Month: February 2020

RSA Overview: OKTA, Splunk and F5 Networks

Posted on by io-fund

Just to be clear: this is not the shopping list of top stocks. That’s on the way! This is an overview of the cybersecurity industry and cybersecurity growth stocks.

RSA is a popular cybersecurity conference with around 45,000 attendees. It’s a good source of information on public companies who overlap between data, cloud and security. This particular conference has quite a few executives attend compared to other cybersecurity conferences, where developers or hackers attend.

Here is a sample list of companies that were at RSA:

Akamai, Crowdstrike, LogMeIn, Equinox, Elastic, Fortinet, Mimecast, Palo Alto Networks, FireEye, OpenSSL Software Foundation, SWIFT, Tenable, Checkpoint Software, Juniper Networks, Zscaler, Okta, Microsoft, Arista Networks, Box, CyberArk, Cyberbit, F5 Networks, Oracle, Secureworks, Splunk, VMWare

I met with quite a few of these companies and want to give my premium subscribers any intel that I found this week.

This is in no particular order …

1. Cybersecurity is crowded; platform consolidation will occur …

You won’t see me recommend a cybersecurity company very often under premium analysis due to vendor saturation. I’ve been to RSA and BlackHat on and off for the past few years (since 2015) and there are so many companies that it’s nearly nauseating.

Here’s a snapshot of the cybersecurity vendor landscape from 2018:

For instance, you may have noticed that I haven’t talked much about Zscaler or Crowdstrike. This is because cybersecurity is very vendor-heavy. If you do invest in a cybersecurity company, then rely on Gartner’s Magic Quadrant to help sift through the various products. Gartner does a particularly good job with cybersecurity. Okta, for instance, is a clear leader according to Gartner.

I’m especially wary of newly public security companies because they seem to have really strong numbers coming out the gate that are hard to sustain due to the competitive landscape. This is because of the crowded market; the supply is overwhelming the demand.

In fact, I wrote a piece about Crowdstrike’s valuation compared to its addressable market around the time of its IPO.

An investment strategy for cybersecurity should be one of the two:

a) The company is a neutral player between Microsoft, Amazon, Google, Oracle and IBM. As multi-cloud continues to grow in popularity, and also hybrid cloud, the very best neutral player in each category should do well. This is because companies will want to avoid vendor lock-in with Microsoft, Amazon and Google. One tactic is to use a vendor who works seamlessly across all of the major cloud players.

b) Look for dominate platforms who own the data, endpoints, or servers, etcetera. Expect to see platform consolidation, which is when companies who own the data or servers acquire smaller specialist vendors.

As with many tech industry verticals, the best moat comes from having the most data. As you can see from the landscape, it is much easier for a dominate tech player to acquire a cybersecurity vendor than for a small vendor to acquire data or endpoints. We saw this with VMWare and Carbon Black last year.

 

Putting on the Watch List

Of the companies I met with, I think the following companies are interesting for future positions:

OKTA:

Per the first requirement above, Okta is the industry-leading neutral player for identity access management. They work seamlessly across the giant cloud competitors. Okta rates high on the product side by Gartner and in conversations with cybersecurity professionals.

My favorite catalyst for Okta is the blockchain. I believe this company will soar once blockchain is widely adopted. I will absolutely want to have a position before blockchain takes off and Okta may be one of my biggest blockchain positions.

(Remember that blockchain can assist centralized currency transactions and will overhaul the fees and costs associated with finance while lessening the burden on financial institutions to fight fraud. Do not think of blockchain only as crypto. Even governments will use centralized blockchain).

However, I’ve been less than enthusiastic about Okta in the past because I believe the company “is fundamentally weaker” than financial analysts believed when the valuation was incredibly high compared to its peers (I wrote about this in September).

The operating costs steepened as the company lowered EPS guidance from losses of $0.22 per share to losses of $0.45 to $0.49. Most importantly, the company has high sales and marketing costs at about 66% of revenue (they reached 85% of revenue in the quarter ending April 2019).

That shows the tough battle they fight in the competitive cybersecurity field. At the time, I said that Okta would need to continue to spend heavily on S&GA or R&D to maintain its leadership position. Subsequently, the company is expected to report more losses this year.

Increasing losses is not necessarily a reason to not invest. To me, it shows the battle Okta fights in basic supply and demand despite being the best IAM product on the market. Like I said, the real catalyst will be blockchain.

Takeaway: I’d like to get a good entry on Okta and hold the stock for identity access on blockchain. We will publish a PDF if/when we initiate and Knox will update on an entry.

 

SPLUNK:

Splunk and Elastic overlap on some customers (Elastic is more search but they do overlap). I initiated coverage on Elastic and recommended a position because one of my favorite setups is a small company eating market share as a unique pureplay with few competitors.

Although Splunk may not be as agile as Elastic right now, there are some important merits to the company’s position. The first thing to note is Splunk’s ability to successfully pivot and expand the addressable market. The company expanded to include SIEM about two years ago and security now makes up a large portion of the business.

Spunk’s three products are: data platform, analytics and security operations. Splunk fits #2 in the investment criteria due to being a company who has the data. It’s an easy transition for Splunk to expand beyond being a data platform and analytics to also help with security operations as they can offer automation rather than incident response.

Examples of customers for Splunk’s data and security operations include: monitoring for fraud in wire transfers or monitoring for patient record snooping in hospitals. SIEM is complimentary to endpoint security (Crowdstrike), network security and identity access (Okta)

Overall revenue is growing around 30-35% with software revenue growing 40-50% year-over-year. Annual recurring revenue is at 86%. This ARR is actually decent for a company as old as Splunk (founded in 2003; went public 2012) as ARR declines over time.

Takeaway: Splunk may not be the most exciting growth stock but it’s stable and steady. I don’t think there will be any major bullish or bearish surprises on the product level but it is worth keeping on the radar for the reach it has with data and now security operations.

 

F5 Networks:

The only reason I would recommend F5 Networks is for the potential catalyst of 5G. Otherwise, the company has been posting a slim 2-5% revenue growth year-over-year since 2015.

Regarding 5G, the company recently partnered with Rakuten to eliminate the need for coaxial or fiber cables to offer 5G in homes. Network functions virtualization (NFV) architecture reduces cost of ownership. By combining software and hardware, 5G networks can scale quickly especially in densely populated areas. This framework is also compatible with future edge computing.

AT&T plans to have 75% of their network virtualized by 2020. For F5, smaller global networks are key to growing this area of its business. Security is also baked in as AT&T states, “virtualization could be the most crucial advancement related to 5G security, for both the provider and their enterprise customers.”

Takeaway: There are competitors in NFV but F5 Networks could potentially stand out for their strength in security. Due to F5 Networks lack of growth in other areas, I would need to see more progress here before initiating — but it’s definitely something to keep on the radar as any decrease in infrastructure costs for 5G is bound to be a growth driver.

 

More info to consider:

SLACK:

Regarding Slack, I’ve mentioned before that we are very early to business messaging and the real use cases are yet to come. The RSA conference helped solidify an even stronger conviction in Slack as security companies discussed integrating Slack as the messaging notification system for monitoring anomalies – i.e. when an anomaly appears, the team will be notified via Slack rather than email as the response is statistically faster. This is already happening with one or two companies. 

Although security companies also integrate with Microsoft Teams, it’s worth relaying that in presentations they only mention “Slack.” This is because Slack is more universal and does not force an ecosystem lock-in.

VMware and Carbon Black

I think VMware and Carbon Black may become a serious competitor to Crowdstrike. This is due to VMware having access to millions of machines and having a neutral position across the various cloud infrastructure companies. Although Crowdstrike and Carbon Black are competitive on endpoints (Crowdstrike was beating Carbon Black in the market), VMware is clearly stronger on the server level. This acquisition was completed in October.

CROWDSTRIKE:

Crowdstrike is a top-rated stock on our cloud software spreadsheet for revenue growth, even beating out Zoom Video, Datadog and Slack. The fundamentals rank high right now. With that said, I can’t quite get over the fence with Crowdstrike as a solid long-term play and have to make these tough choices sometimes especially as we have initiated on many others ranked high on revenue.

Source: Cloud Software List Ranked by Revenue Growth

Market Update: Feb 22nd

Posted on by io-fund

The average inflation-adjusted returns we are taught to expect in the equity market per year is around 7%. However, if you remove the period from 1984-2007, that return comes in just under 5%. According to, Christopher Cole of ArtemisCapital Management, the period between 1984-2007 was the result of anomalies converging that will likely not occur over the next decade.

During that period, baby boomers supported the economy at peak spending, which carried over into the 90s. We also saw the rise of globalization, which boosted inflation. Furthermore, the Fed Fund Rate was at a record 20%, which gave the Federal Reserve an extraordinary amount of room to support asset prices. All of these factors created an economic environment that led to strong markets.

Today, the Fed Fund Rate is under 2% during an expansion, baby boomers (who make up a large portion of the population) are hitting retirement. These factors, coupled with an over-levered population and a global trend that’s moving away from globalization are concerning for future growth. Cole argues that we should expect the next decade to trend closer to the 5% average than what has been considered “the norm.”  

