Month: January 2020

Broad Market Update – Technical Analysis

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My Methodology: Tracking 10-year Bull Market

Looking at the current bull market that began in March 2009, we can map out the path using Elliott Wave Theory, and guess a likely trajectory for the remainder of the move up.

To provide context, Elliott Wave Theory, in essence, claims that the market moves in 5-waves up, then 3-waves down. There is a rigorous number of rules as well as math involved to justify a count, but the fundamental idea is the 5-3 structures.

Each 5-wave move is part of a larger degree 5-wave move, and it also has smaller degree 5-wave moves within it. It’s fractal, which is very important, and something we witness on the hourly chart as well as a monthly chart.

The chart is a close up of the prior chart that is focusing on the bull market that started in March of 2009. In the larger context, we are looking at a close up of the final 5th wave in red, and within this wave we have several degrees of waves, which constitute this move.

On a smaller degree, the blue count is meant to express the 5-wave move that started in March of 2009. Within that blue count, you have the green count, and then below that in the red count.

The Current Correction

Regarding this correction, I consider this to be a buying opportunity, as long as we hold 2950.

Zooming in even closer, we can see the structure of the current correction within its bigger context. The 3rd wave of the red count topped out exactly at the 161.8% extension, which is a text book 3rd wave. That being said, we can expect the current 4th wave to target the usual range, which is around the 123.6% and 78.6% extensions between 3220 – 3070.

I am personally buying in this pullback in the 3220-3070 range with some funds reserved if we hit the 2950 level.

Below 2950, and we could be in for a much larger correction. Each of our individual positions have relatively tight stops that coincide with this level of SPX. Of course, my high conviction investments purchased with low cost basis will not be sold (BABA, MSFT, ROKU, NVDA, etc). This only applies to stocks that I’m still trying to find a breakout on (ZM, AYX, DDOG, etc). I will re-enter anything I stop out of to make back those incremental losses when the trend resumes.

As of now, the more likely scenario is the 3220-3070 range. I’ll update you if this changes.

 

Market Update: January 31st

Posted on by io-fund

Microsoft (MSFT)

Microsoft has been a long-term position, which we have been covering since it was priced in the low $90s. For our newer readers, we recommended considering a position on any pullbacks and breakouts. The most recent breakout, which we pointed out in update, occurred last November and MSFT has gained about 20% since then.

Ever since, the uptrend has not spent more than 2 days below the 10-day EMA, while staying mostly above the upper band of the Keltner Channel, which is an incredible show of strength. However, the RSI is fading while the price is rising, suggesting the momentum may not be enough to support the price as it approaches a key resistance area between $178-$182.

 At some point, Microsoft will pull back and likely test the 55 EMA (in Red). With the negative divergence between the RSI and price as MSFT approaches the above resistance, it’s probable that we could get this pullback for entries or additions to any current position. As long as the market trend is up, MSFT is a buy on any pullback. For a core position like MSFT, I am holding with a 25% trailing stop for now.

Dynatrace (DT)

Dynatrace has held strong this week while the market pulled back slightly. I’m expecting a pullback in the near future (perhaps due to IPO lock-up expiring?). We have negative divergence within the internals and price – momentum indicators are making lower highs while Dynatrace is making higher highs. Note the MFI (money flow index). This index is basically the RSI with volume factored in and is usually a great leading indicator. When I see negative divergence developing in the MFI, it holds more weight.

Furthemore, there appears to be some notable bearish candlestick patterns on the chart. For one, there is a bearish spinning top as well as a possible island reversal pattern. These patterns commonly precede a reversal, and indicate that the buyers are having second thoughts at current levels. Dynatrace will need to break to new highs to invalidate these patterns. For those looking to go long, patience should provide better entries. We entered DT and continue to consider DT a buy on any pullback.

Zoom (ZM)

Like Netflix last week, Zoom is developing into a very bullish structure, which suggests we could be in the early stages of its wave 3 upwards. In Elliott Wave, this is called a 1-2,i-ii setup. This means waves 1 and 2 for a large degree upward move are in place (in green on the chart), and we are in the early stages of wave 3 pointing up.

I’m expecting ZM to pullback into the high to mid-$60s as we progress in this pattern. As long as ZM holds the $62 line, this bullish pattern will remain valid. We recently stated on the forum that the bottom could be in the low $60s and a good stop is at the all-time low – $59.94. As long as ZM holds $62, the bullish setup is still valid. However, below $59.94, and we could see a deeper drawdown.

Boingo (WIFI)

Like Zoom, Boingo is showing us a potential 1-2, i-ii set-up as well on the hourly chart. This is also showing up as a cup & handle pattern, which is a bullish pattern in technical analysis that usually leads to an exciting move up.

If Boingo breaks the $13.40-$13.50 region, expect a strong move, which would coincide with the potential 3rd wave the current structure is suggesting. As long as Boingo holds $9.55 this potential bullish setup is still valid. Below $9.55 and I will hit my stop.

Marvell

Marvel appears to be on the verge of a pullback that should take us to the outward bounds of the bottom Keltner Channel. The momentum is fading, while price and momentum is testing the current uptrend lines. Price is currently below its 55 EMA (red), so the pressure is down.

Marvel, like a lot of the stocks we are monitoring, appears to also be in the early stages of a wave 3. My target for entry is between $22.25 – $18.75, with a hard stop just below $15.90

Bitcoin (BTCUSA)

Ever since topping out last June at $13,868, Bitcoin completed the first leg in a renewed uptrend. This first leg, from Elliott Wave Theory, would be called the first wave in a 5-wave uptrend that is projected to take us to new highs. As long as we hold $4300, this renewed uptrend, which began early last year around $3,000, will be valid. 

With the first wave in place, we have been dealing with the 2nd wave correction, waiting for a bottom to be in place, which would put us in the early stages of an exciting 3rd wave up. Based on the structure, it appears that we have a potential bottom for this wave 2, which landed in the upper boundary of the green target box we were projecting in prior market updates.

Since this bottom, Bitcoin has given us a series of positive signs that the bottom could be in. First off, we have on a micro structure, 5-3-5-3-5 waves in place off the bottom, which on a larger degree, gives us a clear larger degree wave 1. That would put us in the early stages of wave 2 within the larger degree 3rd wave that we are after.

From a more basic technical analysis perspective, the above chart is showing a classic inverse head and shoulders pattern. Note the right shoulder is very small. This has historically been an encouraging sign for a significant move.

Based on the current projections, I’m expecting a pullback around $8,800-7800. Below $6975 is my current stop for this uptrend to protect gains. For long term buyers, a hard stop at $4300 is a good place to exit.

Focus on Enterprise Pays off For Microsoft

Posted on by io-fund

Microsoft is unique from its peers as its cloud services were designed to serve the needs of large companies. This is particularly true with regards to Microsoft’s lead in hybrid cloud, which is attractive to many companies who are adopting cloud infrastructure for the first time, and who desire more flexibility than traditional cloud-only services can offer.

The company’s fiscal Q2 2020 earnings report today prove that Microsoft’s slow and steady focus on the enterprise customers is paying off. Operating income and net income were especially healthy, rising 35% and 38% on a GAAP basis, respectively, from a year earlier. Profits came in at $11.6 billion, and earnings-per-share of $1.51 were up 40%. Analysts polled by FactSet were expecting $1.32 per share on average.

The company is guiding for revenue of $34.1 billion to $34.9 billion in the fiscal third quarter, in-line with analyst estimates of $34.16 billion.

Looking beyond growth, this was also a banner quarter for Microsoft, who secured the Department of Defense’s $10 billion JEDI cloud contract. This contract will cover 1,700 data centers and move 3.4 million end users and 4 million endpoint devices off private servers and onto the cloud. Amazon is contesting the decision.

Read the full article published on MarketWatch here.

Checking in on Tech Trends and My Current Convictions – January 2020

Posted on by io-fund

I covered my top tech predictions recently with an opening statement that we are in an earnings recession as the aggregate S&P 500 is expected to fall 2.6% for the fourth consecutive quarter of year-over-year net income declines. Compare this to 2018’s 23% increase in EPS.

I won’t comment too much on the coronavirus other than to say that Knox is very good at finding bottoms. Please follow him in the forum and he will be writing blog updates to keep you in the loop on what he sees for targets. Right now, based on the information the market has given us, he sees this pullback taking us to 3170-3050 with a small bounce before we hit this target. He will be writing a full-length update by Thursday on technicals when he has more data to work with.

