently, it appeared to have a blow-off top and then a sharp retrace that found support just above the $96 target zone following our encouragement to not buy at the $160 level and to wait for this retrace. It has since corrected upwards in a 3-wave corrective structure, touched the 61.8% retracement level and then turned down again, and is now testing the 73.2% retrace level at $155. Roku is trading above its 20-day EMA, which lighted in light blue. If it falls below and stays below this level, a new downtrend could occur. 

If you want to go long Roku at current prices, I’d recommend a stop at $122.50. Keep in mind, Beth is bullish on Connected TV ads and, as of now, we don’t foresee any negative earnings surprises due to strength of this trend. 

The main risk to Roku is market perception. The stock gets rocked with OTT news. My primary target for a buyand-hold position is highlighted in the yellow box on the chart (sub-$90), if you care to be patient. In the meantime, due to Connected TV ads, Roku is a solid momentum play. 

Zoom (ZM):

Zoom broke the 61.8% and 78.6% retracements and dipped below our $68 stop. Knox closed the position for a small loss while Beth remained in her position due to her current thesis that cloud is not slowing down this quarter (these published in September on free blog regarding all cloud stocks and in October on MSFT ahead of earnings).   

Zoom is now hovering around the 200% extension. In other words, the length of the C-wave is exactly twice the length of the A-wave. This is likely due to Zoom’s lockup period expiring. As long as this level holds, and ZM does not dip below its IPO price, I’ll consider this a deep Wave-2, which can lead to new highs in a Wave-3 push. However, if ZM closes below its all-time low, the structure will become complex and one that I will step aside until a clearer uptrend forms. 

You can take a shot at catching the bottom, buy at the current levels, and place a stop just below the low at $59.90. Stay cautious until the RSI breaks 60 and at least one resistance zone is cleared with force.

Uber:

Uber has completed its A-wave down, and is currently in a corrective B wave. I’m expecting this renewed uptrend to end soon and commence the downtrend to the target zone in the yellow box. Keep in mind, even if Lyft comes in strong, Uber’s lock-up is expiring and we expect this to strengthen the short thesis that we put into motion at the IPO. Place a trailing stop on that short at 25% for safety. 

Workday:

We are still monitoring Workday as we understand the financial analyst day caused a sell-off.  Our original analysis had stated:

“(the) ideal buy-and-hold from technical analysis is in the $142-$140 regions, with a possibility of trading as low as the $120 region. If the earnings report is weaker than expected, I’d see that as a buying opportunity – especially if the price breaks the $172 support and we get a deeper correction.” 

At this point, Workday has not chosen a clear direction and has remained between bearish and bullish trends, even with the negative news. If Workday goes to the 50% retracement level, we consider these prices to be a gift, and will be strong buyers. 

Beth will be writing a new analysis on Workday ahead of earnings and this will cover the financial analyst day in detail. 

Bitcoin:

Bitcoin (BTC) has followed our plan perfectly. It has retraced to the lower end of our target box, around $7400.  The chart below speaks volumes to the excitement we have of a possible bottom being in place. As BTC touched the long-term support region of 7430, which coincided with the Fibonacci time zone of 61.8% of the previous uptrend. At this moment, the RSI broke its downtrend, while the Stock/RSI bottomed and turned up.  

If you have not taken out a position in BTC, we recommend that you consider this. Above is the long-term chart, and the rough path that we expect BTC to take to all new highs and beyond. BTC is known for extending, and the below chart is a very vanilla, no extension 5 -wave uptrend. As you can see, there is a lot of meat on this bone.  

You have not missed the move, it’s just beginning. But, please keep in mind that this is Bitcoin – it’s extremely volatile, known for major extensions, and can reverse on a dime. So, maintain reasonable position sizes. We are not putting in more than 3-5% of a portfolio in BTC, at most. The new stop for BTC is $7500. If it closes below this price, sell and we will regroup. We firmly believe any small losses will be made up on a trend reversal and the goal will be to not miss out on the uptrend.

ChainLink:

Link has also followed our trading plan quite well. It traded into the middle of our target zone – around $1.75 to $1.50, and then shot above the $2 resistance. It’s now trading around $2.75 in a clear 5 wave pattern. We see Link as just beginning its uptrend as well, and we see new highs and beyond as a strong possibility. Link is a high conviction choice. If you start a position now, place a stop just below the $2 region.

BABA:

Trading within the large degree triangle pattern, both on the RSI and the price. It should be due for a sharp move once this pattern is broken. Stop remains just below $146. This stock is fundamentally stronger at the current valuation than it’s peers and has a reasonable probability of doing well in the near term.

Telaria:

Telaria is up about 4% so far. Stop remains just below just below $5.75. This stock is a small cap Connected TV ads play with a low valuation headed into earnings. We believe there is room in this price.

Pinterest:

We like Pinterest more than its peers and believe there’s a reasonable probability of the company reporting strong growth into the near future. This PDF was released last week. We believe the market will reward Pinterest in either this quarter or next quarter for its consistent revenue growth. 

Shopify:

This stock has seen continued volatility and corrections since our last report. Last week, it was trading back at support around $290. The large degree head and shoulders pattern is still in play. Below $280, and it will be confirmed. If you want to go long, keep this price point in mind for a stop. We believe Shopify’s strategy to serve the merchants, and improve their process, will help the company compete with eBay and Amazon. 

Mongo DB:

This stock has continued its downtrend and is currently trading within our original target box. We had stated in the PDF that the more likely scenario is that MongoDB will break support at $141 and allow for an entry between $95 and $128.

The red circles are showing a positive reversal signal, which is telling me that the selling in MDB may be slowing down, and it’s due for at minimum a short-term reversal. It’s holding at a key support level – 23.6% retracement and 200% extension. If this level breaks, expect it to find support at the 38.2% retracement around $85. 

One scenario to consider if you want to attempt to catch the bottom, is to go long today as the stock has a reasonable probability of reversing, and place a stop just below the 23.6% retracement level at $114.

Microsoft:

We recently published quite a bit of information on Microsoft ahead of earnings as part of the thesis that cloud is not likely to slow down this quarter. The company went on to win the Pentagon contract, which was nice timing for our readers. Notably, Beth predicted MSFT would win the Pentagon contract in December of 2018 when only IBM, Oracle and Amazon were being considered due to Microsoft not having the correct security clearance. You can find this prediction on her free blog.

Quick note on Apple & Lyft

Posted on by io-fund

I want to drop a quick note about my analysis published in MarketWatch this week on Apple. The company has released all iPhone 11 models simultaneously this year, so there’s a chance they do well short-term. Longer term, releasing all models is very likely to negatively impact Apple in future quarters. 

I struggle to see why Apple is trading higher than its peak in 2018. Even with an earnings beat, we will see a decline in overall revenue YoY.  We are seeing double digit declines in Apple’s top revenue segment, the iPhone. The effects of smartphone saturation will be even more evident when consumer confidence dips. This is why Samsung is seeing 50% lower operating margins – consumer confidence in China is at a 2-year low and pricing wars are driving prices down (a major warning sign of saturation). Apple has followed by lowering prices. 

Regardless,  with or without an earnings beat,  Apple’s annual revenue will be lower this year than last year. Any other tech company would experience a major sell-off if reporting lower YoY revenue.

Apple has a lot of cash, but to expect a synchronistic handoff between services (or any other pivot) and the iPhone is overly optimistic. 