Regardless of what you believe the average annual return will be over the next decade, one thing is undeniable – the S&P 500 is acting significantly outside of the norm, returning an anomalous 29% in 2019, and this year, assuming the current trajectory, we are on pace to return an annualized 38%.

There are many forces coming together to support a strong year in equities, which are happening with many alarm bells, as well. In fact, Paul Tudor Jones, who famously shorted the 1987 top because he noticed similarities in that market’s structure compared to the 1929 run-up, recently claimed that this market feels a lot like 1999.  The structure of the current market and the final part of 1998 are similar, which if holds, would lead to a sideways consolidation before we see the next leg higher.

  

In fact, we are beginning to see a decoupling of high beta tech stocks from the rest of the market just like we did in the late 90s. One of my favorite risk-on metrics just broke out of a multi-year trading pattern.

The USD/JPY measures the value of the dollar compared to the Japanese Yen. These are two of the biggest currencies in the world, and are both held in global portfolios. The coronavirus scare, as well as abysmal economic numbers in Japan, likely led to this breakout.

Regardless, when we see a rise in the dollar vs the Yen, it historically correlates to a rise in equities. More money is flowing into the U.S., which is good for stocks and bonds. If the breakout holds, it should be a tailwind for stock prices, and a further support for growing asset prices in 2020.

 

Additional Themes for 2020

Two of my favorite places to invest for 2020, on top of Cloud and Connected TV ads, are semiconductors and small caps. Semiconductors had a strong 2019, and the structure supports a strong 2020.

Semiconductors

It’s worth noting that in the late 90’s environment, semiconductors showed spectacular returns, and we are seeing the same today. The structure of the semiconductor index is supporting this theme, as well.

The above chart shows two large first wave setups, commonly known as a 1-2, i-ii setup, which also shows up as a cup & handle pattern. They imply that we are at a large 3rdwave, which is exactly what we are seeing.  

Regarding where we are in the structure, the internals are showing divergences, which we are starting to see in our semiconductor picks – NVDA, AMD, MU (report to come), QCOM (as we get closer to 5G), etc. We are likely in the early stages of the smaller degree wave 4, which should take us lower. However, as long as SMH, the broad market semiconductor ETF, holds the major support around $123, I’ll look to add to these positions in the coming days/weeks.

Small Caps

In December, we provided a more extensive report on the small cap setup. We then followed this up with many TA reports on our small cap choices. These price movements are still in play today.

In brief, small caps historically outperform in bull markets, and they underperform in drawdowns.

As you can see, each leg-up in the current bull market showed noticeable outperformance between small caps and large cap stocks. Today, Small caps are underperforming, which we typically do not see in a bull market. If we avoid a recession in 2020, then small caps will have a lot of room to run in order to take back their leadership role.

So far, our small cap positions have performed very well in 2020. Telaria is up about 55% YTD (exceeding Shopify), WIFI is up about 32% YTD, and INSG is up 25% YTD. Not only are these companies positioned to take advantage of current tech trends, but they should benefit from the small cap thesis, as discussed.

In conclusion, the trend is up, and as long as it is up, I plan to stay invested. As exciting as this market has been, it’s important to realize that what typically follows a great party is an even bigger hangover. It’s important to understand the type of volatility commonly known as reversion to the mean, which is why I brought up the debate around the average annual return being 5% or 7%. Neither of these numbers come close to what we are seeing today, which implies a sharp mean reversion in our future.

So, stay invested, and remember to have stops in place and/or be long volatility in some form as a hedge. The time to buy insurance is before a flood, not during, which is why a portion of our holdings are in gold/silver and some long-dated puts on companies that are most likely to be affected by a pullback.

 

Nvidia (NVDA)

There is simply nothing bearish about the above chart. Nvidia’s price is making all-time highs, while both the MACD and MACD Histogram are making new highs. Also, the Accumulation/Distribution indicator is making new highs, suggesting that this move is supported by healthy volume, and smart money is buying it.

For those that have followed our analysis on Nvidia, we suggested two excellent buying zones – one was in November of 2018and the other was based on the breakout scenario we outlined in our recent analysis in Septemberof 2019.  

As of now, Nvidia’s trend is parabolic before stalling out at all time highs. This is a company we want to own for the long haul, and it also fits with what we are seeing in Semis this year. Any correction should be bought and we plan to investigate if Friday is a correction or not.

The RSI is very overbought and will need to reset for the next leg higher. Also, the 3rdwave up is a textbook Elliott Wave move – the 3rdwave topped out at the 168.2% extension and the 5thwave topped out at the 200% extension. Nvidia’s price has turned and closed just above the prior high from October of 2018, which is around $292.

If it closes below $292, expect a Nvidia to first close the gap and find support around the $270-$272 region. If that level doesn’t hold, I placed some likely supports within the yellow target box on the chart.

However, it’s worth noting the 55-day EMA around $250 right now, which will move directly into the target region. The current uptrend has pulled back to this zone four times and held. It has been very strong support for the uptrend. If Nvidia breaks down to this level, it should be considered a buying opportunity as well. I will update you as we progress.

On positions that I expect to own for many years, if my cost basis is a level that we will likely never see again, I tend to hold that position as long as the fundamental story stays the same. We currently have a cost basis around $150 in Nvidia consisting of many shares we bought in the $140 region, and then added again when we broke $200.

I find it doubtful that we will see $140 again with Nvidia; however, $200 is not out of the question, especially if we encounter a recession. Thus, the portion I’m holding at $200 is being held with a stop just under $220, while the $140 cost basis is held without stops.

 

Zoom (ZM)

For those that have been following us on ZM, you should have a nice position in the current uptrend. The thesis that I outlined around the first bottom in the low $60s seems to be playing out, which is that we could be in the early stages of a strong wave 3 that will take us to new highs.

For those that are wondering what a 3rdwave feels like, this is it. A powerful move that is met with strong momentum and heavy volume. This is exactly what we are seeing with Zoom. Both the MACD and the Accumulation/Distribution indicator are making new highs with price, which is exactly what we want to see.

Today, Zoom broke out to new highs before getting sold below the heavy resistance region that I outlined in red on the chart. The MACD Histogram, which is measurement of internal momentum is diverging from price, suggesting a pullback is underway, which would be healthy for setting up the next leg up. Zoom is due for a pullback, which would be the 4thwave correction within the larger degree 3rdwave we have been riding.

Based on the exuberance in the market and in ZM, I’m not expecting a deep pullback. But, as long as the $75.75 region holds, the current count on the chart is valid, and I’m targeting the $155 region for the completion of the larger degree wave-3. Keep in mind, there are 5 waves in total, so it should be a good a year for Zoom.

Zoom is a buy, and should be bought on any breakout or dip while above $75.75.

 

Dynatrace (DT)

Dynatrace (DT) is a position we think will have good returns in 2020, and the current valuations are attractive when compared to its better-known counterpart, DataDog (DDOG).

Dynatrace is due for a larger degree wave 2 pullback, which is outlined by the red numbers on the chart. Now that the 23.6% retrace level is broken, which is the red price zone between $34.50-$34.15 on the chart, I’m considering the larger degree wave-2 to be in effect.

Also, notice how price has reacted to the 55-day EMA (blue) throughout the uptrend. This level has been strong support, and with a close below this level today, suggests that more downside is ahead.

So far, we up a little over 14%. I will look to add as DT approaches the upper level of my target box, or if DT can take back the red zone above $34.50. My current stop is just under $27.

 

Shopify (SHOP)

Shopify (SHOP) is one of our favorite cloud stocks for 2020. It’s a stock you want to own for the remainder of the bull market and should be bought on any dip. However, the strength of the uptrend has me looking to shallow dips around key moving averages, until price breaks through key supports. Right now, that support is $395. As long as this price holds, expect the uptrend to be intact.

It’s worth noting, since late 2019, SHOP has held the 20-day EMA (green), which is impressive. Below this level, the 55-day EMA has been additional support for Shopify historically as it makes new legs up. I’ll look to these levels for entries on any pullbacks.

The internals are strong, but suggesting weakening momentum. The volume is increasing with price; however, we saw a lot of volume fade the highs, suggesting institutional money is taking profits. Also, the RSI is overbought and needs to reset for a new leg up, suggesting a pullback, or at minimum a sideways consolidation is in order.

The MACD and MACD Histogram are supporting the uptrend. However, they are starting to roll over, suggesting temporary weakness. Shopify is a buy on any weakness. My current stop is just under the $395 region to protect our gains.

 

Alteryx (AYX)

Alteryx (AYX), like Zoom, had a deep wave-2 retrace, and is well within its wave 3 to new highs. Volume is increasing with price while the MACD supports a healthy uptrend. The Accumulation/Distribution index is increasing with price, suggesting smart money is buying into the move up. However, it’s worth noting that this index has not made it to new highs with price, suggesting that we could see a temporary pullback before breaking out.

Like Shopify, the 20-day EMA and 55-day EMA are key levels. Notice the reaction to the breakout. It couldn’t hold, and now the pressure has pushed AYX below the 20-day EMA. The next level of support will be the 55-day EMA, which is where I’ll look to add to my position. As long as the $122 region holds, I’ll stay long and buy the dip. Below $122 and I’ll stop out, protecting my gains.