Purpose of this update

My goal is to help our premium readers navigate the upcoming year as best as possible. Especially as we now have a catalog of research, this update will be geared towards organizing my thoughts around the research we’ve published in a more conversational tone.

In the 8 Predictions for Tech Stocks in 2020 column, I covered eight points. I plan to expand on these for my premium readers with specific stocks starting with this blog.

My two favorite growth trends in tech right now are connected TV advertising and hybrid cloud. Cloud productivity is a strong trend, as well. You can definitely squeeze a few more drops out of mobile (Apple, Facebook and some Google) — but just be aware that tech industry verticals don’t lead in tech for typically more than a decade. We are a hype industry and the way people and businesses interact with tech waxes and wanes in a fairly predictable pattern.

For instance, despite every person on earth using the internet many times every day, the hype faded. We still use the internet every day, but it’s not a driver of growth like it used to be. (Even Amazon needed cloud this past decade to drive operating income). Other examples include mobile gaming, which had a big boom and faded. PC CPUs still drive profits but the boom is over, etcetera.

Over the next two months, I’ll be going to a Deep Learning and AI conference, RSA security conference, Nvidia’s GPU conference and will add more conferences as we go along into Q2 – maybe SaaStr and Programmatic I/O.

RSA at the end of February should deliver some excellent intel on cloud security – so look for a detailed update on companies like DDOG, DT, ZS, CRWD, ESTC, SPLK, CYBR, FTNT, PANW, and QLYS.

Some leading stocks that I’ve covered:

Quick overview of important stocks that are not in the categories below. We’ve hyperlinked the research for easy access.

  • Nvidia has my highest conviction for the next ten years, although Roku is a close tie for second place when considering size of company relative to addressable market.
  • I am watching for breakouts from Xilinx and Marvell. One of these should capture the market alternative to CPUs/GPUs whether it be FPGA or ASIC market – Right now, my understanding is ASICS are winning out. Here’s a good write-up if you want more info.
  • AMD is a great product too and I fully believe Intel has its hands full with AMD as a competitor.
  • Alteryx and Twilio are safer bets in cloud software as the market likes these companies and they meet a few of the fundamental benchmarks with above average forward EPS growth and above average forward revenue growth (the combo is good to have)
  • Alibaba has been my China pick throughout the trade war and it hasn’t let me down or our readers as we continued to encourage this stock through the rockier trade war spots. This company is centered in many big trends (B2B ecommerce and China’s soon-to-be burgeoning cloud market) so keep an eye on it if you’re not invested.
  • Shopify is an excellent stock with very strong forward growth guidance. As I mentioned in the PDF, by serving the merchants, Shopify has a bright future ahead. Follow Knox for TA on this one bc it’s volatile (and that’s a good thing for anyone not in the stock yet).

Connected TV

Connected TV advertising is in a sweet spot because it opens up the multi-billion dollar vault of brand dollars. This is distinguished from direct marketing dollars that favor mobile or desktop.

Please reference the following premium coverage for Connected TV ads:

Roku/TTD PDF
Telaria PDF
Premium blogs here and here.
Premium blogs here and here.

I’ll provide a quick summary:

  • Despite mobile devices far exceeding the number of televisions globally, ad spending on television continues to thrive with 34% of ad dollars in 2018 compared to mobile’s 33%.
  • Television ads are favored by brands who have large budgets as they prefer these impressions.
  • Connected television delivers the optimal form of advertising as you can combine data on the viewer with television impressions.
  • Prior to connected TV, or over-the-top TV ads, the only method of audience measurement was Neilson. These are surface-level insights, such as gender, age and income.
  • Connected TV ads now offer data comparable to mobile, which cracks open a lot of brand dollars
  • Average revenue per user on ad platforms like Roku is $20 ARPU compared to Twitter at $9 ARPU. It took Facebook over a decade to surpass $20 ARPU while Roku did this very quickly (1-2 years).

When a company is centered in an important trend, short-term quarterly earnings are not something that I care too much about. With that said, I don’t foresee revenue being a problem for the companies below. Earnings could miss at times, if a company is attempting to grow very quickly.

If the market wants to sell-off over a short-term miss, then this will open up opportunities for any readers who are not invested in this trend yet, and it will allow those who are invested to increase buy and hold positions.

Roku:

Roku continues to be a high conviction stock as the company owns the tech stack from hardware to operating system to ad platform. Hardware is very low priced and is ad-supported for lower GDP geographies. eMarketer came out with a report in November predicting Roku will continue to lead the market in hardware at 44.2%. (Please reference the razor/razor blade model I cover in the PDF for why hardware matters despite contributing very little to profits)

As stated, one of Roku’s strengths is that it’s more agnostic compared to big tech competitors. We saw this with Apple’s launch (Roku was present), and Disney buying many ads from Roku. There are some rumors that Roku could have a better earnings report than expected because of Disney’s ad spend.

This agnosticism will help Roku with global expansion. It can be quite threatening to invite Google or Amazon into your hardware if you’re a mid-size manufacturer of smart TVs or OTT equipment (even big brand behemoths like Disney and Apple don’t want to strengthen Google or Amazon).

On that note, Roku expanded into Brazil recently. Here’s a write-up on the announcement. If you read my Roku coverage, then you know my conviction is based on the company doing well in international markets.

A reader had asked me about Vizio entering the market. On their own, Vizio doesn’t have enough of a market presence to scale and target audiences (about 13 million devices). The accuracy of data increases quite a bit when you have more scale.

This consortium is something to keep an eye on but it may be more focused on linear, traditional television. Either way, as the article points out, television advertisers aren’t early adopter types who care to explore new platforms or ad formats, such as what Vizio is proposing.

Telaria:

Telaria is especially interesting due to their partnerships with Nielson and the executive team coming from Nielson. This is a selling point for advertisers as measurement is a common complaint and Nielson is a trusted name for TV advertisers.

I like supply-side platforms and have encouraged my readers to consider the strengths of working from the publisher side of the transaction. Rubicon brings a little bit of baggage to the deal as the supply-side platform adjusts to new ad standards. I covered this and the M&A in the PDF.

Rubicon/Telaria will face competition, as the ad-tech market has a low barrier to entry. However, the revenue growth and high margins from ad exchanges are typically very attractive to investors. This is more of a side note as I will monitor the competitive market as we go along.

The Trade Desk:

The Trade Desk’s strength is programmatic omnichannel. They work with advertisers on connected TV ads, but most importantly, they also deliver those ads across all mediums so the advertiser has a one-stop shop.

Programmatic and omnichannel are not unique or new, but TTD’s advertising ID is a differentiation that helps the company rise to the surface as one of the best in the industry. This is because you can track the campaigns independently from Google/Facebook/Amazon’s blackbox.

One reader had asked if Google’s Chrome cookie changes will affect The Trade Desk. This change won’t occur for two years and will give The Trade Desk plenty of time to adjust.

Similar to Telaria/Rubicon, The Trade Desk will face competition due to low barriers to entry in ad-tech. Not all of The Trade Desk’s revenue is Connected TV ads, of course. But it should help the growth trajectory quite a bit that they are a leader in CTV ads. We will monitor any changes here, as well.

More on ad companies

Cardlytics broke out this quarter. This is a company that could be very interesting on a pullback. They reach banking customers and have signed Chase and Wells Fargo.

Adobe has their hat in the ring as a data management platform for connected TV ads. Read more here. The company’s fundamentals aren’t bad either. Keep an eye on Adobe as a leading ad-tech competitor.

A few notes on Snap and Pinterest …

We covered Snapchat in July. The company will need to figure out how to monetize the data outside of their monthly active user base if Snap plans to earn it’s keep with a market cap that matches Twitter (right now, Snap has about 50% less revenue than Twitter and same market cap at the $25-$26 billion mark).

Twitter makes its revenue from brokering its social media data on MoPub, an ad exchange the company bought in 2013. Twitter’s revenue is not driven solely from its monthly active users on the social feeds.  Neither is Facebook’s revenue. Facebook also brokers data on an ad exchange they own called Audience Network (this launched in 2014 and has the same name as what Snap proposed in April).

Snap will need to figure out a way to broker the data outside the social app to become a stellar advertising stock. Snap’s Audience Network announcement in April has not materialized yet. This would help put Snap on par with Twitter/MoPub and Facebook/Audience Network. I’d like to see an update on Audience Network before joining the crowd on this recent Snap rally.

Also, TikTok is a very real threat to Snap as they share the same demographic. This is another reason I’d like to see more discussion on an earnings call about Audience Network or a new press release.