You can read the MarketWatch article in full here: https://www.marketwatch.com/story/investors-arent-noticing-apples-long-slow-decline-2019-10-29

Regarding Lyft, this company is able to report cleaner numbers than Uber. I am very bearish heading into Uber’s lock-up expiration and will personally be betting against both companies again. I have half my position in now, and will lock-in the remaining half of my short position after Lyft reports in the event we see an increase in price from Lyft’s earnings. This will be round four for me on these shorts.

Microsoft Stock Price: Technical Analysis

Posted on by io-fund

Unlike most tech stocks, Microsoft’s stock price has over 30 years of trading action to analyze. With more data to analyze, I tend to lean heavier on Elliott Wave theory to predict Microsoft’s future. stock price because of the many layers of wave patterns that will naturally unfold over time.

This is a guest post provided by Technical Analyst, Knox Ridley

This article will lean exclusively on Technical Analysis as we start from a monthly chart and zoom into a daily chart to reach the conclusion that Microsoft’s stock price may have some upside left in the trend, but a sharp decline is in the near future, followed by a multi-year renewed uptrend.

Multi-Decade Picture of Microsoft’s Stock Price (monthly charts)

multi-decade picture of microsoft's stock price monthly charts

The red extensions are based off the length of Wave I, and then placed at the base of Wave II. The extensions are thus measurements of Wave 1 combined with the internal Fibonacci Ratios (outlined on the right of the chart).

Above is the monthly chart on Microsoft’s stock price going back to its IPO. We have a massive 5-wave pattern unfolding that perfectly aligns with Fibonacci ratios. The exact ratios we use on a daily chart are thus present on a monthly chart, and if you follow the ratio lines in red, you can easily see how the price reacts to these specific levels. It’s because of this that I lean on Elliott Wave as an estimation for the overall direction of Microsoft’s stock price, especially when we can analyze so many layers, and especially considering we are on the final leg of a 30 year 5-wave cycle.

Also Read : Why Microsoft (Not Amazon) Will Win the Pentagon Contract

microsoft stock price chart

The red extensions are based off the red cycle count that started at MICROSOFT’s IPO. The Fibonacci circles are based off the 3rd wave high and the 4th Wave low.

Not only can we use Fibonacci ratios to estimate support and resistance zones, but we can also use the same ratios to gauge the timing of an uptrend. I only use this technique on large trends, but as you can see above, Microsoft’s stock price tends to warp, bend and react to these levels, as well. In some instances, they act as strong resistance and support.  

From my estimation, the price is coming to an inflection point between time and price. The price is moving closer to the 400% resistance circle in black, and is currently hovering between the red 350% and 338.2% price levels in red.

I’m expecting Microsoft’s stock price to make a distinct move within the coming weeks as we approach this inflection point. Either the price will turn down in a corrective fashion, or after bouncing around the resistance levels, we should see the price continue to the next level.

2009 Bull Market (weekly chart of stock price)

microsoft weekly chart of stock price

Each count has its own internal extensions, which match the color of the count. Red indicates the extensions of the large cycle count, blue represents the primary count off the 2009 low, and the orange represents the retrace level of 3rd wave within the primary count.

If we dive deeper into Microsoft’s price action on a weekly chart, we can see the uptrend from the 2009 low until now. Keep in mind, the large cycle uptrend that started from the IPO, which is highlighted in red, is composed of its own 5-wave structure. Since 2009, we have been in the final 5th wave of the red cycle count, and that count is comprised of the 5-wave primary count, which is highlighted in blue, circled numbers.

Also Read : Microsoft Earnings Likely to Prove Cloud Isn’t Slowing Down

My best estimation of this primary count has us pushing to the end of a 3rd wave and possibly just now entering the 4th wave correction. Third waves are typically accompanied by peak technical and is present in the MACD, which is another indicator that we may be close to topping. Also, the 3rd wave will typically reach the 161.8% extension. In this case, we have an extremely extended 3rd wave that reached the 223.6% extension as well as the top of the trend line in blue.

I’m expecting the 4th Wave to correct to the target zone I’ve highlighted in the green box eventually, which is between the $120 – $92 price range. Keep in mind, the $92 price range, though may seem extreme, but it is only the 23.6% retrace level.

It’s worth noting the big picture ahead of us, and the inevitable downside we will face. However, it’s also worth noting that this could take months to play out before we hit a final bottom in the 4th wave drawdown. In the mean-time, I believe the daily chart offers some clues to the short-term direction of Microsoft’s stock price.

msft stock price chart

If we zoom-in further using the daily chart, we are looking at the final push of the 5th Wave of the 2009 uptrend. What’s worth noting is how well Microsoft has held up as the bulk of cloud stocks are experiencing significant drawdowns. That alone is a show of short-term strength, which should be noted.  

Furthermore, Microsoft is trading into an upward sloping triangle pattern, which is highlighted in blue. Price has virtually been rangebound, sloping upwards in a narrowing band. Notice how the RSI has been moving in its own triangle pattern. When I see this, it tells me that the RSI is resetting for the next move higher. The internals are coiling, building up strength, while price is staying stable.

Seeing consolidation of both the price and RSI at all-time highs is bullish, in the near term. Today, Microsoft gaped through the upward resistance, making all new highs, which means we will likely see a continuation of the extension to new highs.

However, if we close below the $128.5 support region, I expect the 4th wave correction to be in effect. If we break to the upside, and close above the $146. 50 region, I expect the bull market in Microsoft to resume as we extend further in this 3rd Wave push.

Also Read : Here’s Why Microsoft Stock Could Overtake Amazon on Cloud Infrastructure

Conclusion

Cloud is priced for perfection, even after a large rotation out of the sector that is still in progress. Microsoft’s earnings and short term technicals show that the price probable will extend further, extending the 3rd wave push of the primary count off the 2009 lows. If you want to play the long side, I would place a stop just under the $128.50 support region, and consider that the time to invest for the long haul is not at current prices.

This market environment is about playing momentum with tight stops. Even though the long-term analysis is showing a pullback in the future, there is still some opportunity to ride the remainder of this bull market with momentum, as Microsoft leads the way.

The big picture is to capture the final 5th Wave push after the 4th Wave correction takes place. When we bottom, Microsoft will be one of my core holdings as we get the final push of this 30-year cycle trend.

Pinterest Premium Analysis

Posted on by io-fund

46042228-46d0-40bd-961c-f35d9bb304d6_Pinterest-premium-report.pdf

Pinterest Premium Analysis

Pinterest – Timing Looks Better Now  

I’ve been cautious about Pinterest in the past as social media often has a hard time holding its value in the months that follow the IPO. Pinterest’s lock-up period is behind us with the expiration having occurred on October 15th – same day as Zoom. 

My best guess is that the IPO lock-up is already reflected in the price going into these earnings, and Pinterest has a high probability of doing well in the next quarter. Pinterest has proven itself as a solid social app in its first few quarters on the public market – something that few of its predecessors have done.  

Pinterest is strongest in the fourth quarter. Unlike Snap which lowered guidance going into Q4, this should be Pinterest’s best quarter. In fact, Pinterest is second to Facebook for generating holiday revenue (although Facebook in the lead by a wide margin). In the event Pinterest remains steady this earnings season, I’m interested to see if the issues with Twitter and the lowered guidance from Snap will help investors view Pinterest as a good option, comparatively. 

Q4 tends to outperform historically …. 

Overall, Pinterest has a stellar business model that functions like a hybrid between e-commerce, social media and display advertising. Pinterest refers to this as a discovery engine. Similar to Shopify, Pinterest challenges the dotcom era e-commerce companies that still dominate retail, such as eBay and Amazon, an area overdue for disruption. 