 

Chainlink (LINK)

I’ve posted quite a bit on Chainlink in the forum as well as on several market update blogs. The little-known blockchain play has been on a tear recently. We began covering LINK at $2, initiated our first position around $1.77, stopped out around $2.45, and then re-initiated again at $1.80. The position is currently up 140% – more than Tesla YTD.

As Beth has pointed out in the PDF, this is not your typical alt-coin or crypto. Rather it is an investment in an important trend called smart contracts. You’ll want to pay attention to this and set any prejudices against crypto aside as we are not a site that covers crypto. We cover tech trends and this one will be parabolic. As Beth pointed out in the PDF, there are reports that Google and Oracle are both invested in Chainlink (page 8). We are in the early days for LINK and it’s something we plan to follow closely with technical analysis to navigate the volatility.

 

Bitcoin (BTC)

Since our last update, Bitcoin (BTC) has retraced into its lower degree wave-2 pullback. As we write this, BTC is within the upper target region. The $8600-$8500 region will be strong support to watch, and a good target zone to add to any existing position, if we get there.

This region coincides with the 38.2% retrace level and also the Volume Weighted Moving Average, anchored at the all-time high. As long as BTC holds the $7,000 region the current count will remain intact, and I will be looking past all-time highs in the coming months. Keep in mind, the $7,000 region is around 25% below current levels. The risk/reward setup at current levels, with proper position sizing, is an attractive trade.

I wouldn’t get too greedy with Bitcoin, considering the uptrend we see in front of us. If you like this asset, then consider layering in now.

For anyone on the fence about bitcoin, read Beth’s write-ups of why it’s important to the technological advancement of both centralized and decentralized blockchain. She has these write-ups on the free blog here, hereand hereand also on the premium site.

 

Telaria (TLRA)

In keeping with our small cap theme, we’ve been covering Boingo (WIFI) extensively over the last month. It’s currently confirming a breakout and is considered a buy along with our other small cap play, Inseego (INSG). Telaria (TLRA), our third small cap position, since we first recommended it, is up nearly 100%.

The uptrend is healthy in that the volume is confirming the price increase, and the internal momentum is strengthening with the price increase. Telaria has recently broken out of a strong resistance zone around $13, which we outlined in prior reports. It is considered a buy at current prices.

We are raising our stops to $9.50 to protect our gains. If we do get stopped out, we will look for re-entry due to our desire to hold TLRA for the long haul.

 

Qualcomm (QCOM)

If we look closer at the structure, QCOM is due for a pullback, and in fact the internals are suggesting this to be the case.

We can see the MACD and the MACD Histogram showing a negative divergencepattern. In other words, as the price increases the internal momentum is decreasing. We typically see this pattern before a pullback and should act as a warning.

Furthermore, the Accumulation/Distribution indicator is decreasing as the price in is increasing. This indicator measures two things: is volume supporting the price and what is the smart money doing. The assumption is that “smart” money buys at the final hours, while “dumb” money buys on news at the open. There is some credence to this sentiment indicator and it’s been an effective leading indicator. What it’s showing us here is 2 things: (1) volume is making lower lows while price is making higher highs; (2) the volume in the final hours is fading these prices, suggesting that smart money – i.e., institutional money is selling at current prices.

A pullback is reasonable; however, in this market, I wouldn’t expect too deep of a pullback. I added shares around $87 and will look to add more in the low $80s or when QCOM breaks out of its multi-decade cup & handle pattern above $100.

Regarding the cup and handle, Qulacomm (QCOM) is currently just under an important price zone: $98-$100 region. A close above this region would confirm a twenty-year cup & handle pattern, which we pointed out both on the forum and on Twitter. For those that may have missed this, the chart below says it all. A close above the $98-$100 price resistance in this pattern would be a bullish confirmation, and one that I would buy into.

Ad-Tech: Keep an Eye on Mobile OS Changes

Posted on by io-fund

INTRODUCTION:

The announcement that Facebook is killing off web supply on Audience Network is actually quite important. This is because the story is changing. You can expect a lot of questions on the next earnings call in regards to this announcement.

To be clear, for Facebook, web supply is not as important as mobile supply. Right now only web supply has been affected. This article suggests that mobile supply could be next. If so, then the story will change quite a bit for Facebook — and Twitter. Google is also in this camp, but Google has search and is more protected and diversified. Due to Google’s strength in AI, a pullback would be welcomed. Smaller companies like Criteo will also be affected.

For Facebook and Twitter, if mobile supply is cut off, we could see a lower average revenue per user become the norm across these platforms.

I would never suggest someone sell a winning position, however, if you’re in Twitter or Facebook, then be mindful of any drawdowns between now and January of 2022 for these less diversified ad companies (compared to Google). Twitter is up 20% this year, so feel free to ride that wave, but have a mental stop and understand the difference between a story or product that has changed compared to undulating market sentiment.

If the ad-tech industry changes how mobile supply operates on the back end, funds and institutions will know first. Funds have full-time analysts to track this. I agree with the Pivotal Research analyst who grew bearish after the Chrome browser changes and Apple’s iOS 13 changes … investors are growing complacent because they have seen some strong earnings reports despite data privacy headwinds. That quote from Pivotal matches my understanding of the situation.

We first covered this in the Google 2019 PDF in July. I also covered this for MarketWatch a few months later in October. However, this has taken time to evolve (hence the market’s complacency).

The real tourniquet on data collection is not coming from regulations, rather it’s coming from the browsers and mobile operating systems, which I describe below.

What is Changing: Browsers Now, Mobile OSs Likely to Follow

Although many consider Cambridge Analytica a temporary issue, the advertising industry would say the privacy changes that began with the GDPR, or the General Data Protection Regulations, had serious side effects. These privacy rules were a decade in the making, and were enacted by the European Union about two months after Cambridge Analytica broke. There was quite a bit of speculation by the Wall Street Journal and others that the GDPR would actually make Google and Facebook stronger (which is not true).

The GDPR’s biggest accomplishment was to put in context the issues around tracking people and collecting data across apps or websites where no relationship exists. Having these standards allowed others outside of the EU to follow. 

The main set of regulations that followed the GDPR is the California Consumer Privacy Act (CCPA). The CCPA was put on the 2018 ballot and passed, and is now currently in effect as of January 1st, 2020.

Browsers

Apple has been whittling away at data tracking on the Safari browser since 2017. I covered this in-depth back in July for our premium members.

Apple’s initial release of Intelligent Tracking Prevention had little effect on Google but did have an effect on publishers. Google stated at CES 2019 that publishers were seeing half the CPM value as a result of ITP’s impact (CPMs is a common way to pay for advertising and is based on cost per 1,000 impressions).

Apple then released ITP 2.1 in an attempt to stop Google and Facebook’s tracking methods, and furthered the attempt with ITP 2.2. The subsequent releases shortened the amount of time a cookie could be stored to 24 hours to prevent loopholes unique to Google and Facebook.

As covered in the PDF, there have been rumors for some time that Google planned to follow in Apple’s footsteps. Adweek reported on this in April of 2019. We now have confirmation that Google will be following in Apple’s footsteps by 2022 by eliminating third-party cookie tracking with the Chrome browser.

Mobile Operating Systems

The main takeaway from this write-up is to keep an eye on changes in mobile operating systems. The browsers are not as primed for data collection as the mobile device. The main impact will be at the mobile device level.

The second change was to cut off apps like Facebook Messenger and Whatsapp from using a loop hole that allows them to continue tracking user activity even when the app is closed.

Ad industry professionals are speculating that Audience Network on mobile may not survive future iOS privacy changes. Facebook, Twitter and others may be forced to shut down their ad exchanges on mobile through a slow squeeze. If this happens, we are dealing with an important change in the story for Facebook and Twitter.

Regarding Snap, TTD, Rubicon and Pinterest …

Before I go into more depth on Facebook and Twitter, I want to cover a few of the other stocks we’ve actually initiated coverage on – Snap, TTD, RUBI, and PINS.

Regarding Snap:

These changes are connected to the reason I pulled out of my Snap recommendation. Snap’s big growth potential was based on launching an Audience Network of their own. This was looking less and less likely. Without this, growth for Snap will be slower than what I would need to recommend a real growth opportunity. They’ll probably nudge up in monthly active users quarter-over-quarter but I don’t see a new trajectory like I did from the filter changes in Q2 2019 or from the highly anticipated Audience Network (that is probably now defunct).

Regarding Pinterest:

Facebook has been very restless since the privacy concerns. We saw the company attempt a blockchain project, which I felt strongly would not succeed the week it was announced.

They also attempted a dating offshoot, which is unlikely to convert users from well-established Match/Tinder. Then there was Lasso based off TikTok. They’re also aiming for a WePay feature in Whatsapp. Now they are going after Pinterest with Hobbi.

Just remember, acquisitions are more successful than an upstart for bigger tech companies (Instagram, Whatsapp). The Facebook social platform is a phenomenal success but there is basically no track record of launching something new and converting users for nearly 15 years.