There are a few risks to Pinterest that I have pointed out since the IPO and in our premium PDF, including the international ARPU and (formally) the high price-to-sales. The positives here is that Pinterest offers a new method of advertising that is very popular from a discoverability standpoint. The niche demographic doesn’t bother me from an addressable market standpoint – Lululemon has done quite well. Snap also has a limitation with its demographic and more competitors.

The price to sales is in better shape now at 11 with forward price to sales of 6.3. I like Pinterest long-term because it solves a real issue for advertisers, which is product discoverability. I cover this in the PDF. Follow Knox for TA updates on Pinterest.

Hybrid Cloud

Hybrid cloud is a trend wrapped inside of a trend. This is helpful because the market will be trading on financials rather than understanding the microtrend that is occurring.

Microsoft is the bellwether for hybrid cloud but there will be many more companies downstream that we plan to capture and build a foundation on.

The concept of hybrid is counterintuitive to anyone who reads the headlines on the popularity of cloud computing and cloud software. We’ve seen rampant success from cloud companies, such as Amazon’s AWS and Salesforce, plus 2018 and the first half of 2019 was a stellar year for many cloud companies.

This would have you believe every SMB and enterprise is moving to the cloud. But, this is dead wrong … especially for big-budget enterprises.

To illustrate my point using statistics:

  • Spiceworks is a well-respected community of over six million IT professionals and 3,000 technology vendors. Their 2019 State of Servers survey reveals that 98% of enterprises will run on-premise server hardware this year[1].
  • According to IHS, the number of physical servers is expected to double in 2019 across 151 North American organizations that were surveyed.

But here’s why there’s so much buzz about cloud …

  • 83% of enterprise workloads will be in the cloud by 2020.
  • 91% of businesses will use the public cloud and 72% will use a private one.

Yet, the budgets don’t match up …

  • According to Forbes, 30% of IT budgets were allocated to cloud computing in 2018.
  • According to Spiceworks, this is actually 22% of IT budgets this year
    (I would place slightly more weight on Spiceworks as a resource).

[1] For simple definition purposes: On-premise means physical servers owned by a company. Cloud means servers owned by third-party, such as Amazon or Microsoft, that is rented. Cloud can also mean software or platforms owned by another company and offered as a subscription service (Salesforce for instance).

How can cloud be so popular yet have less than 1/3 budget allocation?

The answer to this problem is hybrid cloud. Hybrid cloud allows enterprises to keep their on-premise servers while leveraging public and private clouds for specific workloads. This is an important trend because enterprises have very large budgets. The 20-30% you’re seeing equals out to $3.5 million spent on cloud per enterprise. This means an enterprise IT budget can easily surpass the annual revenue of some small businesses who are cloud-only.

Despite the security and intellectual property needs that drive on-premise, these enterprises are well aware they will be left behind if they don’t send real-time workloads to the cloud.

Regarding gains in the stock market, this is why Microsoft has been able to compete with Amazon’s AWS as Microsoft decided to build solutions that cater to the on-premise enterprises while Amazon (and Salesforce) were cloud-only. Cloud-only worked for awhile as SMBs signed up, but the bigger bag of gold comes from the enterprises who have these on-premise needs.

Datadog and Dynatrace

Datadog and Dynatrace are downstream from Microsoft as they help enterprises monitor cloud infrastructure and networks. They either currently offer on-premise or are expanding to on-premise as we speak.

This is why I chose to cover these stocks from the cloud software list (and thanks to the reader who pointed out Dynatrace is now public). Gartner believes cloud infrastructure monitoring can grow as much as 400% through 2021, and even then, this will only cover 20% of all business applications. If this is true, then either both or one of these (Datadog and Dynatrace) should be 4-baggers.

I’d think of these two as an investment pair. Datadog is more agile but Dynatrace already does well with enterprises. I like them both quite a bit better than New Relic or App Dynamics as they can move quickly to answer demand and iterate on the products. New Relic has to shed its image of being a SaaS leader for on-premise and Cisco’s ownership of App Dynamics could hurt in the long run as App Dynamics is not a singular focus.

Rather than choose one, seeing them as a diversified pair is a good idea.

Elastic NV

The reason I like Elastic is because there’s a movement towards “open core” – which takes free open source libraries and improves on them with premium products. Open source and closed source have always been at odds because open source has the larger community improving the product while closed source can pay the best engineers. (A good example is Android and iOS where Android has 85% of the smartphone market yet iOS has the profits and best engineers; open core sits between these pros/cons).

However, “open core” can be tricky because the open source community does not want to be taken advantage of. For instance, Amazon has attempted to profit from the same libraries as Elastic NV and there was serious backlash.

I believe Elastic NV will be successful at walking that fine line and that’s why I covered the company. Another company called GitLab (private company) does a great job of walking the open core fine line, as well.

There’s also the expansion into SIEM, which will help Elastic expand.

Cloud Productivity Tools

Cloud productivity tools claim the majority of cloud budget allocations, and will increase from 10% in 2019 to 14% in 2020.

The percentages are even higher among smaller businesses with up to 18% spent on cloud productivity tools in companies with under 500 employees.

Zoom Video and Slack fit this category. The cost-benefit ratio of cloud productivity tools is important to consider. For the small amount paid for the service, a company saves much more in productivity costs.

Zoom Video clearly has a high valuation. On the other hand, this company will be around for the long haul. Knox trades it well. I’d follow him on the forum if you have interest in a ZM position and look for his TA update blog on Thursday.

I have a high conviction around Zoom Video’s success because the product-market fit is exceptional and there are very few viable competitors in ZM’s path.

It may be contrarian, but Microsoft Teams doesn’t bother me at all with Slack. i.e. Amazon doesn’t bother me with Roku either. There is room for both and Slack’s agnosticism can become a plus. Not only that, but Slack is incredibly popular in San Francisco and Silicon Valley and there are many MS Outlook users who use Slack rather than Teams. I can’t quantify that but it’s still important to share what I’m seeing.

The main issue with Slack is that we are early to this trend. Enterprises and SMBs will eventually understand the benefit of having data to mine across their employees as opposed to siloed email, as well as the cost savings benefit of communicating across a team via messaging as it’s much more efficient. You saw this with consumers, and undoubtedly in your own experience, of how messaging overtook phone calls and emails for communicating due to the efficiency.

Unfortunately, Slack is really bruised up by the market. Knox also trades this stock well as it’s been range bound between $20-$23. Keep an eye on his updates if Slack breaks $24 for any buy-and-hold positions.

5G and Artificial Intelligence …

I’ve covered less than 10% of what I plan to cover on 5G. My plan is to provide more 5G coverage and AI coverage than any other tech analyst on the market. I’ll build this over time with many conferences planned this year including interviews with product people and executives in the field.

In regards to my current coverage on 5G, I’ll expand more on semis soon with Qualcomm being part of the semi coverage. You’ll be getting a lot more on 5G and many AI updates this year.

Boingo is a high risk/high reward choice. It’ll either hit a grand slam by providing indoor 5G coverage to wireless networks or it’ll strike out with someone else answering this demand. I’m leaning towards Boingo hitting a grand slam as they’ve been sitting on this technology for some time but it wasn’t valuable for 4G. As with any small cap, allocation is important. You can always add more when/if it breaks resistance.

In February  …

  • We are planning a 5G spreadsheet similar to the cloud software spreadsheet we published and then will break this down into covering individual stocks
  • Look for unique intel on cloud companies that are at RSA and SaaStr
  • I’ll be starting AI commentary with a Deep Learning summit this week and Nvidia’s AI conference in March (quite a few AI companies attend)

Netflix Stock: Unshakeable Long Term

Posted on by io-fund

This article was originally published on Forbes on Jan 20, 2020, 07:49pm ESTForbes on Jan 20, 2020, 07:49pm EST

Two of the world’s largest brands entered subscription video on demand (SVOD) over the past quarter, which means the upcoming Netflix earnings report on January 21 will be under pressure. However, financial analysts are overestimating Disney and Apple, as these companies will not easily catch up to the top streaming subscription service over the long-term.

Netflix has a Firm Hold on OTT

There are more than 190 OTT providers to keep track of in the United States. This has the market in a frenzy, which is one reason we see whipsaw reactions to news of any kind in the OTT market. For instance, Netflix shed $24 billion in market value following the second-quarter earnings release in July. This could happen again, but in the long-run, it won’t matter.