In the past, I have been critical of Pinterest’s international ARPU. In the S-1 filing, the company was somewhat evasive about it when quoting the overall key metrics. I was vocal about this around the IPO as it’s the lowest ARPU I’ve ever seen from a social site. Note: overall ARPU for Pinterest is healthy due to the United States averaging out international. I expand on this point below.

Ben Silberman is a classic founder-CEO who flies under the radar. I’ve seen him speak quite a few times and he has an excellent reputation in Silicon Valley as someone who is ahead of the trend curve and is patient in his outlook. He is not hasty and you won’t see him in the limelight much, although he has the ideal, impassioned Founder-CEO recipe. 

Fundamentals & ARPU

In Q2 2019, Pinterest reported 62% revenue growth year-over-year of $261 million. Analysts were expecting $233.7 million in revenue. Adjusted EPS was -$0.06 versus expected -$0.08. The company raised revenue guidance slightly from $1.06 billion at the midpoint to $1.105 billion. This was a solid earnings report. Monthly active users also exceeded expectations at 300 million versus 291 million.

Average Revenue Per User  

In the past, I have been a critic of Pinterest’s international ARPU. To be clear, I still see this as an important risk to continually monitor as a disproportional amount of growth is coming from international (80% growth) yet the ARPU is so low, that it could damage operating margins long-term and lead to losses. 

The United States users monetize at $9 average revenue per user annually while the international user monetize at a mere 25 cents per user, as of 2018. This is what that looks like:

Pinterest’s international revenue is growing at 199% last quarter, but this is because the numbers are so small. To compare, Facebook’s international ARPU is at $7 and has never been below $1.50 as a public company even with the stock struggled in 2012. Twitter has seen below $1 ARPU but was also hovering at 5 price-to-sales during some of this time period compared to Pinterest’s 16 P/S. Meanwhile, SNAP has nearly 1500% more ARPU in the rest of world region at $1.24.

Pinterest is Niche, yet Fires on Many Cylinders     

The United States is where nearly all of Pinterest’s revenue originates. Pinterest’s top five countries are the United States, Brazil, India, Turkey and Russia. Many investors are discouraged by the skew in demographics towards women, as they view this as limiting the addressable market. However, 80 percent of household purchases are decided by women. 

In addition, Pinterest is adding many male subscribers; depending on the source the percentage of new subscribers that are male falls between 40-50%. This will put the gender split between women and men at 70/30 by 2022. 

Relative to market cap, Pinterest is ranked among heavyweights when you consider its digital reach. It nips at the heels of eBay and Twitter and could easily rival Wal-mart in a couple of years (on digital reach). This is important because 87% of Pinterest users have purchased a product due to exposure on Pinterest and nearly half of Pinterest users have a household income over $100,000. 

For retailers, Pinterest rivals Instagram despite having a fraction of the user base. One out of every 2 Millennials use Pinterest with Pinterest driving the same percentage of product discovery among Millennials as Instagram despite having one-fourth the user base. 

Source: Kleiner Perkins

Valuation                 

Pinterest I wrote at length about Pinterest’s valuation on my free blog when the company went public. There aren’t many examples of successful investments in social media trading at above 10 price-to-sales. Historically, Facebook traded at a price-to-sales of 15 between 2013 and 2016, however the company had 1.2 billion users at that time and 63% YoY growth and $1.5 billion to $3 billion in profits. 

Pinterest is a better comparable to Twitter and Snap’s user base in the 300 million range. Twitter did have a P/S above 15 when posting 75% growth but did not last long as the price was down nearly 50% within two quarters. Notably, Pinterest is a discovery engine and I believe the ARPU has the ability to surpass Twitter and to steadily climb rather than be driven by only traditional ads. Snap has also seen sudden corrections above the 10 P/S mark even when reporting 50% YoY quarterly growth. 

With that said, as noted above, advertisers and retailers see Pinterest as a more valuable platforms as users are in a shopper mindset.

In the conclusion below the technical analysis, I point out the probability is higher that Pinterest remains strong this quarter and next quarter fundamentally when compared to peers Twitter and Snap. The technicals are setting up nicely and don’t raise any flag, with the information we have today. 

For a larger buy-and-hold investment, I’d like to get Pinterest below 10 P/S but I am playing momentum in the short-term. 

Technical Analysis                   

By Knox Ridley

Symmetrical Correction  

Pinterest, from a technical perspective, is suggesting a nice set-up. 

First of all, the structure of PINS is a clear 3,3,5 correction. In other words, if you follow the blue A, B, C, they each have an internal structure, which is highlighted with the orange circled letters.  So, the A-wave is a 3-wave move, the B-wave is a 3-wave move, and the C-wave unfolded in a 5-wave drop. This 3,3,5 structure is very common with corrections. 

Most notably, the length of the A-wave drawdown is the exact length of the C-wave drawdown. In other words, we have a symmetrical A=C correction, which is also very common.  This is referred to as the 100% extension of Wave A (So, A=C), which is shown as the blue support on the right. Another visual of this is below.

The length of the first drawdown was about 33.5%. The length of the second drawdown was a little over 34%. Price tends to correct in symmetry, which can offer a guidepost for bottoms as well as help guide risk/reward setups. 

RSI Divergence 

If you look at the RSI pattern in relation to the price action above, we have a clear positive divergence between the RSI and the price. As the price is making lower lows, the RSI is making higher highs, suggesting fading downside momentum. This suggests a possible trend reversal. 

Furthermore, the price is trading just below the 10-day exponential moving average (EMA), and the 20-day EMA. These moving averages give more weight to recent price action, and are indications of short term and mediumterm trends. They should act as resistance, but I’m expecting PINS to take them back, which will add further evidence of an upward trend reversal in progress.

Conclusion  

The market has been challenging lately, but we like this set-up. The fundamentals and technicals seem to agree that Pinterest has a higher probability of receiving a positive reaction to earnings. You can place a stop just under the 100% extension at $24.50. If you want to give it more breathing room, place your stop below the 123.6% extension at $22.00.

Semi update: October 23rd

Posted on by io-fund

Texas Instruments, widely known as the bellwether of the semiconductor space, reported a big miss yesterday on the top and bottom line. With sales down 11% YoY and a downside Q4 forecast of $3.07-$3.3B compared to the consensus of $3.6B, the stock slipped just around 10%. 

Semiconductors trade like commodities in that they are highly cyclical, and the timing of the end of the cycle is typically sudden and a sharp move. 

I encourage you to review the technical outlook in the Nvidia PDF  that I wrote mid-September. The global outlook around the KOSPI as well as the Philadelphia Semiconductor are still in place and have not changed much, since my last writing. 

In other words, the KOSPI is in a bear market with weak momentum, suggesting a lower leg, and the Philadelphia Semiconductor Index (SOXX) is still trading in an ascending wedge pattern with weakening momentum. 

The US semis are crucial and we’ve now seen two warnings – Texas Instruments and Micron. Xilinx didn’t have the best quarter-over-quarter results even if they did beat analyst estimates. This quarter, Xilinx reported $833 million in revenue down from $850 million last quarter. EPS was flat at $0.94. 

To highlight the SOXX ETF, which tracks the Philadelphia Semiconductor Index, you can visually see this pattern unfolding. Notice how the index has been making higher highs while the momentum indicators in the RSI and MACD are decelerating, making lower lows.

The technical evidence coupled with the recent earnings reports of Micron, Texas Instruments and today’s Xilinx suggests that this pattern should resolve to the downside. 

Our primary entry target is Nvidia. This is a high conviction, long-term hold. 