Regarding Pinterest, I wouldn’t over-react to another one of Facebook’s announcements. I would expect there to be many more pivot attempts from them in the future. Pinterest has a strong foundation and is ran by a very solid founder/CEO.

Ideally, the browser and OS changes shift ad dollars away from Facebook – this is a very real possibility. If so, Pinterest’s ad model is well situated for the future of AI and product discoverability.

Quick note on The Trade Desk and Rubicon/Telaria:

There are two reasons to drop cookies or pixels on browsers and/or track app activity through mobile software.

1) The first is for attribution, which allows the advertiser to know an ad was seen or an ad video was completed.

2) The second is a bit more nefarious, which is to actually track your activity and create behavioral profiles for advertisers to target. This more nefarious data collection is the culprit prompting changes across browsers and mobile operating systems.

TTD and Rubicon are not deep in the business of data collection (#2) because they do not have the conflict of interest of also being a large publisher with 2 billion users (Facebook) or 400 million users (Twitter). They are in the business of ad serving and attribution (#1). There are retargeting ad exchanges, like Criteo, who have seen major declines in stock price.

In addition, attribution (#1) will need to be resolved for everyone’s sake because publishers still need to make money. The Apple ecosystem is based on millions of app publishers making money. Online activity – and many websites — are also supported by ads. Attribution is not a privacy concern and it doesn’t lead to privacy issues when done correctly.

In other words, TTD and Rubicon’s core business model is not reliant on data collection because they are not heavy retargeting companies. Therefore, I don’t see the story changing right now for those companies. They do need attribution but the whole ecosystem will need this. I’ll be listening for TTD’s answers to these questions on the earnings call but I expect them to echo something similar to what I’ve described. If they say something else, then I’ll circle back.

Similar to Pinterest, I’m curious to see if the changes will divert ad dollars away from FB and towards TTD and RUBI as the backend changes should level the playing field.

More on Audience Network, MoPub and AdMob …

First and foremost, it’s important to understand that the more data you have, the more your revenue grows exponentially. There is nothing linear about data (or data science or data mining).

Google, Facebook and Twitter were uniquely positioned in the early days of native apps and mobile browsers because they were the first to build and own large audiences.

Due to this positioning, the bright idea occurred to these companies to acquire or build ad exchanges. Basically, they figured out that ad exchanges are able to insert code across a lot of websites and apps, which in turn, pumps a lot of data. 

The ad exchanges are called AdMob (Google), MoPub (Twitter) and Audience Network (Facebook). The purpose of this was to collect data from as many sources as possible to pump their ARPU on the social platforms they own.

Maybe think of Google, Twitter and Facebook’s ad exchanges as the gasoline in a Ferrari. The gas isn’t worth much compared to the vehicle, but in turn, the vehicle doesn’t go very far without the gas. Data fuels the machine. It’s not worth discussing the value of the gas, which in this case, might be $40.

Facebook says Audience Network pulls in about $3 billion. That’s irrelevant because it’s pumping data for higher ARPUs on their own platform. This is why Facebook makes much higher ARPU than other sites.

Twitter’s MoPub also has software inside many apps that Twitter does not own. The purpose is to collect data, that in turn, leads to higher CPMs/ARPU on Twitter because they now have more data and better targeting than the competitors.

To illustrate, when you close your Facebook app, and you open a Bloomberg or Fidelity app, Facebook now knows you’re a stock investor and can send you a Charles Schwab ad. This information is then sold to advertisers on the Facebook feed. The software that tracks your activity outside of Facebook is Audience Network but the revenue is reflected on Facebook’s ARPU.

Facebook’s social feed does not have as much valuable data as you might think. It’s your cross activity that compounds into perfect behavioral profiles. Facebook may know you went to the Bahamas based on your last social media update, but did you fly first class? How often do you check stock trading apps while on vacation – once per week or five times per day? Do dine out or get delivery in your hotel room?

Tracking activity with Audience Network helps them determine if they should show you a Mercedes Benz ad on Facebook, whereas your posts on Facebook are not enough to tell them your income bracket and spending patterns. Or maybe they’ll show you a Grubhub ad if you ordered in.

This is a fairly challenging concept for people outside the ad industry to understand. The Facebook bulls continually revert back to thinking Facebook’s revenue comes only from the Facebook app, Instagram, Whatsapp. They’ll cite Audience Network generates $3 billion, etcetera.

Google is more protected with search and their response was more muted on the recent earnings call. Facebook’s was a bit more cautionary. I’ve included clips below.

RECENT EARNINGS CALLS:

Google had the following to say in the recent earnings call:

  • On page 30 of Alphabet’s most recent annual report, the company reflected slowing growth across “Google Network Members’ properties”

“Our Google Network Members’ properties revenues increased $1,537 million from 2018 to 2019. The growth was primarily driven by strength in both AdManager (included in what was previously referred to as programmatic advertising buying) and AdMob, partially offset by the general strengthening of the U.S. dollar compared to certain foreign currencies.

Our Google Network Members’ properties revenues increased $2,394 million from 2017 to 2018, primarily driven by strength in both AdMob and AdManager, offset by a decline in our traditional AdSense businesses. Additionally, the growth was favorably affected by the general weakening of the U.S. dollar compared to certain foreign currencies. “

Source: ABC.XYZ/InvestorABC.XYZ/Investor

On the earnings call, an analyst from BMO Capital Markets asked about Chrome changes. Sundar PIchai anwered the following:

“And so we are engaged in these issues, and we anticipate and structurally work on them early on. So it’s how we broadly approach these things. And so there’s nothing notable to call out, other than there will be continued changes in these ecosystems, and our ability to anticipate and adapt is key to the years ahead.

Facebook had the following to say in the recent earnings call:

Dave Wehner, on the Q4 2019 Facebook earnings call:

“We expect our year-over-year total reported revenue growth rate in Q1 to decelerate by a low-to-mid single digit percentage point as compared to our Q4 growth rate. Factors driving this deceleration include the maturity of our business, as well as the increasing impact from global privacy regulation and other ad targeting related headwinds. While we have experienced some modest impact from these headwinds to date, the majority of the impact lies in front of us.”

Analyst Brian Nowak of Morgan Stanley asked Wehner to expand on the comments above:

“Yes, we are seeing headwinds in terms of targeting and measurement, but as I noted, the majority that impact lies in front of us. Just as a reminder we utilize signals from user activity on third-party websites and services in order to deliver relevant and effective ads to our users, and in that regard, there are sort three overlying factors that I’d point to, and I spoke to these on prior calls as well.

First the recent regulatory initiatives like GDPR and now CCPA have impacted, and we expect will continue to impact our ability to use such signals.

Secondly mobile operating systems and browser providers, such as Apple and Google, have announced product changes and future plans that will limit our ability to use those signals, and then finally, we’ve made our own product changes that gives users the ability to limit our use of such data signals to improve ads and other experiences, and there I’d point to something like the rollout of Off Facebook Activity controls, and that’s at 100 percent today.

So each of these factors limits our ability to target and measure the effectiveness of ads on our platform and that can negatively impact our advertising revenue growth. Both Mark and Sheryl talked about importance of ad targeting for small businesses, and I think it’s important to note that the regulatory and platform changes will have a disproportionate impact on the ability of small businesses to use ads to grow and thrive.”

5G: List of Stocks and Overview

Posted on by io-fund

Here is a direct link to the 5G list of stocks spreadsheet: 5G List of Stocks 2020

300c2b14-9353-4a4a-bc1a-7309e2824cee_5G-List-of-Stocks-v1.pdf

5G: List of Stocks

For this analysis, please reference the 5G spreadsheet that includes a comprehensive list of the companies we are tracking across various metrics. We have also written an overview of 5G infrastructure and where we believe the most growth will occur in the 5G tech stack.

Access 5G spreadsheet here. Access 5G spreadsheet here.

As stated in our first 5G analysis, the goal is to balance optimism with a more conservative outlook. Nokia is a great example of where the 5G “hypercycle” can go wrong. The company chose a chipset that ended up being too expensive and this hurt Nokia’s profit margins. The stock is down 30% over the past year. 

The following from NXP’s earnings report was sent to me by a reader: “And clearly, there is a churn going on in China right now, not only with the suppliers but also with the different standards and the different combination of carriers and their technology…it looks like it’ll still be a couple of quarters out before we’ll see strong growth in 5G deployment. We clearly see that it’s coming, just don’t see it in the near term."

NXP Semiconductors provided guidance around base stations in their recent earnings report, with the serviceable market for power stations growing only 13% CAGR over the next five years to $2.5 billion by 2024. Meanwhile, NXP issued more optimistic guidance for macro base stations and last mile solutions with a broad-based roll-out in late 2020 to early 2021 at 30-35% CAGR. 

Cisco also reported declining revenue this week for fiscal Q2 2020 and stated revenue will continue to decline slightly 1.5% – 3.5% year-over-year in Q3. The CEO called 5G a “multi-year transformation” on the earnings call.  

With this in mind, we are evaluating companies that solve problems unique to 5G that did not exist in the fourth generation of wireless. We are looking for companies that supply the expensive 5G chips (like Nokia referenced) and last mile connectivity (like NXP referenced). Ideally, for long term gains, the companies we evaluate will serve both consumers and business/enterprises.