According to Digital TV Research, the OTT market is set to grow from $68 billion in 2018 to $159 billion in 2024. Subscription services will grow by $51 billion between 2018 to 2024, reaching a total of $87 billion.

Netflix is the top subscription service in the OTT market by a wide margin, claiming 87% of OTT households in the United States. In Western Europe, Netflix has a penetration of 70-87% in English-speaking countries and 55-64% in non-English speaking countries. 

Disney forecasts Disney+ to have between 60 million and 90 million subscribers by 2024. This is despite many free promotions. Netflix currently has 158 million paying subscribers and is adding roughly 28 million more per year. With this level of penetration, for Netflix, the opportunity that remains is global.

Netflix’s Stock Price Hinges on Global Logistics

Before third quarter earnings, I had pointed out that Netflix’s opportunity is global, and this is why the balance sheet looks frightening to value investors. Netflix’s stock price has most certainly reflected a market concerned with the company’s debt as the stock has posted 0.17% returns – or nearly 0% — over the past 12 months, while Disney and Comcast are up 30% and 31%, which is more in line with the broader market.

The company is in the red with free cash flow due to producing content for many geographic regions. However, as broadband coverage increases globally, and as 5G delivers faster speeds to developed countries, Netflix is well situated to grow its already-dominant user base and to reclaim these costs. Notably, Netflix’s operating margins stand at 18.9%. (More on broadband penetration below).

There is plenty of evidence that domestic OTT players will not be able to handle the logistics of going global. For instance, while Friends and The Office are leaving Netflix in the U.S., many of the shows will remain with Netflix internationally. According to Amy Reinhard, VP of Acquisitions at Netflix, only Disney can compete in international distribution at this time. Netflix also partners with companies like Warner Bros. for international film rights.

Asia’s population represents the majority of the world with gains of 2-3% being more impactful than double-digit gains in North America. According to eMarketer, Netflix’s penetration of Asia-Pacific will advance from 11.8% in 2018 to 14.3% in 2020.

Regions, such as China, have high barriers to entry for standalone services, yet Netflix has secured a promising licensing deal with Baidu-owned QiYi. Netflix’s share in Japan remains at 17%, despite launching in 2015, as the country has an older population that is averse to newer technologies.

International markets such as Central and Eastern Europe, the Middle East and Africa have upside specifically for acquired titles, an area of strength for Netflix. 

If Netflix continues to dominate globally, then the company could be serving 50-70% of all developed countries and 20% of the developing world. With the limitations of broadcast and linear television, it is unprecedented to have a truly global media company. We will see the full effects of this once broadband penetration increases and 5G speeds bring OTT content at reasonable speeds to mobile devices.

Broadband Penetration and 5G

The OTT market in the United States has taken a decade to surpass pay-TV, with Hulu launching in 2007, popular set-top-boxes launching circa 2008 and Netflix streaming service launching in 2010. This growth has been assisted with the wide availability of high-speed broadband. 

You can expect the global market to take twice that long, or maybe thrice. Broadband is slow to non-existent in many countries, although progress is being made. Brazil, for instance, reports a 20% annual improvement in households with 4 Mbps or greater (Netflix requires 3 Mbps or greater).

Japan and South Korea have nearly 50 million people with speeds of 100 Mbps or higher. Fiber technologies and broadband are prominent in Japan and South Korea, along with Australia, Hong Kong, Malaysia, Singapore, Taiwan and Vietnam. There is room for growth once higher broadband rates are achieved in New Zealand, Indonesia, Thailand, India and the Philippines.

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Overall, OTT video is projected to grow to 6.4% of emerging market households, or 103 million in total by the end of 2019. This is up from 19.4 million in 2014. By 2025, digital growth will add over a billion middle-tier consumers for telcos, which will also help to open the market for OTT players.

Media is a universal staple for quality of life, and OTT delivers cheaper content on-demand compared to broadcast or linear television. Some forecasts place 2040 as the pivotal point when essentially every person on the planet will have internet access, up from roughly 50 percent today. With the same data, others are more optimistic and are forecasting 2030.

Gene Munster told CNBC that “Netflix is not going to make a dramatic change to our lives in the next decade.” This misses the point entirely that Netflix is set to make a dramatic change for the remaining 6.5 billion people outside of the United States and Western Europe.

Beyond Subscriber Numbers: User Engagement

Netflix is not only capturing market share from cable TV attrition, but the company is also seeping into Hollywood’s addressable market.Recently, Netflix received 24 Oscar nominations, which is more than any major Hollywood studio or distributor.

High-ranking content isn’t exactly new for Netflix. In both 2018 and 2019, Netflix claimed 19 of the top 20 most streamed shows. According to Christy Ezzell, senior director of TV Time, this is partly due to Netflix’s investment in global audiences, including significant regional investments in foreign-language content and licensing partnerships. For instance, DARK and Elite are foreign-language originals that topped the top 20 list and beat out Amazon Prime on all accounts, including The Marvelous Mrs. Maisel. Notably, two of these are Marvel originals and will count for Disney+ moving forward. 

These charts are incredibly important for understanding user engagement as opposed to subscriber numbers. For instance, Amazon is reportedly in the number two spot for OTT services yet is absent from the top 20 list for content. (I suspect subscriber numbers are skewed with Amazon Prime members who subscribe for the free one-day shipping or Whole Foods discounts, yet are more loyal to Netflix in their viewing habits).

Keep this in mind, as both Disney+ and Apple+ attract users with free promotions. Subscribers may sign-up yet use the service very little compared to Netflix’s level of engagement.

Conclusion:

Interestingly enough, many criticize Netflix for continuing its lead at 87% of subscribers through 2023. Again, they are also missing the point that this is the law of large numbers, as a leader cannot hit 100% of all OTT households and now Netflix must look outside of the United States for growth.

Global OTT is not a market we’ve seen before, and there’s nothing to compare it to in terms of scale and subscription revenue potential. To think Netflix is in trouble due to domestic competitors is to misunderstand the opportunity and the slow process of OTT proliferation due to broadband access in undeveloped countries and the forthcoming 5G in developed countries.

The positive here is that the $12 billion debt overhead and competitive landscape will likely spook the market a few times in the near-term and shake up the stock price, as it did following the Q2 2019 earnings. For anyone who wants a global OTT pureplay for the long haul, this should be welcomed.

I’ve included some information regarding Netflix’s stock price below. 

Review of Netflix’s Stock Price

Netflix has held the $385 resistance zone since late 2018. This is a significant region that Netflix is looking to retest in the coming days and weeks. Netflix just reclaimed the 50-day and 200-day simple moving average (SMA), which will now act as support. It’s also worth noting that the 200-day SMA is signaling that the long-term trend is pointing downward.

Netflix Stock Price Technical Chart - KNOX RIDLEY

In the chart above, you can see decreasing volume as Netflix approaches the $385 resistance. Although the internals of Netflix are showing a clear uptrend, which is supported by the MACD and the RSI, there is also negative divergence with the price making lower highs while the RSI makes higher highs into overbought territory. It’s important to monitor whether the internals break down through their respective uptrends along with the price.

Netflix is trading between support at the 200-day SMA and resistance at $385. If Netflix fails before testing $385, the structure suggests a setup that can see a retest of the October lows. This structure can be viewed as a reverse cup & handle pattern or, from Elliott Wave, a 1-2 i-ii structure, which will be confirmed below the $250 support. This level will need to be monitored closely if we see a renewed downtrend. However, if Netflix can break above $385 and close with heavy volume above this region, we could see new highs. 

Market Update: January 23rd

Posted on by io-fund

Hope everyone is having a good week. You can find some of these updates on the forum. I’ve put together a few notable charts for you to consider.

Twilio

Twilio (TWLO) is currently above its 8-day EMA (in green), which is holding the price as support, as it tests the 61.8% retrace level around $123.50. This level coincides with a number of price clusters, so breaking through it would indicate that the likelihood of a new uptrend is high.

  • I want to see it take break above the 61.8% retrace level around $132/$133 before initiating a position. Once in, I will use the 200-day MA as my stop.
  • I am leaving a count up that suggests another leg down until these levels are taken back.

It’s also worth noting that the RSI is at an extreme overbought point. The internals will need to reset to continue the climb up, or it’s reached exhaustion.

Alteryx

Alteryx (AYX), like Twilio, appears to be corrective. The structure of the uptrend appears to be a 3-wave move, were the final leg extends to the 127.2% extension of the first leg around $132.60. This is a significant point in Fibonacci trading, where we see prices usually hault and reverse. With Twilio, this level is currently acting as resistence. The RSI is also at overbought levels, showing negative divergence (higher highs in the RSI compared to lower highs in the price), which is also suggesting a needed pullback, so the internals can reset.