Also, it’s one of the strongest names in the semi sector, and any cyclical slowdown has not caught up to the sentiment in Nvidia. As you can see, its momentum is also fading as it is failing to break and close above the $200 region.  

If you’re bearish on semis, the easiest way to play this position would be either short or buy a put on SMH or SOXX, which are both ETFs. The SMH tracks the VanEck Semiconductor Index while the SOXX tracks the Philadelphia Semiconductor Index.

However, SOXX has a few more names and also caps the allocations allowed, so it’s technically more diversified. Either option should be sufficient. As more earnings flow in, we should get a clear direction for the near future. In the mean time, I’ll leave you with a quote from the recent Texas Instruments (TXN) earnings call. 

In the quote below,  TXN states their negative results are due to a broad-based macro slowdown on the earnings call. 

“I can sense that you collectively are unsatisfied with our answers, and I understand that. We have close to 100,000 different customers, and we sell about 100,000 different products. It’s difficult to pinpoint any one thing, but the sense we get, talking to those customers, getting input from them, from our sales people and all the touchpoints that we have, is that the weakness is broad-based. It’s due to macro events and specifically the trade tensions. And if you think about when there’s tensions in trade and obstacles to trade, what do businesses do? They become more cautious, and they pull back. And we are at the very end of a long supply chain, and when the ones at the very front pull back, it becomes a traffic jam. And so our sense is that is what’s happening in the marketplace. But we’ll see what other companies will report over time and we’ll get a clearer picture over the next several weeks and really quarters, because this thing, we’ve been in it for now four quarters, and it’s going to be longer than that.”

Microsoft Earnings Likely to Prove Cloud Isn’t Slowing Down

Posted on by io-fund

This week, Microsoft’s earnings will shed light on whether the fear over cloud valuations is warranted or not.

Just last week, IBM results showed that its cloud segment grew by just 14%, boosted by its Red Hat acquisition. In more signs of trouble in the industry, Workday (WDAY) stock declined sharply last week after the company said that growth in its once-lucrative human capital management was slowing to 20%. This led to analyst cuts from Stifel, Deutsche Bank, and RBC. Morgan Stanley (MS) and Evercore ISI analysts have also rushed to downgrade the cloud industry ahead of the busy earnings extravaganza. Companies like Slack, Okta, Splunk, and Salesforce have dropped by 27%, 25%, 20%, and 8% respectively in the past three months.

This week, Microsoft earnings will be important because they will provide a picture about whether this sell-off and pessimism is warranted. Microsoft is important because it is the biggest cloud computing company in the world. It’s impressive growth in cloud has pushed it to become the second-biggest company in the world with a valuation of more than $1.07 trillion. Don’t be surprised if the sector ignores the market sentiment and reports impressive earnings.

Microsoft will provide a good indication of the cloud sector because of its broad offerings. The company has a large portfolio of cloud software (SaaS) and cloud infrastructure (IaaS) products. The IaaS and SaaS industries have grown to almost $40 billion and $95 billion in the past decade. This growth is expected to accelerate in the coming years as global corporation and governments embrace the efficiency of cloud. The industry revenue could double in the next three years. Although there will be many winners in the cloud race, Microsoft is well-positioned because of its scale and its approach of the industry. Just this week, the company acquired Mover, a small company that will help it simplify and speed migration to Microsoft 365.

Also Read : Why Microsoft (Not Amazon) Will Win the Pentagon Contract

Cloud Cycle

The cloud sector has had impressive growth in the past decade. This growth is just getting started. According to Gartner, cloud spending will accelerate at nearly three times the rate of the overall IT sector through 2022. The research firm expects IaaS sector to grow by 27.5% in 2019 to $38.9 billion. It is expected to reach $76.6 billion by 2022, which is an incredible growth.

Not only this, Gartner expects other cloud sectors like Platform-as-a-Service (PaaS) and SaaS to nearly double. Another estimation is that 90% of companies will purchase these products from a single company. As a market leader, with a diverse suite of PaaS, IaaS, and SaaS products, Microsoft will likely be a potential beneficiary in the cloud cycle.

To be clear. Quarterly results will be inconsistent. It has been like this in all fast-growing sectors.

Source: Gartner

Microsoft

The past few months have been challenging for technology stocks. Yet, Microsoft has been a better performer. In the past one year, Microsoft’s stock has soared by 27% compared to Amazon’s 1.2%, Alphabet’s 13%, and Apple’s 9.6%.

Microsoft has beaten its peers mostly because of its approach to the cloud sector. The company was early to embrace hybrid cloud strategy, which started to take hold in 2018. This was two years after the company’s first technical preview in 2016.

Also Read : Here’s Why Microsoft Stock Could Overtake Amazon on Cloud Infrastructure

This growth has happened even as the company’s valuation has gotten cheaper. The company has a trailing PE ratio of 27.5, which is much lower than last year’s ratio of 46. This implies that the 27% stock gain has been well-earned.

In the past quarter, the company reported great results. Its revenue of $33.72 billion beat the consensus estimates by $920 million. The EPS rose to $1.37, which was 16 cents better than what the market was expecting. In the previous quarter, Microsoft’s revenue of $30.57 billion was $760 million higher than the consensus estimates. Since 2014, the company has had just one EPS miss and three revenue misses.

In the most-recent quarter, the company’s growth momentum continued. Commercial cloud grew by an annualized rate of 39% while Azure grew by 64%. Dynamics 365 grew by 45% while Office 365 grew by 31%. These are excellent numbers for a company that was ignored and ridiculed by the investment community.

Investors should pay close attention to hybrid cloud when looking at Microsoft. Looking at it carefully will give them perspectives about how the company is positioned to set itself apart from other cloud companies like Microsoft and Google.

Hybrid cloud is a technology which enables companies to store some of their data on their own servers while simultaneously sending other data to the private and public cloud. Companies love hybrid cloud because it is cost-efficient, transparent, and safe. Azure’s strength in hybrid computing has made it the main player in the industry. The product is used by 95% of Fortune 500companies.

Government agencies like the Department of Defense are starting to invest in this technology. Last year, I wrote a long-form article explaining why Microsoft would be a better contender for the $10 billion Joint Enterprise Defense Infrastructure (JEDI) contract. In August, the department, which had favored Amazon paused the procurement process on Amazon security concerns. There were also concerns over why single-sourcing was used for such a sensitive contract.

The decision by the DoD to pause means that Microsoft could be at play to win the contract. Microsoft is a leading contender because of its track record with the DoD. Recently, the department awarded the company a software computing contract worth about $7.6 billion. The Defense Enterprise Office Solution (DEOS) will provide productivity tools to the U.S. military.

Microsoft’s cloud products are also used widely in the country’s intelligence sector. In May 2018, the U.S. Intelligent Community announced that it would continue to use Microsoft’s products like Azure Government, Office 365 for US Government, and Windows 10. In the announcement, Microsoft said that its Microsoft Cloud for Government solutions were used by over 10 million government customers.

In 2018, the company won a $480 million contract to supply about 100k augmented reality devices to the US military. The company won this contract after competing with other companies like Magic Leap, Lockheed Martin, and Raytheon. The military bought these devices because it wanted to incorporate night vision and thermal sensing in its training.

The U.S. Department of Defense has partnered with Microsoft on more projects. This means that there is a possibility that the company could be a leading contender on the JEDI project.

Also Read : Microsoft Stock Price: Technical Analysis

Conclusion

Microsoft will release its Q1’20 earnings on Wednesday. Analysts expect the company’s earnings to increase to $1.24 from $1.14 a year ago. Revenue is expected to jump from $29.08 billion to $32.24 billion. As with all of its earnings, the market will be focusing on the cloud segment. There is no evidence that this revenue will slow down. While uncertainties on trade and economic growth could lead to some fluctuations, Microsoft has an advantage because of its cloud strategy and execution.