I was not surprised to see the Sprint and T-Mobile merger approved. I discussed this in the prior PDF. You can expect to see the government to subsidize 5G and also become lenient with regulations in order to push 5G ahead.

The United States is behind China on 5G and this is more important than any single argument around the merger. 

Top Stocks to Watch:

As of today, one of the more important takeaways from the spreadsheet is that Micron may be undervalued in regards to its impact on 5G. We will cover this stock in a full-length report as there are few competitors in data storage/DRAM. 

Qualcomm ranked high across a few important metrics and that is reassuring as we also like its competitive positioning across multiple manufacturers with the Snapdragon X55 solutions.  An example was found in our coverage of Inseego on hotspots and fixed wireless access, where we noted there are 33 OEMs that Qualcomm is working with on hotspots and FWAs (Inseego being only 1 of the 33). This level of diversification helps provide a safety net if one OEM stumbles or a 5G roll-out is delayed. 

Skyworks and Qorvo are market favorites with well-known stories due to being Apple suppliers. These companies provide radio frequency front end (RFFE) components with an increasing bill of materials (BoM) from 3.5% during the 3G era, to 14.6% in premium 5G mmWave smartphones. Some bullish analysts expect the BoM for RFFE components to increase by as much as 30%, including Gary Mobley of Wells Fargo. Keep in mind, average sales price (ASP) of smartphones will be tested – even for 5G. 

Regarding Qorvo and Skyworks, keep in mind, the bigger opportunity will be at the enterprise-level. Here’s a writeup on that with an overview of the 5G breakdown. 

Large Cap Stocks:

Micron:

•        Micron has nearly 150% forward projected EPS growth from $2.27 to $5.52. 

•        In addition, Micron ranks high across 5G stocks with forward revenue growth of 25% with healthy margins of 20%. 

•        Micron is guiding for weak sales and earnings over the next two quarters which has provided a lower valuation than most. However, the company is one of the only DRAM and NAND suppliers capable of serving the 5G market. 

•        Micron may be undervalued with a forward price to sales of 2.5 and forward EV/EBITDA of 8, which is half that of its 5G semiconductor peers. 

•        The company is developing a new memory chip, the 3D Xpoint, to provide both DRAM and flash. 

•        Micron extends beyond the consumer use case to include industrial IoT and other data and storage needs for 5G.

Here’s a snapshot of data consumption over the next few years:

 Source: Cisco and Telecoms.com

Qualcomm:

•        Qualcomm ranks high on forward EPS growth of 45% from $4.21 to $6.10. 

•        Excluding small cap stocks, the company is second to Micron in the 5G category for forward revenue growth of 23%.

•        Operating margins are slightly better than Micron at 31%. 

•        Qualcomm has an EV/EBITDA of 14 which is double Micron’s.

•        Qualcomm’s Snapdragon X55 and platform will power the majority of 5G devices across many manufacturers.

•        We like Qualcomm as a diversified play across consumer and enterprise. The company works with many smartphone manufacturers and is in hotspots and fixed wireless access devices. 

•        Qualcomm has been trading at an important resistance zone.

•        Qualcomm was covered in the 5G semis overview. Please reference this for more information.

Skyworks and Qorvo:

•        Skyworks and Qorvo have EPS growth in the 20% range and revenue growth in the 10-15% range.

•        The only drawback to Skyworks is that it’s mainly a consumer smartphone play with 73% of sales coming from smartphone wireless chips. 

•        RFFE components are expected to have a 3x higher bill of materials for premium smartphones.

•        The market favors Skyworks and Qorvo as the story of being Apple suppliers is well known and easily understood. 

•        Qorvo was covered in the 5G semis overview. For more information, please reference this PDF.

Lam Research:

•        Lam Research provides wafer fabrication equipment with the majority of its revenue coming from NAND and DRAM memory manufacturing (like what Micron does).

•        Lam had a big rally in 2019 due to its strong financials.

•        We covered Lam Research in the 5G semis overview.

Taiwan Semiconductor:

•       TSMC is a fabrication plant for semiconductors that supplies integrated circuits to fabless semiconductor companies. 

•       Taiwan Semiconductor manufactures over 10,000 products for nearly 500 customers.  TSMC owns

50.5% of the foundry market and is a supplier to Apple and Huawei. 

•       The company is currently making a lot of lists for top stocks of 2020 and is a well-known story to the market. 

Small Cap 5G Stocks – Watch list:

We will be covering 5G small cap stocks throughout the next two quarters. As of today, our watch list is:

•       Boingo Wireless: 

We covered this early-on and have seen nearly 30% gains in the last 2-3 months. Please reference the PDF and Knox’s TA updates as the stock recently broke resistance. 

•       Inseego: 

This stock ranks high on revenue growth and has won over many analysts following the Huawei security concerns. Please be aware, the lead investor is H2C Holdings, which is ran by Phil Falcone. For disclosure purposes, he had a high-profile bankruptcy with LightSquared and an SEC investigation for using clients' funds to pay taxes. It's important to report all information on a stock and we will be issuing an update on our TA that comes out tomorrow. The stock has climbed 13% over the past week since we covered the company in a PDF.

•       Tower Semiconductor and Atomera: 

These small caps compete on 5G mobile-transmit receive chips that have the ability to deliver up to ten times the data rate as 4G LTE, as well as RF SOI technology that helps to increase battery life and boost data rates. These companies are having less-than-spectacular earnings reports with flat to declining revenue but look for a breakout in 2020. Tower works with Cavendish Kinetics, which Qorvo acquired. 

•       F5 Networks:

F5 Networks is a company I like a lot and plan to cover with a PDF as they specialize in network functions virtualization (NFV). NFV enables network slicing and software virtualization, which we covered in our 5G tech stack report. Network slicing will allow a physical network to be separated into multiple virtual networks that can support different radio access networks. F5 Networks recently acquired Security Shape, an AI-driven cyber security company. I am especially interested in F5’s recent acquisition of NGINX, which has an open source developer following, and will help F5 provide flexibility for software developers. 

•       Generac Holdings:

This company had an earnings beat last week and the stock responded with a 15% increase since the report. The company provides power generators and energy products with most of the gains reflecting the power outage issues in California. The company is also well positioned to provide backup power for 5G networks. 

•       By my estimation, Microvision and Appian Corporation will be slower to breakout because they require successful 5G roll-outs before the products or technologies can fully mature. We will keep them on our radar for now. 

o   Microvision could be an acquisition target for AI-powered assistants. 

o   Appian is an enterprise-level low-code programming platform for automation. 5G will drive a need for enterprises to release new applications very quickly, similar to Sprint.

Market Update Feb 13th

Posted on by io-fund

Boingo (WIFI)

For the last several weeks, we pointed out the setup in Boingo (WIFI). A cup & handle pattern was forming, and last week we spotted the bounce and trend reversal exactly at the 127.2% extension, which is a common place to spot short term trend reversals.

So far, the uptrend has been a healthy one – buying pressure increasing with price and volume increasing. This signals that more buyers are showing up just before the resistance.

Today, WIFI broke through our targeted breakout region, closing on the high at $13.98 with double the average trading volume. The internals are confirming what we are seeing – buying pressure is increasing with price and volume.

If WIFI can hold above this level tomorrow (Friday, Feb 14th), that will be a strong confirmation of a breakout, and the move from here could be swift. We have provided good setups in the past leading up to this moment; if you do not have a position in WIFI and have been waiting for a breakout, this is what we have been waiting for. 

We are raising our stop to just under $10.70 to protect our gains.

Slack (WORK)

Last week we noted that Slack was appearing to stall-out again within the range it has been stuck in for several months between $25-$20.

With decreasing momentum and a reversal at the 20% symmetrical tops we outlined in Slack’s prior attempts to breakout, we were planning on price, once again, retesting the $20 support. However, an announcement surrounding IBM as a listed client of Slack changed this setup. On heavy volume, Slack broke right through the strong resistance that has halted all attempts prior.

This move did so with the MACD supporting a healthy trend as well as the MACD-Histogram showing an increase with each attempt by buyers to push prices up. Both the MACD and the Histogram are making new highs, while price is breaking through its range on strong volume. This is the type of breakout we want to see and one that you should pay attention to.

Furthermore, the resistance zone that kept Slack bottled up is now support – So, $25-$23 is now the primary support zone for any continued uptrend. After breaking out, Slack attempted to retest the now support zone between $25-$23. This move was quickly rejected, which is also a bullish sign.

As of now, it appears as though Slack is in a well-defined bull flag pattern that has been confirmed by today’s close. All of these signs point to a healthy breakout. We went long on the breakout and have a tight stop at $24.25.

Chainlink (LINK)

Since bottoming just above our stop at $1.60, Chainlink (LINK) revealed a micro 5-waves up, which is a sign of a potential turnaround. On December 12th, we announced on the forum the setup, which was that we are going long at $1.80 with a stop at $1.60. Since then, we’ve added to the breakout above $2.

My current count on Chainlink has us in a strong uptrend with plenty of room to run. Chainlink recently broke out again at $3.40, making a new higher high within the range it was trading in. The next stop will be all time highs at $4.80.