  • Above the $132.60 level and I will go long with a very tight stop, which I will place just below the 20-day EMA (in blue). I will keep this stop until we break out to new highs, at which point I will look to widen the stop.
  • If AYX continues to stall, look to the 200-day MA for the next support level (in red).
  • If the 200-day MA does not hold, expect AYX to test the prior bottom.

Slack

Slack (WORK), also saw a new uptrend, but terminated around the same region it has failed since bottoming in November of 2019. Slack has been trading in this range between $23/$24 – $21/$20, showing no sign of making a decision yet.

It’s worth pointing out the symmetry in Slack’s recent failure to breakout. Symmetry is an important tool in Technical Analysis, which can be used to establish game plans. The last move up failed at 20.53%. So, for this move up, the 20% range was an important pivot point, which I was watching for a confirmed breakout, or a retest of the lows.

Notice The current uptrend failed at 20.23%. This is not coincidental, and a phenomenon we see time and time again.

  • Slack has been range bound between $19.50/$20.00 and $23/$24 for a few months. I’ve been able to predictably trade this range.
  • If Slack breaks through the new 78.6% retrace level at $21, while breaking the noticeable uptrend in the MACD, we can expect a retest of $19.50.
  • When Slack breaks $24, that’s a sign of a renewed uptrend and will be with the trend. Or, attempt to catch the bottom with a buy and hold in the $20-21 range with a stop at $19.50. We believe the sentiment around Slack could lead to a surprise this year. Beth believes timing could be somewhat painful for Slack, but the engagement is too high to ignore. The noise about Microsoft is valid yet there is easily room for two workplace messaging apps and this shouldn’t deter Slack’s user base from growing.

Netflix

Netflix is showing a classic (1)-(2), 1-2 structure. In other words, in Elliott Wave Theory, the 5-wave move is comprised of smaller degree 5-waves and is part of larger degree 5 waves. So, in the chart, we have a clear wave (1) and then a (2) in red. That would potentially put us in the first wave of the wave (3). This will be confirmed if we get a corrective pull back, which bottoms around the target box in the graph.

  • If Netflix pulls back to the $250 level, then I will look to go long and lean towards the next leg up being the early stages of a 3rd wave.  
  • I understand I could miss an upward trend if Netflix breaks $385 on high volume. Due to risk/reward, I’m favoring the pullback.

Zoom Video

Zoom (ZM) cannot break above the volume weighted moving average, which is anchored at the all-time high in blue. These levels show who is in control of the current trend, and breaking above these levels is both a sign of strength and also needed to confirm a continued uptrend.

However, the structure of ZM is suggesting more downside before we get a confirmed breakout. The internals have broken their trend, and the uptrend in ZM is too overlapping to be anything but corrective. For anyone looking to go long, I think you will get better price. For any positions, I recommend placing a tight stop at the all-time low of $59.90.

We recently suggested buying ZM in the low $60, and as long as ZM holds the all-time low, we are expecting new highs in the coming months.

Beth is putting out a conviction list soon. She likes Zoom’s fundamentals quite a bit including the viral mechanics of the product.

8 Predictions For Tech Stocks In 2020

Posted on by io-fund

This article was originally published on Forbes on Jan 16, 2020, 03:22pm ESTForbes on Jan 16, 2020, 03:22pm EST

Despite record highs in the market, the consensus forecast is for an earnings recession with the aggregate S&P 500 expected to fall 2.6% in the fourth quarter. This will mark the fourth consecutive quarter of year-over-year net income declines. When taking into consideration buybacks, which help to reduce companies’ shares, the S&P 500 could post 0.6% EPS growth in all of 2019 compared to 2018’s 23% increase in EPS.

Although sentiment is bordering on euphoria in the market, there are pitfalls to watch out for and winning tech verticals to lean into.

As the analyst who early-on called the top-performing stock last year (Roku) following its IPO, plus many other accurate calls such as Uber’s IPO flop, Zoom’s successful IPO, and Microsoft’s Pentagon win, here are my top 8 predictions for successful tech investing in 2020:

1. 5G is a business to business growth story; the consumer story is overblown

Investors who believe 5G will drive a “supercycle” for Apple are not taking into consideration that 5G is a replacement cycle for 4G. The consumer opportunity will not be as significant as previous generations, such as when 4G delivered mobile broadband with smartphones being the primary beneficiary.

Apple’s revenue declined 2% year-over-year and is nearly stagnant in forward estimates at 4% growth from fiscal 2018 for fiscal 2020. To put it simply, investors are paying 105% more for each dollar of Apple’s earnings as the fundamentals are flat with a decline of 7% in net income. Some of this hype is being driven by the highly speculative 5G release in September of 2020.

To determine the 5G story of the year, the following has to be taken into consideration:

  • China is ahead of the United States; the 5G story of the year will be more geographically diversified than Apple, who has conflicting reports from shipments in China. There are reports that iPhone shipments were up 18% in December, yet conflicting reports that iPhone shipments decreased by 35% in November. Regardless of how these monthly reports play out, Apple is number five in the top 5G market globally and one month’s worth of sales is unlikely to change this.
  • 5G semiconductors can sell 50% more-dollar chip content per device versus the previous 4G generation, meanwhile, handsets are in all-out price war. In other words, the profits will be more substantial at the chip level than the handset level while average sales price (ASP) continues to erode.
  • There are many areas where 5G will create major gains for investors. See #2 below.

2. Diversified 5G Small Caps and 5G Suppliers will be 2020 Winners

5G is unique from previous wireless generations due to the required change in infrastructure. While previous generations delivered increased speeds and robust internet, 5G proposes a more advanced technology stack. A brief overview of infrastructure changes include:

  • Massive Multiple Input and Multiple Output (MIMO) – more antennas will be needed.
  • 5G frequencies cannot penetrate glass and are up to 100 times worse at penetrating walls than 4G. Indoor 5G cellular is a major concern at this time.
  • Small cell sites are needed to avoid the interruptions and latency that base stations alone can cause.
  • Carriers have various strategies with low-band, mid-band and mmWave.
  • Microdata centers and the edge cloud will open up hundreds of thousands or even millions of data centers globally.
  • Orthogonal frequency domain multiplexing (ODFM) will need to condense channels into mmWave range.
  • 5G allows for virtualization, which allows traffic to be software-defined and centrally located. This greatly reduces the need for power and cooling costs.

The best 5G stocks will come from companies that solve real issues related to 5G infrastructure and performance, or who supply a broad swath of the ecosystem. Triple-digit (and maybe quadruple-digit) returns in 5G will come from scarcely-known names.

3. Ad companies will quietly outperform:

As I write this, the Consumer Electronics Show is taking place in Las Vegas with futuristic promises, such as electric air taxis from Uber and Hyundai, rollable OLED screens from LG, and autonomous security drones from Sunflower Labs.

I’ve been to tech gadget shows for over a decade and have concluded that making real money in tech is often much more boring. Ad conferences may not make headlines but they will make you money and 2020 will be another “slow-and-steady-wins-the-race” year for ad revenue.

My prediction is ad companies will continue to quietly outperform their futuristic tech peers. There are 7 billion people on this planet, or 14 billion eyeballs, and companies are flush with cash to reach them.

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According to Magna, media net advertising revenue will grow 4.1 percent in 2019 and 6.2 percent in 2020, partly due to political ads and the Olympics.

The outcome for the usual suspects of Facebook and Google is anyone’s guess, while stock market darlings, The Trade Desk and Roku, see plenty of volatility. I recommend looking far and wide as there are many companies driven by ad revenue on the public markets that target audiences while being privacy compliant.

4. Cloud companies will continue to report strong growth

The market became more prudent with valuations last year, and cloud software took the brunt of the rotation. Before the correction, cloud software was the leader in the market – and for good reason, as cloud spending is currently outpacing IT spending by 400%. According to Gartner, global IT spending will grow 3.7% in 2020 with enterprise software growing 10.9% and software-as-a-service growing 16.5%.

With cloud spending outpacing IT spending by 400%, it’ll be important to know and predict the winners. The market’s widespread categorical pullback on cloud software, coupled with forward earnings projections, places cloud software winners in an enviable position going into 2020. Keep in mind, this performance is simultaneously occurring during an earnings recession across most other industries.

