In this report we analyze: FFIV, NVDA, MRVL, WORK, BAND, DT, LVGO, LRCX
Please note the glossary of terms and techniques here and here.here and here.
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Last week, we sold our position in FFIV and shifted those funds into MRVL and NVDA. We are buying into strength, and the semiconductor sector had a large breakout signal last week. This will likely be the focus of our attention in the coming weeks.
Also, in this report, we take a look at three potential buy setups forming in DT, WORK and LRCX. We then analyze the uptrend in BAND and LVGO.
The technicals are not as strong as we’d like to see in a tech driven bull market.
We believe we are early to the fundamental story, as well, so will keep this stock on our radar.
Key Price LevelsKey Price Levels
Above $153.50 signals a large breakout to the upside.
Below $120 signals a breakdown of the recent uptrend off the March lows.
We closed our position in FFIV for two reasons: 1) we believe we are early to the fundamental thesis playing out – perhaps a year or more; 2) the technicals are not as strong as other names we track. Overall, other tech names are much more attractive to us right now.
Regarding the technicals, FFIV is struggling to make much progress above the 200-day SMA in black. Also, the Accumulation/Distribution line is still trending down, which signals that smart money is not yet buying into FFIV at current prices.
However, and most importantly, the relative strength indicator is the key tell. This indicator is comparing the price of FFIV to the price of the NASADQ 100. Notice how much stronger the NASDAQ is to FFIV. The same is true of the S&P 500. We simply aren’t seeing the kind of reaction I was hoping to see in such a heavy tech driven uptrend.
For these reasons, we decided to sell out position for a small gain and deploy our capital elsewhere. We will keep an eye on FFIV going forward. If price does break out in a meaningful way, we’ll look to get back in.
Marvell (MRVL)
SummarySummary
Marvell broke out of its base on strong internals.
Smart Money seems to be buying this semiconductor play and so are we.
A retest of the recent breakout zone around $36 would be a healthy move before the next leg up.
Key Price LevelsKey Price Levels
$36 support is key for the recent breakout to hold. Below here and we will have a false breakout.
Below $33 will signal a larger correction could play out.
We placed our stop at $32.60.
Last week, our system flashed a breakout in the semiconductor sector. This had us on the lookout for a similar move in a solid semi choice given infrastructure challenges right now. We added to MRVL just before it broke to the upside because the internals were suggesting this.
The selling volume was drying up as the price made a nice cup pattern up to the breakout price at $36.40. The Accumulation/Distribution line confirmed this move as did the MACD.
We could see a false breakout below $36. To be safe, we placed our stop below the base at $32.60.
Nvidia (NVDA)
SummarySummary
Like MRVL, Nvidia recently broke out from another base.
The MACD flipped to a buy signal.
Considering we are long-term investors and NVDA is one of our favorite stocks, we want to take every opportunity to own this position.
Key Price LevelsKey Price Levels
Below the $380 region signals a false breakout.
We placed our stop for this attempt below the recent base at $355.10.
Nvidia is without question the stock we are most excited about. Our aim is to make this our largest holding, and we began that process last week. There was a small base and breakout at the $380 region. We took this trade with a wider stop just under the base at $355.10.
Potential Buying Opportunities
Slack (WORK)
SummarySummary
Slack is holding the key support level at $31-$30.
There are three buy signals flashing, which support higher prices.
Key Price LevelsKey Price Levels
Staying above $31-$30 is crucial
Above $34.50 will signal a breakout.
Above $40 will signal a large breakout.
Slack is probably my favorite setup going into next week. Notice how the price has respected the $31-$30 region. This level is incredibly important for WORK to hold. Below here, and Slack will have to start over in building a breakout move.
However, for those looking to go long, WORK is providing us with one of my favorite setups – buying just above a key support and placing a stop underneath that support, with internals giving us positive buy signals.
Regarding the positive buy signals, there are currently three signaling within the internals. For one, the RSI is signaling a positive RSI reversal pattern. This signal typically appears in an uptrend, and tells us that the uptrend is not over. Since the March low, we are technically in an uptrend. Furthermore, the MFI is showing positive divergence while the Accumulation/Distribution line is making new highs.
The internals are strong and price is just above a key support. Going long at Friday’s closing prices and placing a stop just below the $30 region will put about 11% at risk.
Dynatrace (DT)
SummarySummary
DT has created a small base, which is setting up for a low risk buying opportunity.
A stop just below the base at $38.90 risks about 10% in case our timing is wrong.
The momentum seems to be diverging from price, but smart money is buying this stock.
Key Price LevelsKey Price Levels
Above $44-$45 signals a breakout of the recent base.
Below $37.90 and the base fails.
$34.50 is the line in the sand for the uptrend.
The above count shown in the chart is the most probable scenario that DT is playing out. If so, it is quite bullish and I believe it is giving us an opportunity to buy more shares. Notice how the price on the daily chart has created a base just below two key Fibonacci levels – around the $43.50-$44.50 region. A break above these levels will signal that the 3rd wave is not over, which is providing us a reasonable risk/reward setup.
This is backed up by the Accumulation/Distribution line making new highs before price. This is a sign that smart money is buying into DT at current prices, and is almost always a great leading indicator.
The only points of concern are the diverging momentum indicators. The MACD is trending slightly down, which is the opposite direction of price. I’m not too concerned about this, because it is not a large divergence. However, we do see a concerning divergence in the MFI. Because the MFI factors in volume, it also can act as a leading indicator.
When the internal signals I use give mixed signals, I tend to focus on price. For those looking to go long, if we get a break out, I’d place a stop at $37.90. If DT hits this level, which is just below the base it created, it could be the beginning of a larger correction. However, a breakout helps confirm the bullish count outlined on the chart.
Lam Research (LRCX)
Summary:Summary:
Lam Research is close to confirming a large breakout.
If the price does break out to new highs at $344.50, we will look to add to our current position.
However, I’m expecting a pullback first, considering the patterns we are seeing within the internals of the stock.
Key Price Levels:