The internals are all confirming a healthy uptrend, and LINK is a buy on pullbacks or breakouts. The 34-day EMA (the red line) has been the support since the renewed uptrend off the December 2019 lows. Any break of this trendline will signal a correction is underway, and should be monitored closely. We are raising our stop to just under $2.6 to protect our gains, in the event the current uptrend fails.

I posted my long-term targets in red on the chart. As long as LINK does not break down below $2, this target remains my long-term plan for now. Alt coins, like Bitcoin, are notorious for false breakouts and failed impulses. So far, the structure we are seeing is promising and is the type of trend we want to be invested in. With a asset this volatile, stops and position sizing are crucial. Even if do get a failed breakout, we will lock in a nice profit at $2.60, and wait for the next uptrend.

Please note that LINK is not a typical crypto as it’s tied to smart contracts which will be first in play for blockchain with smart contracts gaining a lot of interest from the finance industry. Reference the Chainlink PDF for more information.

Bitcoin (BTC)

In our first report on Bitcoin in August of 2019, we outlined that both the fundamental story is aligned with the technical story. We may be in the early stages of a larger degree third wave, which we have been following and covering closely. When confirmed, this will take us to all-new highs.

The above chart shows this long-term pattern, starting from the bottom of Bitcoin’s all-time top and roughly 85% drawdown. On the forum we spotted the most recent bottom and initiated a buy around $7100.

It’s worth noting that a close above $10,000 is a big deal for Bitcoin. Historically, it has been a psychological region of importance. The chart above outlines my general game plan for Bitcoin, and as long as we hold the $7,000, this will be my primary count and remain my game plan.

Another scenario is that Bitcoin pulls back, which will take us to the low $9000-low $7650 region.

MongoDB (MDB)

The internals are suggesting that MDB is stalling out as it approaches new highs. We have divergences across the MCD Histograms and the RSI. The MACD signal is on the verge of crossing over to the downside as well. All of this is happening while the price is making higher highs. This is not what we want to see from a stock poised to breakout to new highs.

For any current longs, the 34-day EMA has been solid support for the current uptrend, which is currently at $155. If this support is broken, I’d be looking to the 200-day SMA for the final support, currently at $142.

Roku

Roku has been trading within a descending wedge pattern since December of last year. We had a false breakdown in late January where the price tested the 200-day SMA (red). The next day the price went back into the range.

Prior to beating earnings, the price broke out of the wedge pattern to the upside, closing for 3 days above this breakout. The internals confirmed the move with an increase in buying pressure and volume.

Tomorrow, we will likely see a gap-up at the open. As of now, the price is set to open within the green resistance zone around $147. We will want to see Roku clear the $153 price target as the first hurdle, and then new highs before we can say the bullish trend is renewed. Long term, Roku has been and remains one of our highest conviction plays due to size of addressable market.

Disney Earning Preview: Disney Plus Ranks High On App Store

Posted on by io-fund

This article was originally published on Forbes on Feb 3, 2020,05:07pm ESTForbes on Feb 3, 2020,05:07pm EST

Disney earnings tomorrow will report subscriber numbers for its OTT-streaming service tomorrow in what is perhaps the most anticipated earnings report of the week. One day after the launch, Disney announced that Disney Plus had attracted 10 million subscribers. App store data collected in the remaining part of the quarter suggests that Disney Plus continued to outperform. 

Disney Plus Beat out Social Media on Many Days

When looking at the top-ranking free apps, Disney’s media entertainment app knocked out the #1 viral sensation TikTok on a few days and ranked higher than Instagram, YouTube, Facebook Messenger, Whatsapp and Snapchat on many other days. 

Disney Plus ranking Dec 6th on iOS. Disney Plus ranked as number one in both free and top-grossingon Android on Dec 6th – APPFOLLOW.IO

Across top-grossing apps, Disney Plus held its own against the top-grossing gaming industry with many high-ranking days on Android and the iOS app store. This is rare as the majority of downloads for over-the-top (OTT) media apps come from OTT players, such as Roku, Amazon Fire, Google Chromecast or Apple TV.

According to Apptopia, a provider of app intelligence, the Disney Plus app ranked number one every day for the first four weeks following its launch in both the App Store and Google Play.

Disney Plus outranks competing OTT apps during the first four weeks post-launch. Apptopia estimates 22 million downloads during this time span. – HTTPS://APPTOPIA.COM

While App Store data cannot guarantee an earnings beat, the app store ranking most certainly doesn’t hurt Disney’s chances for a strong earnings report tomorrow. Analysts are looking for either 20 million or 25 million, depending on the consensus source.

Netflix had highlighted search terms in their earnings report to prove the popularity of their programming. Interesting enough, according to Google, Disney Plus was the top trending search term in 2019, showing the popularity of the overall service as compared to any one show in particular. 

Disney Plus was a top trending search in 2019, as reported by Google.  – GOOGLE.COM

Ahead of Disney Earnings: Bullish Analyst Reports 

For Disney’s earnings tomorrow, analysts are predicting adjusted earnings of $1.47, according to FactSet. This represents a decline from $1.84 per share a year ago. Estimates for fiscal Q1 2020 revenue are at $20.77 billion, up from $15.33 billion, according to FactSet. The software platform, Estimize, has an adjusted earnings consensus of $1.49 a share and revenue consensus of $21.18 billion.

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There is a string of analysts who have published positive notes on Disney. Rosenblatt Securities raised subscriber estimates for Disney+ to 25 million users by the end of the first quarter in 2020, up from 21 million. He calculated the penetration at 43% in households without children and points towards the popularity of Baby Yoda in The Mandalorian as an indication of the reach. (Baby Yoda also claimed a top search spot on Google in 2019).

Bank of America released a note at the end of December that stated Disney’s estimate for FY 2024 guidance of 60 to 90 million subscribers appears to be low. Their price target is $168 with a buy rating.

Amazon Prime, not Netflix, is at Risk

Many analysts wonder if Disney Plus will eat market share from Netflix. Instead, Amazon should be concerned as the Prime Video app may be pushed out as the number two streaming app as Disney’s user base grows. According to Apptopia’s data, over the first four weeks, Disney+ beat out Prime Video with total hours spent in-app. 

Amazon Prime Now reported subscriber numbers of 150 million, yet failed to be ranked in the Top 20 most ranked shows. This includes Prime’s top hit The Marvelous Mrs. Maisel. This suggests that many of Prime Now’s subscribers may have the app downloaded as part of their Prime delivery service, yet spend little time in the app compared to competitors. 

Meanwhile, two of Disney’s Marvell titles were ranked in the top 20 in both 2018 and 2019.

Once Disney proves itself on subscriber numbers, the next challenge will be to convince subscribers with free promotions to pay for the service. The upcoming task for the global media powerhouse will be to release enough consistent hits, like The Mandalorian, to keep up the monthly active user numbers. Quality is clearly not an issue for Disney, yet quantity could be. 

Mastering high retention, low churn and viral mechanics will be a new set of skills for Disney, who has primarily specialized in theater releases and theme parks. 

Theme park attendance in Hong Kong during the political unrest may affect earnings. The coronavirus and closure of the Shanghai theme park during the busy New Year holiday will also affect earnings next quarter in fiscal Q2 2020. Analysts may overlook these setbacks for now with the main focus being on Disney Plus. 

Market Update: February 6th

Posted on by io-fund

The Recent Pullback

Despite coronavirus fears that many were forecasting could lead to a crash, the market remained fairly stable. While the market was overextended in valuations we rarely see, it took the fear of a global pandemic to knock the indexes down just 3%.

The market hit the top end of our target at 3220, as mentioned in last week’s market update. Regarding the correction, 2.5% is what we got in the NASDAQ before the market caught a strong bid that pushed the index to new highs. The SPX soon followed.

A few things I’ve noticed this week:

  • Some extremes we’re seeing in the current Put-Call Ratio.
  • All-time high in the U.S. PEG ratio,
  • NASDAQ is reaching new highs while more than half the index is still at least 20% off their 52-week highs.

In short, a handful of stocks in the index are accounting for most of the returns. So, this is not a broad market uptrend. Therefore, I am not sure the correction is entirely over. We will monitor this as we go along. While the main indexes are reaching all new highs, it’s doing so without the transport index and small cap index doing the same.

The small caps represent the health of the domestic economy. Considering the vast majority of their revenue is domestically centered, they provide a better gauge for the domestic economy. The transport sector also reflects economic health simply because when businesses are booming, they need to transport more goods for sales. Until these indexes join in the broad market with new highs, the current uptrend should be closely monitored.

The market climbs a wall of worry, and the current environment is no exception. You will always be able to find reasons to not invest until it is too late. I have a stop in place with every trade so I don’t have to worry about a crash.

My goal is to try to buy stocks near key supports with tight stops, or when they are breaking out. As stated on the forum, as well as the last market update, we bought the recent dip, and will continue to until the broad market breaks key supports.

In the meantime, I’m holding some cash for new opportunities, have stops on all my tech positions, am hedged with a few choice gold/silver plays as well as some cheap, long-dated puts on indebted companies. And, most importantly, I’m staying with the general trend, which is up. The key level to watch today in regards to the recent correction is SPX 3290. If this support breaks, we will likely see a retest of last week’s lows, and the levels I outlined in the last market update will be back on the table.