The trick will be to choose wisely as there is an overabundance of cloud software companies on the market and many are unproven across various fundamentals. Silencing the noise and determining where the real long-term growth and profits will be in this burgeoning category is key.

5. Semis will not be able to sustain current valuations

Less than fifty percent of semiconductor companies will return to growth next year, or twelve out of thirty, up from three out of thirty in 2019. Most of the sales growth expected next year will be regaining lost ground to return to 2017 levels — before the U.S. trade conflict with China. Meanwhile, because of flat earnings, these stocks are incredibly expensive.

AMD is a growth stock with a forward price-to-earnings (P/E) ratio of 45, a current P/E ratio of 257 and EV to EBIT of 201. The company is posting low-single-digit revenue growth year-over-year and 18% revenue growth quarter-over-quarter. In October, AMD had a 12-month price target of $32.94 based on a 25% expected sales increase in 2020. The company has blown past this target based on 4% growth this year, and is trading near $50 per share.

6. Some AI and ML investments will continue to bleed, but will steal all the glory in the coming years

Artificial intelligence and machine learning investments will go through a period of flat growth over the next few years as the transition costs and capital expenditures exceed the output gains.

Over the next year and perhaps into 2021, investors will be able to pick up AI stocks cheap relative to the forward 5-7 year growth potential.

7. Look for the market miscalculating the competition. Netflix is a prime example.

Netflix is one example of how financial analysts overestimate the competition. Netflix is the top streaming service by a wide margin, claiming 87% of OTT households in the United States. In Western Europe, Netflix has a penetration of 70-87% in English-speaking countries and 55-64% in non-English speaking countries.

According to Digital TV Research, the OTT market is set to grow from $68 billion in 2018 to $159 billion in 2024. Combine this growth with Netflix’s current market share, and you have an unshakeable first mover. The speculation on competitors may become marginally true. Disney could do well. But, to think Netflix will be ruined, despite being in the lead on all accounts and posting $1.5 billion in yearly profits, is a rather sensational conclusion.

8. Balance sheets will matter again

Remember balance sheets? That’s where you can find the debt a company is holding. Don’t tell Tesla investors but balance sheets will eventually matter again and Tesla’s $13.3 billion in long-term debt isn’t going anywhere fast with negative operating margins. Don’t tell Uber investors either as this company’s $5 billion in debt won’t exactly evaporate with $1.3 billion in quarterly operating losses and $4 billion in annual operating losses. It’s this combination of high debt and a lack of profitability (by any reasonable margin) that causes trouble when sentiment turns.

Dynatrace Premium Research

Posted on by io-fund

6ca1bcfb-1977-41c8-a084-07f790a54db0_Dynatrace-Premium-Research.pdf

Dynatrace Premium Research

Dynatrace

Dynatrace is a premium application management software company that ranks high on product evaluations by Gartner and Forrester. The company claimed 8.8% of the APM market in 2018, placing the company in third place behind New Relic at 10.3% and Cisco’s AppDynamics at 11.2%. The company is ahead of IBM at 8% and Broadcom at 7.6% of the APM market.

The all-in-one cloud platform is priced higher than other APM products and is sold as a package rather than as separate modules. The offerings include real-time topology and AI algorithms to monitor applications, infrastructure and business operations. 

In 2016, Dynatrace launched a full-stack cloud monitoring platform. The platform is now the main driver of growth at 80% of annual recurring revenue, up from 75% of total annual recurring revenue last quarter, and up from 39% a year ago. Subscriptions and services combined make up 98% of revenue compared to licensing at 2%.

Dynatrace is seeing the positive effects of transitioning to the subscription-based model in its operating margin. The non-GAAP operating margin grew from 13% in fiscal Q1 2019 to 22% in fiscal Q1 2020, ending in August. The most current non-GAAP operating margin in fiscal Q2 2020 was 23%. 

Dynatrace is focused on large, enterprise accounts with greater than $750 million in annual revenue. This is reflected in the company’s average account totaling over $200,000 ARR per customer. 

Product

Please refer to the Datadog Premium Research report for more information on the APM market including information on competitors New Relic and AppDynamics. t for more information on the APM market including information on competitors New Relic and AppDynamics.

Dynatrace’s product road map is geared towards exceeding Cisco’s AppDynamics and New Relic in AI-powered analytics, such as self-learning AI, real-time discovery, automated problem remediation and the use of AI chatbots. 

Full-stack observability is another area where Dynatrace stands out. Rather than offer infrastructure monitoring or application monitoring separately, the company has developed a more comprehensive approach to business observability. In a recent earnings call, Dynatrace stated the company was four years ahead of the competition in full-stack observability, which helps return business value to its customers. 

In a sponsored case study, Dynatrace returns up to 311% ROI over three years to its customers with the investment paid back in six months.

Hybrid cloud

Dynatrace’s product roadmap includes expanding into multi-cloud and hybrid cloud and using purpose-built AI to perform root cause analysis faster.

Hybrid cloud is a technology that enables companies to store some of their data on their own servers while simultaneously sending other data to the private and public cloud. Companies prefer hybrid cloud because it is cost-efficient, transparent, and safe. Hybrid essentially helps to push many companies off the fence in deciding between cloud and on-premise. 

According to a recent study, 76% of companies are committed to hybrid cloud. This is the main catalyst for why Microsoft Azure has gained in popularity against the heavyweight Amazon’s AWS as Microsoft set out to specialize in hybrid cloud in 2016. (I’ve hammered this point home a few times on Microsoft). It’s important to pay close attention to this trend as hybrid will be a driver for the remaining growth in cloud. 

Fundamentals

As stated, Dynatrace is reporting 23% non-GAAP operating margins since moving to an all-in-one cloud monitoring platform. The company is profitable on a non-GAAP basis at $0.06 in the most recent quarter, yet has reported negative GAAP EPS of -$1.58. 

Total revenue increased 27% year-over-year in the most recent quarter with subscriptions and services growth exceeding this at 37% YoY and annual recurring revenue increasing 44%.

The question that is worthy of speculation, is if the subscription growth of 37-47% is going to pick up the overall revenue growth in the forward year as the Dynatrace platform eclipses the classic products at 80% versus 20%. Subscription and services also far exceed licensing at 98% versus 2%.

The company is projecting full year fiscal 2020 revenue to be between $533 million and $535 million. This is up from $431 million in fiscal 2019, or 24% growth. 

As of now, the company is not projecting the kind of rampant growth that the more popular cloud software stock report although revenue growth has been steadily increasing since the 2016 product pivot. Revenue growth was negative from 2017-2018 as the company absorbed the transition and was at 8% year-over-year growth from 2018-2019.

The CEO believes the company is in the sixth quarter of a 10-12 quarter transition from the licensing model to the subscription model. The dollar-based net expansion rate of 140% is well above the cloud software benchmark, which is a very good sign for future revenue growth. This is higher than any cloud software subscription company that reported net retention in 2018 with the previous leaders being Smartsheet at 130% and Alteryx at 131%. Netdollar expansion rates measure whether the growth from the existing customer base offsets any losses. Typically, these numbers will decline over time. With Dynatrace, the number has increased due to the pivot to cloud platform. 

Non-GAAP operating income is expected to be in the range of $119 million to $121 million. This will put non-GAAP EPS at $0.23 to $0.24 for the fiscal year ending in March.

There was nearly $1 billion in debt on the balance sheet, but this has steadily improved over the last year with the help of the IPO. Following the public offering, which produced $590 million in net proceeds, the current debt balance is $540 million. Cash flow for fiscal Q2 was $27.2 million, and $174 million on trailing 12-month basis.

According to Dynatrace’s S-1 Filing, the addressable market is $18 billion. Gartner places the addressable market for global IT operations software at $29 billion with compound annual growth rate of 6.7% to $37.5 million in 2023. 

Notable Price Volatility & Upcoming Lockup

Expiration

Dynatrace launched in 2006 and raised $22 million before Compuware bought the company in 2011. The private equity firm, Thoma Bravo, bought Compuware for $2.5 billion in 2014 and spun Dynatrace off as a private company after merging Dynatrace with Keynote, another APM company in Thoma Bravo’s portfolio.  

After the company went public in August, Thoma Bravo reduced its stake from 71% at the IPO to 61% over the course of a week in December. The stock price fell 12% during this time with the offering from Thoma Bravo of

27.5 million shares. 

Most importantly, the company’s lock-up period will expire on January 28th. The company reports quarterly earnings the following day on January 29th. One of the current trends in this IPO market is for lock-up expirations to result in a short-term drawdown in stock price.