A version of this article originally appeared on MarketWatch October 22nd, 2019.

Microsoft Update: October 21st

Posted on by io-fund

I’m publishing this week on Microsoft – the full copy of the article is below.

This is a stock I have a decent track record on, as I encouraged investors to consider the company during the Q4 sell-off (about a month after the company had missed earnings).

I also pointed out in a separate analysis that it would be a strong contender for the Pentagon contract. I got a lot of backlash from a few AWS bulls who said I was wrong. A few months later, the DoD announced that Microsoft was in the running and now it’s widely believed the contract is between Amazon and Microsoft.

I hope my streak continues on this stock because I’m definitely swimming against the stream in my upcoming article this week. The point of the upcoming article is to make it clear that the projections for cloud growth are not in agreement with the current rotation out of cloud. In fact, the rotation is sending the wrong message as the best gains on cloud are predicted to happen over the next three years at an acceleration of 200-300% compared to the last decade (stats below).

My readers should remain flexible and be prepared to play this either way. If cloud rallies, or if cloud sells-off – make sure to have a strategy to get back in. If other tech companies come in weak over the next year, all the better to get cloud cheap. I am personally playing the cloud market right now while understanding the market will eventually fold its hand on these high valuations. I can’t perfectly time a market, so I prefer to play on trends that I know are in their prime. If the market doesn’t behave the way I want it to, I follow my stops and get back in. My biggest drop was Nvidia during the crypto bust — which retained gains because I had a stop. And, I believe in this company so I got back in.

Keep in mind, if Microsoft has a negative surprise, cloud stocks will get rocked. I do already own Microsoft as I was vocal about its strength during the Q4 selloff but I’m playing momentum in the short-term right now, as well. I can’t find any evidence that cloud is slowing down, so I’m sticking with what has worked in the past (numbers and facts, rather than the emotions of the market).

Gartner has been accurate in the past with their unbiased analysis on tech trends. I place more weight on Gartner than IDC. In fact, IDC has already been proven wrong this year with a forecast that cloud would grow 11%. Cloud has already grown 24% in the first half of 2019 with IaaS and PaaS growing at 44% and SaaS growing at 27%, according to Synergy. (Gartner is detailed in the second chart below)

Gartner’s take on the cloud market:

If you are not in Microsoft right now, and the valuation is too rich for you at a 25+ forward PE and P/S of 6-7, then Knox sees a broader market pullback opportunity at $92 down the line. For anyone in Microsoft, he sees $128.50 as support and $146.50 as the start of a renewed bullish trend. He has more detailed analysis coming out on this soon after earnings.

My full article on Microsoft is below the technical analysisMy full article on Microsoft is below the technical analysis

Microsoft Technical Analysis

By Knox Ridley

Though MSFT is trading flat with a decelerating RSI, relative to its cloud peers, its showing some strength. In other words, while most cloud stocks are down double digits, MSFT is simply flat.

It’s trading within an ascending triangle pattern, which more often than not, resolves to the upside. If you are going to play the long side, a safe stop would be just under $128.5.

I placed a series of supports that will act as significant regions in any significant pullback. Also, even in a major drawdown, the likelihood of MSFT retracing beyond its 23.6% retrace level is slim . Above the $146.5 region, and the bull market in MSFT should extend.

I will release a more detailed report of MSFT’s long term prospects soon.

 

Microsoft Article:

 

Headline: Microsoft’s earnings report will likely make believers out of cloud-software skeptics

Subheadline: The company is well-positioned for further gains, reflecting accelerating revenue growth in the industry.

Story:

Microsoft’s quarterly results to be released this week will tell us whether fears about the cloud-software industry are warranted. 

Revenue growth in the cloud sector has been phenomenal and, according to research firm Gartner, is poised to accelerate. 

Morgan Stanley and Evercore ISI analysts aren’t so bullish. They downgraded some cloud companies before they released earnings. The stock market showed tension cracks last week when Workday said human-capital-management-software growth was slowing to a 20% pace. Shares of Workday, Okta and Slack Technologies, among other companies, tumbled in response. 

This week, we will see if the momentum from growth to value picks up steam. Don’t be surprised if cloud companies continue to report strong earnings. The goal for investors is to tune out the noise, as cloud-revenue growth is likely to defy the odds.

In a sweet spot

Microsoft is at an inflection point for cloud software (also known as SaaS) and cloud infrastructure (IaaS). Well-rewarded revenue growth in the cloud sector has taken more than a decade to accumulate, measuring a market worth $40 billion in IaaS and $95 billion in SaaS.

However, it will take only three years to double this revenue. Although many cloud stocks will reap those benefits, Microsoft is especially well-positioned.

According to Gartner, the cloud-services industry will grow at nearly three times the rate of overall IT services through 2022. Cloud infrastructure-as-a-service will grow at 27.5% in 2019 to $38.9 billion, and will reach 76.6 billion by 2022, or nearly 100% growth. 

Other areas where Microsoft excels, including platform-as-a-service (PaaS) and SaaS, will also nearly double. This helps to cement Microsoft’s IaaS market share, as Gartner also predicts 90% of organizations will purchase public cloud IaaS and PaaS from a single provider.

Although it’s likely there will be some ups and downs on a quarterly basis, the market may be surprised to find that growth across the cloud industry occurs with, or without, a perfect economy. 

This has been a challenging time for tech stocks, yet Microsoft’s shares have returned nearly 29% (with dividends reinvested) for one year through Oct. 18, compared with much lower returns for Amazon.com, Alphabet and Apple

Previous earnings reports

Microsoft’s stock has performed better because its hybrid cloud strategy began to take hold in 2018, two years after the first technical preview in 2016, and this spurred faster growth than the market estimated. 

Last quarter, Microsoft beat revenue expectations by $920 million and the consensus earnings per share (EPS) estimate by $0.16. The company exceeded expectations handily in the two quarters before that as well.  

Microsoft will report fiscal first-quarter results Oct. 23 after the market close. The company’s fiscal fourth quarter was its best yet for commercial cloud, with revenue increasing 39% year-over-year. Azure had the strongest growth at 64%, followed by Dynamics 365 at 45% and Office 365 Commercial at 31%. 

Hybrid cloud requires a closer look, and not only because it’s been showing up in the financial statements under Azure. It’s important to consider what will set Microsoft apart from other cloud IaaS providers, including Amazon, the leader, and Google Cloud. This is key to forecasting future earnings.

Hybrid cloud allows for scenarios where customers can keep their most sensitive data on their own servers while sending workloads to the private or public cloud that gain an advantage from mining data more efficiently and require improved accuracy and productivity. 

Azure’s strength in offering both on-premise and cloud in a hybrid solution has prompted Amazon to chase Microsoft with recent efforts to improve its hybrid strategy. Today, Azure claims more than 95% of the Fortune 500 as customers because of its hybrid flexibility. 

Security is a key concern:

Understanding hybrid provides transparency into how managers of companies with big budgets think and how they evaluate the cloud. Security is clearly a concern as on-premise servers continue to be in demand as a counterpart to the public and private cloud.

The Department of Defense (DoD) is a perfect example of an entity that would want to keep its most secure data with on-premise servers while leveraging the cloud for artificial intelligence and machine learning. Fortune 500 companies with substantial intellectual property are additional examples. 