Telaria (TLRA)

Last year, small caps started to break out. We did published report on this opportunity early-on, showing that small caps are trending towards recessionary levels while large caps continued to make new highs. The thesis was that if we are not heading into a recession in 2020, then small caps have a large gap to fill in order to catch up. Even though small caps have not made new highs, they began to breakout of their range, trending towards new highs. It was based on this thesis that we added to our two small cap positions with Telaria being one of them, and since then we are up about 40%.

The structure of Telaria is a complex one, which can be analyzed from various angles. It is because of this that I focused exclusively on the 5-wave uptrend we are currently in. Since TLRA was acquired, the 55-day EMA has been strong support for the price (the red line).

If TLRA breaks the 55-day EMA, the levels to watch are the $8.50, $7.90, $7.15, $6.20. These areas are derived from the ratios on the right of the chart, which are price clusters that are taken from various Fibonacci ratios applied to the structure of TLRA. There are very tight clusters that will define the important levels to watch if TLRA breaks the 55-day EMA.

As of today, I am raising my stop to either $8.25 or the 200-day SMA, which ever gives first. This will give the first support region some room to breathe. If this stop is triggered, it will lock in about a 20% gain from our initial position, and we will look to re-enter down the road.

However, if Telaria can break out to new highs at $11.82, we could see it trade in the $13 before any sizable pullback. If this happens, our stops will be raised to compensate.

The Trade Desk (TTD)

We are long The Trade Desk, and have been since their last earnings report. The recent breakout to new highs, suggests that the current 3rd wave that we are in is not over, and the next level I’m targeting is around the $350-$375 area before we see a pullback. However, it’s worth noting that we haven’t fully cleared the $296 region, and until we do, the risk is that the 3rd wave is topping at current levels is still present.

The internal momentum is fading while price is going up, which is not preferable as a price breaks out to new highs. However, we like TTD for 2020, so on any pullback, we will be adding to our current position.

Zoom (ZM)

We have been covering Zoom weekly, mostly because the bullish setup offered a great low risk/high reward opportunity. Going long in the mid-low $60s with a stop just under the all-time low at $59.95 was the setup we were offered our premium readers twice.

This also lined up with the 1-2, i-ii bullish setup we talked about in the last few market updates. If this was valid, we targeted the $87 region for a wave-3 top, which is exactly what we got the day of the breakout. The following day we extended to the $92 region before correcting.

The volume spikes are encouraging, as well. We saw an influx of buyers at key resistance step in. The RSI is showing positive divergence, suggesting the current pullback will likely be shallow before completing its 5th wave push. The MACD is also well above the trendline. All of these internal signs are suggesting a healthy uptrend.

As long as Zoom holds the $75.75 region, the larger degree 3rd wave uptrend is in place. That would put us in internal 4th wave of the larger degree 3rd wave. If valid, this will likely test new highs before we get the larger degree wave 4th wave pullback.

Boingo (WIFI)

Boingo is one of my favorite setups today. We have, like with Zoom, a 1-2,I-ii setup in place. This also is showing up as a standard cup and handle pattern. If WIFI can break above $13.40-$13.50 region with heavy volume, we will likely see strong uptrend, much like we witnessed with Zoom. If this is valid, I’m targeting the $20-$21 region.

Further proof comes from the structure of the handles in the above chart. Notice the 3-wave move, where the final wave ended exactly at the 127.2% extension of the first wave. This is textbook Fibonacci trading, which lends the current bullish setup being valid. In summary, as long as $9.55 holds, which is a wide stop, I’m long WIFI at current prices.

Slack (WORK)

We recently sold out position in Slack around the $23.50 area this time around. It appears that Slack, yet again, is topping out within its very tight range, and will retest the $20-$19.50 region. After climbing nearly 20%, which falls in line with the symmetry we pointed out in the last 2 attempts to breakout, we can see negative divergence between the RSI and price.

Also, the MACD is rolling over at higher highs. All of these signs are suggesting that a breakout may not happen this attempt. We will look to go long again if Slack can clear the $24.30 region, or if it finds another bottom around $20. Eventually Slack will break down or break out, and based on how range bound it has been, this move should be a strong one.

Datadog (DDOG)

Datadog is another stock with limited price action that is providing a complicated and ambiguous structure. Right now, I am giving the uptrend the benefit of the doubt and will keep this count as my primary one unless DDOG breaks through the $39.60 region. Below this region, which is my current stop, and DDOG will likely retrace in a more bearish count.

So far, the internals are lining up with the price in a healthy uptrend. Also, the yellow region on the chart highlights a very tight cluster of important Fibonacci prices, which should act as strong support.

Roku (ROKU)

Roku has been trading within a descending wedge pattern since December of last year. These patterns more often than not, resolve themselves in the direction they are pointing. The MACD confirms this with the direction it is pointing in, as well.

The blue and red regions on the chart highlight recent drawdowns, and they coincide with the colored ratios on the right of the chart. Symmetry is a strong force in technical analysis, and we can usually target the length of prior drawdowns for important inflection points.

The red area region highlights a, roughly, 21% drawdown. If we measure the length of this drawdown from the top that followed it, that will take us to $120.83 (or the 100% extension).

We have been layering in at this level, which also coincides with the 200-day SMA. If we break through this level, the next support region will be between $112-$115. Below that, and we will reach the 100% extension of the drawdown highlighted in blue, which will take us sub-$100.

I’m expecting us to at least hit the $112-$115 region, which I will use to layer in more longs. Roku sub-$100 would be a gift, based on our future calculations on where this we see this company going within the connected TV ad space.

Pinterest (PINS)

After reporting stellar earnings, Pinterest is set to open tomorrow with heavy volume, through the above resistance cluster between $24.75-$25. There is a heavy confluence of important prices, coupled with the 38.6% retrace level, which also happens to coincide with PINS closing the gap.

Breaking through an important price resistance with force is exactly what we want to see. What we want to see next is – can PINS hold the $24.75-$25 region as support now that it has broken through? We will likely see a retest of this area, and that is where I will look to add to my current position.

Quick update from Beth: the 5G spreadsheet is coming out this upcoming week. We got a little delayed as we have twice as many companies we are tracking as we do for cloud. Should be out Mon-Wed of next week.

5 Soon-to-Be Trends in Artificial Intelligence And Deep Learning

Posted on by io-fund

This article was originally published on Forbes on Jan 31, 2020,08:06pm ESTForbes on Jan 31, 2020,08:06pm EST

Artificial intelligence is frequently discussed yet it’s too early to show real gains. AI’s major headwind is the cost of the investment, which will skew returns in the short-term. When the turnaround occurs, however, companies who are making the investment can expect to be rewarded disproportionately with a wide performance gap. In a recent report, McKinsey predicts AI leaders will see up to double the cash flow.

We can see some evidence of this in Alphabet’s revenue segment, Other Bets, which includes many AI projects with a loss of $3.35 billion in 2018. Of this, Deep Mind is responsible for $571 million in losses and owes its parent company $1.4 billion. The autonomous driving project, Waymo, had its valuation cut by 40% due to delays last September.  

We see other companies taking on massive and expensive AI projects, such as Baidu, Facebook, Tesla, Alibaba, Microsoft and Amazon. Except for Tesla, these companies are flush with cash and can afford the transition costs and capital expenditures required for artificial intelligence.

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Despite tech giants pouring cash into AI investments, most of the industries that stand to benefit are not in the tech industry, per se. This week, I attended Re-Work’s Deep Learning and AI Summit, where AI engineers and executives gathered for presentations and discussions about the projects they’re spearheading. 

Here are a few ways that AI is slated to make an impact sooner rather than later:

1. Training AI to Know What it Does Not Know

The next decade will determine if humans or machines are better are making a medical diagnosis as more health care companies turn to AI for accuracy. One problem that Curai is working on, is how to train a model to know when it doesn’t know, so a human can intervene to avoid the misclassification of unknown diseases. This approach is known as physician-in-the-loop.

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Daphe Koller of Insitro presents on Machine Learning and Drug Discovery at Re:Work Deep Learning and AI Summit

BETH KINDIG / RE:WORK DEEP LEARNING AND AI SUMMIT

2. Reducing Call Center Burden

United Health received 36 million calls in 2017 with 7.6 million calls transferred to a representative. The AI platform solution involves deep learning for a pre-check portal and claim queue, Automatic Speech Recognition (ASR) to translate audio to text, and Natural Language Processing (NLP) for unsupervised clustering, to generate new call variables and automate transfer calls.

3. Retail Giants making Big AI Investments

Retail had a large presence at the conference with Wal-Mart Labs, Proctor and Gamble and Target presenting on ways they plan to make the retail experience more optimized. Perhaps these companies are being more careful to embrace technology and AI after the last decade ushered in many competitors who stole critical turf (i.e. Amazon). 

Imagine a shopping experience where the carts are plentiful, cashiers are always open, and inventory is fully stocked. Rather than focus on replacing cashiers, Wal-Mart is more focused on inventory control. This is a different approach than competitor Amazon Go, designed to be cashier-less.  