Technical Analysis

By Knox Ridley

Just under 6 months ago, Dynatrace (DT) listed on the NYSE at $16. Following the recent, hot IPO trends, DT closed on the first day of trading 49% above its IPO price at $23.85. Notably, shares opened at $25.50. 

However, unlike the broad market that continued to rally in the back half of 2019, DT then began a 36% drawdown that bottomed just above its IPO listing price at $17.13.

Basic Technical Analysis

Using basic Technical Analysis, we can follow the initial downtrend with the price and MACD using the downward sloping, blue-dashed lines in the chart above. The MACD signaled long before the bottom that the momentum was fading.  

Notice the green arrow sloping up on the chart. As the MACD was making higher lows, price was making lower lows. This is the type of positive divergence that we see before a bottom. The trend reversed when both price and the MACD broke through the blue downward sloping lines shown on the chart, as DT began to make higher highs and higher lows for the first time since going public.

Since then, Dynatrace has been in a standard uptrend. It’s worth noting that DT broke above the all-time high at $26.90 this year. This is a sign of strength that we want to see prior to initiating a long position.

Just like on the way down, we can use the same trendline tools to gauge the health of the current uptrend. The MACD signaled weakness prior to the actual recent top. As the price was making new highs, the MACD was making lower highs, which is a sign of fading momentum. The RSI, MACD and price all followed their own internal trendlines in unison, highlighted in blue. Recently, all three have broken these trends, which is a sign that a possible reversal is underway.

Elliott Wave Analysis

Using Elliott Wave, we can get a clearer idea of what the structure of Dynatrace is telling us. The initial downtrend followed a standard 3-wave structure, where the C wave unfolded in a final 5-wave impulse before bottoming. Since a reversal at $17.13, the uptrend broke out to new highs, which takes a larger degree downtrend off the table for now. 

We have a clear 5-waves up off the bottom, which is highlighted by the green roman numerals. These waves coincided with the standard Fibonacci levels that make up a 5-wave uptrend – e.g., 3rd waves typically break at the 161.8%extension of waves 1 and 2, and the 5th wave terminates around the 200% extension. 

This would now put us in a larger degree 2nd wave, which will be confirmed if Dynatrace breaks through $26.50 level. Above this region, and DT could press higher, extending for its final 5th wave towards the $30 region before we see a larger degree pullback. 

If Dynatrace breaks support to confirm the 2nd wave scenario, I’ll look between the 38.2% retrace level, around $25, and the 61.8% retrace level, around $22, to initiate a position. 

If this is the structure we are dealing with, expect the 3rd wave up to take us to new highs and beyond. However, if DT closes below $19.25, I will consider this a failed impulse and stop out of any long position. 

Market Update – January 16th

Posted on by io-fund

As we have referenced in the past, we are not a research site that attempts to predict the market. We think that’s a nearly impossible task. We simply keep an eye on various, opposing scenarios while providing stock tips we think are relevant in the current environment.

Bull Count

The level I’ve been watching is the S&P 500 at 3200. The market powered through this and has overtaken 3300. This means the bull market could take us up to 3800-4000 region. This is based on basic Elliott Wave analysis where the 5th wave, more times than not, reaches the length of the 1st wave, or an extension of that wave, which we see time and time again.

My rational for such a position is based on the global loose monetary policy seen by central banks. Not only are dozens of central banks cutting rates, but the Federal Reserve publicly said the goal is to keep the expansion alive, and they are using tools used to re-stimulate an economy from a recessionary position. In other words, they are going all-in on keeping the expansion going.

Also, it’s worth noting that an accommodative Fed has historically been great for MOMO stocks. As long as inflation stays muted according to the CPI, and central banks stay accommodative, I will stay long tech with rising stops to match rising gains.

Another point of encouragement is that a record level of cash is still on the sidelines, waiting to come back in. Furthermore, one trading platform shows 69% of clients are short the S&P 500 today. As these shorts cover their losses, it will force more buying, which will force more covers. Massive levels of shorts can propel a market, and this pattern will continue until the shorts give up, which can be propelled forward if cash on the sidelines moves in because of FOMO.

So, long term, I am bullish and slow-tilting my portfolio towards a more aggressive stance. However, in the medium term – i.e., a few weeks to a month out – I am expecting a local top to take us back at minimum 3%-5%, at which point I’ll look to allocate more of my cash. Tech has led this market and I believe it will continue to lead throughout the expansion.

Flashing Bear Signals

I’m going to expand on this more next week, but the current market environment is not without some flashing signals. It’s important to understand the backdrop in which we are investing and also where we are in the current market cycle. 

 In a nutshell, these are:

  • The yield on the 2-year treasury and on the 10-year treasury have inverted. The inversion occurred in August of 2019 and the average time period before a recession following an inverted yield curve is 18.5 months.
  • According to the ISM, manufacturing peaked and has been in a steady decline since late 2019. Once again, this trend has preceded every recession, and about 31 months after the cycle peak, on average, a recession follows. So far, the ISM peaked in summer of 2018.
  • The Conference Board Leading Economic Index (LEI) is at the zero line. This is at its lowest level in over a decade. To be clear, it has not crossed yet, so it’s worth watching. I’ll expand more on this next week.
  • After several years of zero percent interest rates, corporate debt is at historic and unsustainable levels totaling over $10 trillion total, or 47% of our national GDP. Fifty percent of investment grade debt is in the BBB ratings.

I’ll go more in-depth next week on those signals. The way that I protect my gains is to have trailing stops between 10-30%. If I hit my stop on a stock that I like, I will re-enter once the price has stabilized. A recent example is when I exited Zoom at $68 and got back in at $62. This is a small-scale exit, whereas Nvidia’s crypto bust was a larger-scale exit. My gains were protected and I simply re-entered once the price stabilized again. This is the only way I’ve found that I can stay in the market when there is a lot of noise towards the end of a market cycle.

Technical Analysis:

By Knox Ridley

Alteryx (AYX)

After about a 40% drawdown, Alteryx has dragged along the bottom of the long-term trend channel, which is highlighted by the blue dotted lines. The move up appears to be overlapping, and therefore corrective in nature, with the final C-wave unfolding in a 5-wave pattern, which I’m targeting the 127.2% extension around $133. I’m treating this as a corrective move, and holding off on adding to my current position until:

(1) we break $133 with heavy volume, at which point I’ll hold this position with a very tight stop until we clear new highs. If this happens, we will be in the heart of a 3rd wave, and the bottom for wave-2 will be in.

(2) AYX stalls in the coming days/weeks, and retests the $100 level. If this support doesn’t hold, I’ll look to pick up more shares as we approach the C-wave target box that I outlined in the chart above.

Roku (ROKU)

I’ve been patiently waiting to pick up more Roku sub-$100, and the set-up is in place for this to happen. Roku has tested the $127 support level 3 times, and each time it has corrected from $127 with less momentum and lower highs.

It’s currently trading just under the Volume Weighted Moving Average, which I anchored at the all-time high (in red). This average factors in volume from a critical moment. This week, the bears are in control. Furthermore, the price is below the 55-day exponential average, which is a great measurement of the overall trend.

Also, look at the internals (MACD, RSI). They have both broken their respective trendlines and are heading lower. I take this as a warning.

But, most importantly, the final C-wave set up is intact. Corrective waves (second waves and 4th waves) unfold in 2 moves (A down, B up, C down). There are several rules patterns that we see over and over. One of the most notable is that the C wave will almost always unfold in an impulsive, 5-wave structure, which on lower time frames will have its own smaller degree 5-wave structure.

We have a 1-2, (i)-(ii), i-ii setup right at the $127 support. If $127 is broken, we will be in the 3rd wave lower. Based on basic Elliot Wave, I’m expecting this move to terminate around $100-$95, at which point, I’ll look to add to my long-term position. Just to be clear, I’m still expecting Roku to reach $200 by 2021. 

However, it’s worth noting that Roku has held the $127 support, and though the signals are suggesting that it could head lower, Roku has a tendency to move fast against bears. On a long-term basis, $127 is not a bad price to pay for this stock, based on what we are projecting for 2020.

Also, if Roku can break out on heavy volume in a 5-wave move up from $127 upwards, while the internal indicators break their downtrend (look at the green arrows), I’ll scrap this bearish set-up, and look to go long from higher levels.