I wrote a long-form analysis on why Microsoft would be a strong contender for a Pentagon contract when pundits had zeroed in on Oracle, IBM and Amazon. The contract is worth $10 billion over 10 years.

Beyond the $1 billion in annual revenue, it’s the implications of which company the Pentagon chooses that is most important. That’s because the winner likely has the best security. 

There are many instances in recent years where the DoD chose Microsoft for software and operating systems. Recently, the Pentagon awarded Microsoft a $7.6 billion contract to provide software. The Defense Enterprise Office Solution (DEOS) will provide email, calendar, video-calling and productivity tools to the U.S. military. 

In May 2018, the U.S. intelligence community extended its agreement to use Microsoft products such as Azure Government, Office 365 and Windows 10 in a joint licensing agreement with Dell. At the time, Microsoft said more than “10 million government customers from every federal cabinet level, including the Department of Defense” rely on its Cloud for Government.

In November 2018, Microsoft won a $480 million contract with the DoD to bring 100,000 augmented-reality headsets into the military’s arsenal. The two-year contract will help soldiers prepare for combat training.

There were more contracts in 2016 to provide technical support to the Defense Information Systems Agency (DISA) and a contract that took effect in 2017 to provide 4 million laptops, desktops and mobile devices. 

Microsoft’s advantage:

There is no evidence that cloud revenue growth will slow in the short term. There could be minor earnings fluctuations, but the trend is carrying a lot of force, with projections to accelerate two to three times faster than what we’ve seen over the past decade. Microsoft is well-positioned across all cloud segments, and has an advantage with hybrid cloud solutions and security.

SNAP Update: October 21st

Posted on by io-fund

I was excited about playing the momentum for this stock last earnings season when I released the PDF at about $14 a share and it popped to $17 a share about a week after we published.

I felt confident on the probabilities of a big earnings beat because the company had released new filters that pushed it’s downloads to new highs. They also had announced beta-testing for Audience Network, a way to monetize the 190 million users outside of the Snapchat application.

Funds and institutions will pile in for Audience Network because of what it did for Facebook. However, Audience Network hasn’t opened beyond beta-testing and there hasn’t been an update since April, when the company stated it would be released in the “coming months.”

If/when this does happen, Snap will report higher revenue but I don’t see any evidence that we’re there yet. I also haven’t seen any new filters that would suggest new app downloads or viral popularity (even if short-lived, these are great for momentum plays). We now see Snap testing dynamic ads, which are popular on Instagram. These will not have an effect on earnings this quarter.

TikTok is a looming threat to social media apps, as well. However, if/when I hear anything about Audience Network officially launching, I will be an immediate buyer.

For this earnings report, I am on the sidelines for Snap.  I like more confirmation from app download reports than what I’m getting right now.

However, Knox trades more on technicals and he is getting into the trade ahead of earnings. Here is his take on the situation:

SNAP Technicals 

By Knox Ridley

After Snap hit my stop at $14, closing the position for nice little gain, I’m getting back into SNAP and here is why:

  • 5 waves up (in purple) that hit all the Fibonacci points.
  • 3 waves down from the recent high (A,B,C), and the C wave hit the 138.2% extension and is turning back up.
  • Just reclaimed the 10-day EMA – a show of changing momentum.
  • If we take the length of the uptrend (the bottom of 1- and the peak of 5)and multiply it by the Fibonacci ratios, SNAP turned up right at the 38.2% time marker, which coincides with the MACD turning up, and the Stochastic/RSI turning up.
  • We now have 5-waves up on the 3 minute chart when you zoom into the most recent push up. This is a tell of the bigger direction that is unfolding.

I’m going long, but cautious of the overall market, hence I’m placing a stop at $13. If you want to give it more room to breathe, I’d place it just under the .382 retrace level in black. 

Here’s the chart:

Connected TV Small Cap

Posted on by io-fund

cb15be9f-e24f-4cf4-94d0-d62736934ca2_Telaria-2019-Analysis.pdf

Telaria 2019 Analysis

Overview of Connected TV Advertising:

 Connected TV advertising is in my top three favorite tech trends for near-term gains, as discussed in the PDF that covers Roku and The Trade Desk. This is a massive opportunity that is occurring right now and should be given close attention. 

 Connected TV takes the best part of mobile (audience data) and combines it with the best part of television (brand messaging). This is a very important trend for brand dollars that should not be dismissed as “eyeballs migrating to OTT.”  

 The opportunity is much larger than represented by the number of people who are cutting the cord as

Connected TV ads are not merely a 1:1 ratio. Rather, these ads represent a higher ratio as the demand (advertisers) consider the medium more valuable. There is evidence that Connected TV is closer to a 2:1 and up to a 5:1 ratio in terms of its value to advertisers in terms of the rates they are willing to pay.

 It may be hard for investors to imagine that some advertisers don’t like working with Google, Facebook and mobile or desktop, in general. This is a very real issue in the advertising world. Many big brands are not convinced that these mediums offer true, lasting impressions. They also do not trust the measurement offered as it’s behind a blackbox that they have no control over. Nielson offers an audience measurement system that many brands are accustomed to for traditional television. 

Below is an illustration of television holding its own against mobile. Keep in mind, this is despite 5 billion mobile devices entering the market over the past decade compared to 2 billion television sets. The 34% who have held onto their television budgets are the advertisers this PDF is referring to, plus any of the remaining advertisers who are frustrated with a lack of measurement and click fraud on the other mediums.  

Connected TV ads already see a $20 average revenue per user, according to Roku’s earnings. This is 200% more than social ads, such as Twitter, at $9 ARPU. It took Facebook over a decade to surpass $20 per user while we can trace the relevant emergence of Connected TV ads to late 2017/early 2018. You’ll also see below that Telaria’s CPMs on Connected TV ads are nearly 5x higher than average CPMs and have surpassed Facebook’s CPMs at the height of its dominance (and even with all of that Facebook data).  

For quick reference, here are some CTV ad statistics referenced in the August PDF which related to the overall size of the opportunity:

Mobile’s share of programmatic video will peak in 2020 at 53.9%. By 2021, mobile’s share will dip below the 50% mark due to the rise of CTV ads. 

To illustrate the growth of CTV, SpotX saw the share of impressions it serves through connected TV increase from 15% in Q1 2018 to 33% in Q1 2019. Innovid also saw CTV ads jump from 13% to 27% and Extreme Reach reported an increase from 15% to 44% over the time span of a year. Telaria reported triple digit growth in revenue from Connected TV ads at 133% year-over-year.

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

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

Telaria Overview

Telaria is a volatile small-cap stock and even solid earnings has not helped to stabilize the price. Revenue was up 47% with the CTV business growing 133% year-over-year. Gross profit of $14.7 million was up 31% year-overyear in the last earnings report. The company increased the full year revenue guidance to $68-$72 million, up from $66-70 million.

When comparing Telaria to other connected TV stocks on the market, the two differentiators are that it’s headquartered in Israel, which may position it better for global inventory. The opportunity for CTV ads is global, and this could be a major positive for Telaria. 

The second differentiator is that Telaria is primarily a sell-side or publisher platform – rather than a demand-side platform. For comparison purposes, The Trade Desk is a demand-side platform. More on this below.

Telaria is not a pure play but they are focused enough on connected TV to almost meet the criteria. They also sell mobile and desktop inventory, which is not as interesting to me in the current environment as these are not hyper growth categories.  

Telaria Fundamentals

The most important key metric to focus on in Telaria’s report is CPMs, or the cost per 1,000 impressions, which grew from $11.58 to $15.41 year-over-year. These are very impressive CPMs, although not entirely surprising as in my previous report, I have stressed the importance of CTV ads for brand advertisers. 