4. AI Could Be the Answer to Restoring Privacy

Privacy has been in the headlines lately as regulators and social media users begin to question what is a fair exchange for a free service. While the battle is nearing two years since Cambridge Analytica, other companies are creating AI recommendation engines so powerful that little information is needed about the person making the choice; their preference is enough to determine what to recommend next.

Netflix is a leader here with its recommendation engine for content. Pinterest also employs a complex recommendation engine to surface the best image for an individual out of the billions of images on Pinterest’s platform. This is done through the process of query understanding to candidate generation to ranking to blending to the final result. In layman’s terms, this is how a discovery engine narrows down choices from billions to hundreds. 

5. Prepare to Be Blown Away by AI-Assistants

Over the next few years, we will become hands-free and will have better posture and fewer car accidents. Once AI-assistants are fully built out, our interaction with mobile devices may become the brunt of criticism from future generations. Many companies are working to own this space as the ecosystem lock-in and data produced by AI-assistants will be incredibly valuable – expect a full-fledged battle between Amazon, Google, Facebook and Apple in this space.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Disney+ Killing it on the App Store – Roku Downstream

Posted on by io-fund

Not only should Disney+ perform well this quarter, according to the data below, but keep in mind, Roku is downstream from Disney+ and will benefit from the company’s success.

When I was researching Facebook last week, something really stood out to me. Disney+ was ranking very high on both free apps and top-grossing apps on Android and iOS. On a few days, Disney+ beat out #1 sensation Tiktok, and on most days, the app beat out Instagram, Snapchat, YouTube, Facebook, Facebook Messenger, and Whatsapp.

This is unusual because the majority of the OTT media downloads don’t come from smartphone app stores. They come from an OTT player, like Roku, Amazon Fire, Google Chromecast or Apple TV.  

This deck was collected at the four-week mark (or December 12th). Apptopia told me in an email that Disney saw a total of 30 million downloads on the app store in November and December (so, basically another 8 million after the deck was published).

You’ll see in the deck that retention is lower than usual, but with the OTT volume, Disney should be able to have a decent report tomorrow. Retention is probably low due to viewers watching The Mandalorian and not returning to the app. Disney will also have to prove it can convert free subscribers to paying subscribers when promotions expire (i.e. the Verizon promotion is a year of free Disney+).

From my perspective, this is positive data for Disney and I’m excited to see the earnings report tomorrow. I fully expect Disney to permanently overtake Amazon Prime Now for the number two spot over the next year or so. Global will be a significant strength for Disney.

Theme parks in Hong Kong may affect earnings. The coronavirus may also affect theme park earnings and theater earnings in fiscal Q2 2020 ending in March. I think analysts will look at these as temporary setbacks and will be more focused on Disney+.

Disney also probably spent a decent chunk of change on advertising this quarter. This may affect their earnings, but I think any positive news on Disney+ will overshadow this. Roku will benefit from the ad spend. Also, look at page 8 in the deck– it shows the effects Disney+ has had on Roku downloads.

Here’s a note from Needham on the Disney-Roku relationship that I highlighted in my convictions update. 

Please note, the Disney+ information will be in MarketWatch tomorrow per an agreement with Apptopia. I will not be publishing the Roku download information  on page 8 of the deck and will keep that exclusive for premium subs.

Salesforce Stock: SaaS Juggernaut Must Evolve

Posted on by io-fund

This article was originally published on Forbes on Jan 27, 2020,10:00am ESTForbes on Jan 27, 2020,10:00am EST

Last month, Salesforce lowered its guidance on EPS from a Q4 consensus of $0.61 down to $0.54-$0.55. Although the company beat on revenue, the growth is slowing from 28% in FY 2020 to an estimated 23.5% in FY 2021 on estimates of $20.9 billion in annual revenue.

Slowing growth and lowered EPS guidance could become the new norm if the company does not diversify its software-as-a-service strategy to meet the on-premise needs of high-spending enterprise companies.

The question Salesforce must answer, especially in the aftermath of large acquisitions, is if the company can reinvent itself to capture more of the addressable market — or, will the company continue to enhance its current software-as-a-service (SaaS) and platform-as-a-service (PaaS) cloud offerings for future growth?

The latter may not be enough to stave off competitors as cloud software and platforms evolve to meet the needs of on-premise enterprises.

Cloud is Evolving, and Salesforce should too

Previously, Salesforce has demonstrated a singular focus on cloud. Similar to an over-developed muscle, this may become its weakness. According to the 2019 State of Servers survey by Spiceworks of more than 500 IT decision makers, 98% of enterprises run on-premise server hardware.

Market research firm IHS Markit reported “a growth phase” was coming for on-premise servers and hybrid strategies, with 151 North American organizations planning to double their physical servers in 2019. According to IHS, a good portion of on-premise data center capacity is going to productivity apps, collaboration tools and unified communications — which is Salesforce’s sweet spot.

Business intelligence shares many of the same functions as customer relationship management (CRM). As stated in the2019 State of Cloud Business Intelligence, small organizations of 100 employees or less are the most enthusiastic, perennial adopters and supporters of business intelligence.

Smaller companies being a main driver for cloud could be one reason we see a divergence between statistics on cloud software penetration and overall IT budgets. For instance, 83% of enterprise workloads will be in the cloud by 2020, 91% of businesses use the public cloud and 72% use a private one. However, only 30% of IT budgets were allocated to cloud computing in 2018.

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According to these studies, nearly half of enterprises are either using hybrid cloud computing or are using on-premise servers. Therefore, Salesforce may need to expand beyond cloud to capture the remainder of IT budgets.

Examples of industries that may never rely fully on the public cloud or private cloud (and will retain some data on-premise) include the government, energy companies, gaming companies with valuable IP, health care companies and pharmaceuticals, and many others who have sensitive information and are held back from sending data to a vendor.

The best SaaS and PaaS solutions for these companies can work across data no matter where it resides rather than forcing the data into a public or private cloud.

Salesforce’s Recent Acquisitions

Salesforce has been on an acquisition spree lately, yet two, in particular, stand out for the potential to diversify Salesforce’s overweight in SaaS.

Tableau

Tableau was acquired by Salesforce for a large price tag of $15.7 billion. The data visualization company helps non-technical people make sense of data. The company was founded in 2003, the same era as Salesforce, with a focus on desktop software, which seemed counterintuitive to the cloud hungry tech space of the early 2000s.

Tableau illustrates the importance of on-premise tools, as more than two-thirds of its 86,000 customer base are on-premise customers. Most certainly, this acquisition could help to diversify Salesforce to serve broader customer needs.

MuleSoft

MuleSoft supplies back-end data through an API network. API networks connect applications across the cloud/software-as-a-service, on-premise software and also legacy systems. Inherently, APIs are able to collect data as they connect enterprise applications, databases, and IT infrastructure.

Ideally, Salesforce makes the most of this acquisition by leveraging the on-premise software and legacy systems client base rather than forcing a cloud-only narrative.

Similar to Tableau, SalesForce stock dropped 5% when the news was announced in March of 2018. Thus far, MuleSoft has contributed $451M in revenue over the past year and $181M in revenue in the most recent quarter.

Salesforce Trading at High Forward PE Ratio

Over the past decade, Salesforce has been a 10-bagger, and continues to exceed 20% revenue growth over the past two years. Salesforce gains see-sawed for most of 2019 with little to no gains, yet the stock has risen nearly 20% over the past three weeks.

Current year revenue is expected to come in at $17 billion with forward guidance for next fiscal year at $20.9 billion. EPS is expected to grow from $2.90 in fiscal year 2020 to $3.11 in fiscal year 2021.

These valuations require some level of confidence in the company’s ability to grow despite a thriving cloud software market with many new software companies going public that are valued at over $10 billion. The current PE ratio is at 196 while the forward PE ratio is at 63, which is quite high for a company that has been public for fifteen years and has been profitable for over the past five years.

These PE ratios are 400 higher than Adobe and nearly 700% higher than Microsoft. Prior the lowered guidance and stock price rally in early 2019, Salesforce had a 200% higher PE ratio than Adobe.

IMAGE SOURCE: YCHARTS: ALTHOUGH SALESFORCE HAS HAD 2X HIGHER PE RATIO THAN MANY OF THE LARGER CLOUD COMPANIES, CRM NOW HAS A PE RATIO THAT IS 4X HIGHER THAN ADOBE AND OTHER PEERS.

Technical Analysis of Salesforce’s Stock Price

IMAGE SOURCE: KNOX RIDLEY

Salesforce (CRM), has broken out from the $162 price range, which has been a significant zone of resistance since 2018. This move is confirmed with the internal momentum indicators breaking out, as shown by the MACD and RSI. Further strength is shown by Salesforce being well above its 50-day and 200-day SMA, as well as above the more short-term 10-day EMA.

The stock needs to be further monitored to determine if this is the extent of the breakout, if this is a bull trap, or is this the real thing.

If CRM can close above $186, this will help solidify the thesis of a breakout and the stock will be looking up towards the $218-$220 price cluster as the next zone of resistance to watch. If Salesforce cannot hold the $151 support, then there could be a retesting of $135.