Qualcomm (QCOM)

QCOM is approaching a cluster of resistance. The red box highlights a strong concentration of significant Fibonacci prices. Rarely do you see a concentration like this. QCOM will either break through on heavy volume, which would be an indication to go long, or it will break down from current levels. If we break down, I’ll be looking to add to my position in the green target box between $80 and $62.

Alibaba (BABA)

Since Alibaba broke out, we have clearly been in a 3rd wave uptrend. For anyone curious what a 3rd wave feels like, this is it – an uninterrupted bull train, where the price stays above the 10 and 20-day EMA. I’ve put my targets in the chart above as well as significant resistance zones as we continue upwards. We should have pullbacks along the way.

Twilio (TWLO)

Twilio has shot straight through the 200-day SMA and found resistance at the 61.8% retrace level around $123. If Twilio can break this region, I will likely begin layering into Twilio. I will want to see it break through the $135 region for a final confirmation that the 2nd wave is over. However, a move up like we’ve seen in Twilio, breaking the 61.8% retrace is worth noting.

Zoom (ZM)

So far, Zoom is playing out as planned. After topping out in its first wave, it retraced nearly the entirety of that move in a very deep second wave. Since then, it’s provided us with a 1-2 setup, and is now powering up towards its AVWAPS. We picked up shares in the low $60s with a stop at all-time lows. As long as this level holds, I’m expecting new highs this year for ZM. If it can power through the above AVWAP in blue, that will be a strong showing of strength, at which point I’ll add more to my position.

Market Update – January 16th

Posted on by io-fund

As we have referenced in the past, we are not a research site that attempts to predict the market. We think that’s a nearly impossible task. We simply keep an eye on various, opposing scenarios while providing stock tips we think are relevant in the current environment.

Bull Count

The level I’ve been watching is the S&P 500 at 3200. The market powered through this and has overtaken 3300. This means the bull market could take us up to 3800-4000 region. This is based on basic Elliott Wave analysis where the 5th wave, more times than not, reaches the length of the 1st wave, or an extension of that wave, which we see time and time again.

My rational for such a position is based on the global loose monetary policy seen by central banks. Not only are dozens of central banks cutting rates, but the Federal Reserve publicly said the goal is to keep the expansion alive, and they are using tools used to re-stimulate an economy from a recessionary position. In other words, they are going all-in on keeping the expansion going.

Also, it’s worth noting that an accommodative Fed has historically been great for MOMO stocks. As long as inflation stays muted according to the CPI, and central banks stay accommodative, I will stay long tech with rising stops to match rising gains.

Another point of encouragement is that a record level of cash is still on the sidelines, waiting to come back in. Furthermore, one trading platform shows 69% of clients are short the S&P 500 today. As these shorts cover their losses, it will force more buying, which will force more covers. Massive levels of shorts can propel a market, and this pattern will continue until the shorts give up, which can be propelled forward if cash on the sidelines moves in because of FOMO.

So, long term, I am bullish and slow-tilting my portfolio towards a more aggressive stance. However, in the medium term – i.e., a few weeks to a month out – I am expecting a local top to take us back at minimum 3%-5%, at which point I’ll look to allocate more of my cash. Tech has led this market and I believe it will continue to lead throughout the expansion.

Flashing Bear Signals

I’m going to expand on this more next week, but the current market environment is not without some flashing signals. It’s important to understand the backdrop in which we are investing and also where we are in the current market cycle. 

 In a nutshell, these are:

  • The yield on the 2-year treasury and on the 10-year treasury have inverted. The inversion occurred in August of 2019 and the average time period before a recession following an inverted yield curve is 18.5 months.
  • According to the ISM, manufacturing peaked and has been in a steady decline since late 2019. Once again, this trend has preceded every recession, and about 31 months after the cycle peak, on average, a recession follows. So far, the ISM peaked in summer of 2018.
  • The Conference Board Leading Economic Index (LEI) is at the zero line. This is at its lowest level in over a decade. To be clear, it has not crossed yet, so it’s worth watching. I’ll expand more on this next week.
  • After several years of zero percent interest rates, corporate debt is at historic and unsustainable levels totaling over $10 trillion total, or 47% of our national GDP. Fifty percent of investment grade debt is in the BBB ratings.

I’ll go more in-depth next week on those signals. The way that I protect my gains is to have trailing stops between 10-30%. If I hit my stop on a stock that I like, I will re-enter once the price has stabilized. A recent example is when I exited Zoom at $68 and got back in at $62. This is a small-scale exit, whereas Nvidia’s crypto bust was a larger-scale exit. My gains were protected and I simply re-entered once the price stabilized again. This is the only way I’ve found that I can stay in the market when there is a lot of noise towards the end of a market cycle.

Technical Analysis:

By Knox Ridley

Alteryx (AYX)

After about a 40% drawdown, Alteryx has dragged along the bottom of the long-term trend channel, which is highlighted by the blue dotted lines. The move up appears to be overlapping, and therefore corrective in nature, with the final C-wave unfolding in a 5-wave pattern, which I’m targeting the 127.2% extension around $133. I’m treating this as a corrective move, and holding off on adding to my current position until:

(1) we break $133 with heavy volume, at which point I’ll hold this position with a very tight stop until we clear new highs. If this happens, we will be in the heart of a 3rd wave, and the bottom for wave-2 will be in.

(2) AYX stalls in the coming days/weeks, and retests the $100 level. If this support doesn’t hold, I’ll look to pick up more shares as we approach the C-wave target box that I outlined in the chart above.

Roku (ROKU)

I’ve been patiently waiting to pick up more Roku sub-$100, and the set-up is in place for this to happen. Roku has tested the $127 support level 3 times, and each time it has corrected from $127 with less momentum and lower highs.

It’s currently trading just under the Volume Weighted Moving Average, which I anchored at the all-time high (in red). This average factors in volume from a critical moment. This week, the bears are in control. Furthermore, the price is below the 55-day exponential average, which is a great measurement of the overall trend.

Also, look at the internals (MACD, RSI). They have both broken their respective trendlines and are heading lower. I take this as a warning.

But, most importantly, the final C-wave set up is intact. Corrective waves (second waves and 4th waves) unfold in 2 moves (A down, B up, C down). There are several rules patterns that we see over and over. One of the most notable is that the C wave will almost always unfold in an impulsive, 5-wave structure, which on lower time frames will have its own smaller degree 5-wave structure.

We have a 1-2, (i)-(ii), i-ii setup right at the $127 support. If $127 is broken, we will be in the 3rd wave lower. Based on basic Elliot Wave, I’m expecting this move to terminate around $100-$95, at which point, I’ll look to add to my long-term position. Just to be clear, I’m still expecting Roku to reach $200 by 2021. 

However, it’s worth noting that Roku has held the $127 support, and though the signals are suggesting that it could head lower, Roku has a tendency to move fast against bears. On a long-term basis, $127 is not a bad price to pay for this stock, based on what we are projecting for 2020.

Also, if Roku can break out on heavy volume in a 5-wave move up from $127 upwards, while the internal indicators break their downtrend (look at the green arrows), I’ll scrap this bearish set-up, and look to go long from higher levels.

Qualcomm (QCOM)

QCOM is approaching a cluster of resistance. The red box highlights a strong concentration of significant Fibonacci prices. Rarely do you see a concentration like this. QCOM will either break through on heavy volume, which would be an indication to go long, or it will break down from current levels. If we break down, I’ll be looking to add to my position in the green target box between $80 and $62.

Alibaba (BABA)

Since Alibaba broke out, we have clearly been in a 3rd wave uptrend. For anyone curious what a 3rd wave feels like, this is it – an uninterrupted bull train, where the price stays above the 10 and 20-day EMA. I’ve put my targets in the chart above as well as significant resistance zones as we continue upwards. We should have pullbacks along the way.

Twilio (TWLO)

Twilio has shot straight through the 200-day SMA and found resistance at the 61.8% retrace level around $123. If Twilio can break this region, I will likely begin layering into Twilio. I will want to see it break through the $135 region for a final confirmation that the 2nd wave is over. However, a move up like we’ve seen in Twilio, breaking the 61.8% retrace is worth noting.

Zoom (ZM)

So far, Zoom is playing out as planned. After topping out in its first wave, it retraced nearly the entirety of that move in a very deep second wave. Since then, it’s provided us with a 1-2 setup, and is now powering up towards its AVWAPS. We picked up shares in the low $60s with a stop at all-time lows. As long as this level holds, I’m expecting new highs this year for ZM. If it can power through the above AVWAP in blue, that will be a strong showing of strength, at which point I’ll add more to my position.