Brands who have the big advertising budgets, such as Coca-Cola, Geico, McDonalds, etcetera, are willing to pay much more for television. Compare this to Facebook’s 2018 CPMs which are driven by hordes of data and were considered “skyrocketing” when they hit $11 CPM at Facebook’s 2-billion user peak in 2017-2019.

Due to Connected TV ads and high CPMs, Telaria was able to report $2 million over the $15.5-16.5 expected at $18.2 million in the last quarter. The company reported adjusted EBITDA of $1 million with EPS of -$0.03. 

Full year guidance was raised from $66-$72 million to $68-$72 million with Q3 2019 guidance at $16-$17 million. 

Notably, there is no long-term debt on the balance sheet and the company has $58 million in cash.

Valuation is another area where Telaria checks quite a few boxes. Roku and The Trade Desk can wildly fluctuate, but at time of writing, forward price to sales is 14 for both companies while Telaria is at 4.8. 

In the recent earnings report, leadership stated, “This quarter, we also advanced our technology leadership by becoming both the first video platform to provide Nielsen verified audiences to programmatic CTV buyers and by launching our addressable audience targeting solution.”  

This is intriguing as traditional television buyers are impartial towards Nielson for measurement and verified audience purposes. The majority of the television advertising industry is tied to Nielson data. 

The company also expanded the addressable market feature, although addressable is a common offering among

ad companies these days. The more important announcement is Nielson as the brands who are buying Connected TV inventory rely on Nielson for broadcast and linear television ads. 

As you’ll see in the Risks section below, executives at Telaria come from Nielson, which is an interesting advantage for supply-side partnerships.

Sell Side Vs. Demand Side

Put simply, the sell-side works with publishers (inventory or supply). For Connected TV, the publishers are the apps where you view content: Hulu, HBO, Netflix, Vudu, ESPN, etcetera. Sell-side platforms have direct relationships with publishers. 

The demand-side works with advertisers (demand). This is companies like Expedia, Coca-Cola, Geico, McDonalds, T-Mobile, Verizon, BMW, Mercedes, and sometimes other publishers who want to advertise their services (ESPN could buy advertising on Vudu, for instance). 

Programmatic is real-time bidding that removes salespeople. Ad companies often talk up this piece, but in reality, just about all ad-tech is programmatic and offers real-time bidding these days (and has been since about 2012-2014 when ad-tech underwent this evolution for mobile and desktop ads). This is not a differentiator. It does help to facilitate more ad placements and some brands who were adamantly against mobile or desktop will use programmatic for the first time with Connected TV. 

There are strengths to the sell-side approach. The first is that switching costs are higher for publishers than for advertisers as publishers have to install software into their applications to serve the ads. They’ll typically limit the number of sell-side platforms they work with as it can create app bloat to broker with too many sell-side platforms (SSPs). 

Telaria advertisers an impressive client list, including Sling, Hulu, PlutoTV, A&E and the Discovery Channel. One thing to note: ad-tech companies can integrate via server to server rather than through software. The latter is a much stronger relationship. Telaria, and other ad-tech companies, typically don’t disclose if the client list is a direct software installation or a server-to-server integration. In the case of a server to server integration, the switching costs are not high and the relationship is similar to DSPs who have to consistently outperform in order to win the business. 

For example, Telaria may have a direct relationship with Warner Brothers but not with Hulu (who likely uses more than one SSP).

To contrast, the demand-side is almost never loyal and almost always has low switching costs. Often, advertisers will run campaign tests across as many as twenty DSPs and will run the campaign on those who perform the best. This is the downside to programmatic and server-to-server integrations across ad exchanges. Even when the SSP is a server-to-server integration, they are not as aggressive as advertisers in switching. 

It requires very little time or energy to run these tests. Some advertisers will repeat this process frequently before every campaign, going with only the DSP who is performing well in that month. DSPs will differentiate among themselves with features such as omni-channel advertising to become a one-stop shop for campaigns across multiple mediums and device types. 

Of course, as the world is well aware at this point, data is king. The publisher will be paid more if the advertiser can target the audience with more precision. Therefore, the sell-side has an advantage because the direct relationship with the publisher provides the best data. To illustrate, Roku is a publisher of the Roku Channel and a platform owner, as well. There is a lot of data here from these sources, and therefore, the average revenue per user is very attractive at the $20 ARPU. 

Demand-side platforms, such as The Trade Desk, rely on the identifier for advertisers (IDFA) from Apple and their own Universal Ad ID. This helps to track the user for omni-channel advertising and retargeting, such as when a person switches from watching OTT apps to browsing on mobile. However, the playing field is equal for IDFA across all advertisers while The Trade Desk is attempting to have an advantage with their own proprietary Ad ID. 

When comparing apples to apples, the sell-side is better positioned as they hold the data and the inventory in a space that is more limited in inventory than in advertisers. The relationship that is created by installing software holds more weight than the relationship that is dependent on monthly pricing. 

You can see evidence of the value of SSPs historically in the mobile ecosystem. The larger players acquired sellside platforms, such as Google’s acquisition of AdMob for $750 million and Twitter’s acquisition of MoPub for $350 million. These ad companies have little reason to acquire a DSP as this is where they already excel and is easy enough to build, if you have the data. Similarly, Facebook acquired LiveRail for $500 million for its premium video publishers. 

Risks

As noted in the supply-side discussion, ad-tech companies don’t disclose if their client list is a direct software installation or a server-to-server integration. The impressive client list that Telaria discloses, including Sling, Hulu, PlutoTV, A&E and the Discovery Channel, may be brokered to Telaria through server-to-server integrations rather than directly served through ad software. This is a risk because another SSP can easily establish a serverto-server relationship through a web of ad exchanges. Direct software is a more protected relationship.

A primary risk is that Telaria does not have a straight path behind ownership and management. We do not have a passionate-founder type like Anthony Wood or Jeff Green at the helm. I’ll outline what I’ve been able to gather and add some information as to my experience with ad-tech companies during that era. 

Founded in 2012, Telaria’s former company, Taptica, was a mobile user acquisition company. Interesting enough, Neilson EVP Itzhak Fisher was an early investor, which may be why we see Nielson recently partnering with the company on audience measurement. By April of 2014, Taptica wasn’t doing well and sold a purchase option for a $1.5 million line of credit. By October 2014, Marimedia purchased Taptica for $13.6 million. 

By May of 2015, the company issued a profit warning and Marimedia changed its name to Taptica. The company then went through a series of acquisitions, including Tremor Video’s demand-side platform for $50 million. There were mergers in 2018 and 2019, resulting in Taptica renaming itself to Tremor International.

Notably, Hagai Tal, the CEO had to step down due to concealing material facts during a sale in 2011. The former CEO of Matomy Media, Ofer Druker, then took over as CEO of Taptic and Termor International. Mark Zagorski has been CEO of Taptica since 2017, and has connects to Nielson, having served as CEO of a Nielson company named eXelate, and EVP of Nielson’s Marketing Cloud.

Needless to say, the history is complicated. Taptica and Telaria have decent client lists, which helps. This was an era which was particularly hard on ad companies. Part of the anti-trust issues we see with Google and Facebook is that they forced many ad-tech companies out of business. 

There is always a lot of risk when investing in an ad-tech company, and I pointed this out with my analysis on The Trade Desk. There is endless competition as there is no intellectual property to speak of. Advertisers are looking for the best addressable media at the best price, and publishers are looking for the highest returns. Whoever is capable of climbing to the top of the pile (of the 2,000 ad-tech companies on the market) usually isn’t there for very long (1-3 years) The only exceptions are if you have proprietary first-party data or other direct relationships.  

Technical Analysis

By Knox Ridley

Telaria (TLRA) has had a rather complex structure ever since it began trading in 2013 under Taptica/Tremor. In fact, its all-time high occurred on its IPO around $11.09. Since then, its structure has been a complex, overlapping, corrective (A,B,C) structure up until today. 

In other words, it bottomed in early 2016 at $1.29, and though it’s been in an uptrend, that uptrend has been characterized by a series of 3-wave corrective moves. This would put us in the final C-Wave push of this uptrend. So, after a massive move from $1.29 to $10.66, the structure of this uptrend seems to be part of a larger degree corrective structure, which is highlighted by the blue A,B,C. 

That being said, the structure of TLRA is not as reliable as the current trend currently in place. Time and time again when I’ve seen these larger-degree, corrective moves up, over time, and with some additional momentum, morph into a larger degree 5-wave structure, which I never want to miss out on. 

Or, I’ve seen them morph into an even more complex structure or extend to much higher levels. This can be especially true when analyzing the charts of small to micro-cap stocks that are thinly traded. In short, seeing a complex corrective structure in a small cap stock, I take this as the market not really sure what to think of TLRA at the moment.

As you can see in the chart, TLRA reached the 100% extension of the A wave (A=C in blue), and then turned down hard. It found support at the 23.6% retrace level, which coincides with the 200-day moving average. I outlined this region in yellow, and would place a stop just below $5.75. Below this region and the likelihood of closing the massive gap around $3.70 becomes elevated. This will provide entry with a rather tight stop – low risk with high reward.

Furthermore, the MACD has found a base, and is now turning up, while we go into earnings.This is a sign that momentum is shifting back to the upside. Also, note the volume has elevated to new heights, which is signaling increased interest, which has been heavily tilted to the long side. With volume lowering into this pullback, and the stock resting over the 200-day, it appears that TLRA is in a wait and see mode with their earnings on deck.

October 15th Update: Netflix

Posted on by io-fund

The Netflix critics who point towards massive debt load and the unsustainable $12 to $15 billion annual content production costs causing a bleeding of free cash flow are not wrong to question these things. They are absolutely correct in thinking this company could be a ticking time bomb.

I’ve always avoided writing negative analysis on this company because I hesitate to think Reed Hastings doesn’t have plan. He’s one of the better entrepreneurs of the past decade as far as execution and hard-to-nail pivots. 

Most naysayers refuse to recognize the wide margin Netflix has in OTT subscribers compared to the competing streaming services. This stands at 87% in the United States and 70% in developed, English speaking countries. They claim 50-60% in developed, non-English speaking countries. 

Amazon Prime is supposedly in second place, yet they are entirely absent from the Top 20 most streamed shows. I don’t trust the numbers here as Prime is many things beyond OTT and some of these subscribers could have Prime for shipping or groceries, yet remain loyal to Netflix in their viewing habits. Of the Top 20 most streamed shows globally, Netflix claimed 19 of them (although the number should be adjusted for 17 shows as Disney’s Marvel counted for two of the rankings).

Despite the noise of new OTT entrants, the projections from unbiased analyst firms continue to put Netflix at a wide margin with 87% in the United States.

The real question is what will Netflix’s penetration be globally? Half of the world does not have broadband and many geos that do have slow speeds. I believe Reed Hastings is gunning to be the first truly global media company. The barrier to entry is high for global and the only other streaming service that has the ability to license content internationally is Disney. 

If Netflix reduces its content bill over time (the company has stated this is the peak spending year), and meanwhile, simply keeps doing what it’s been doing on the execution front, it has the possibility to reach the majority of global households.

I do think they’ll have to offer a reduced subscription fee for catalog content and keep the higher subscription fee for premium and new content in order to fit global household budgets, but the numbers are there .

The slow proliferation of fast broadband and OTT has the market somewhat confused right now. The Untied States is far ahead with OTT accessibility and this has skewed how investors see this opportunity. They are not considering that Netflix’s biggest headwind is global broadband speeds. They are thinking this is a turf war in the United States, and therefore, the debt load looks prohibitive for only 150 million households.

You can read my entire analysis on Netflix here. my entire analysis on Netflix here.  

I don’t get to choose the titles of those articles. If I could have chosen the title, it would have been “Get Netflix When It’s Dirt Cheap and while Broadband Penetration is Low.”

Below is some technical analysis from Knox on entry scenarios. If we reach his target number, we will update you. 

This isn’t an earnings call. Netflix could beat earnings. I just think it’s pretty high risk with the market perception around OTT subscription services right now with Apple,  Comcast, etc.  

p.s. I have a PDF coming for you tomorrow on Telaria, the small cap focused on Connected TV ads.  

Netflix Technical Analysis 

by Knox Ridley

The Very Big Picture (Weekly Chart)

Going back to the beginning of its trading, the weekly chart of Netflix is interesting. To see a stock as explosive – in both directions – like Netflix, follow a uniform trend channel, as well as adhere to extensions on such a large time frame, actually shows a sense of order to its path upwards.

The blue roman numeral count shows the very large degree cycle count, which operates on a time frame that is not as useful to most investors. That is, unless we are coming close to the end of a wave and the beginning of another, which I do not see happening just yet.

My main count has us still within this larger degree 3rd Wave in blue roman numerals.  This means, if we go to a lower degree of time within this cycle count, we are looking at the primary count in orange. This count will be more useful to us because we have topped out in Wave 3 and are correcting into Wave 4.

Third Waves are typically accompanied with a trend’s peak momentum, which is what we are seeing when looking at spike in the MACD. Being in a 4th Wave, there are a number of price clusters that could find final support.

There’s a confluence of extensions highlighted on the graph: the pertinent extensions to the cycle count in blue roman numerals are on the right in blue; (2) the extensions of interest to the primary degree count in orange is on the left in orange; (3) the 23.6% retrace level to the internal red count is also in red.

As you can see, there’s a confluence with these important points, which will be major support regions in any significant pullback. Also, keep in mind the 23.6% retrace level is on the chart to offer perspective on just how far Netflix can reasonably fall.

Please keep in mind we are talking about a primary degree count, which started in 2005, and in 2019 we are just now completing Wave 3. So, this correction could take weeks to months to play out. In the meantime, we can play the momentum on a lower degree, which is highlighted below.

Close Up

Zooming into the 2 hour chart, we get a better understanding of specifically where we are within this larger trend that is unfolding. We are in an A,B,C correction, where (A) bottomed at the December low in 2018, (B) peaked in June of 2019, and we are currently in the final (C) wave, which appears to be unfolding in a 5 wave pattern, and is highlighted by the red letters red.

Notice the RSI making higher highs, which is putting it into overbought territory (above 70), while the price action is making a lower higher. This is highlighted with the red circles, and is a negative reversal patter, which suggests more downside is on the horizon.

The final targets I have for this (C) wave push, is at minimum the $227.50, which will close the gap-up from January of 2018. However, the more likely target will be the A=C price around $212-$211. I would be interested in seeing how the stock holds support around this region, and see how the price behaves before committing. If this level does not hold, then the extensions in the weekly chart will come into play, and we could be in for a more aggressive correction.

Miracles do happen, and if we close above the $335 resistance level, which is highlighted just below the green arrow, I would consider Wave 4 over, and for us to be in the primary 5th wave push to all new highs. We feel this is unlikely due to the headwinds the company faces – some that are very real headwinds and some that are driven by perceptions.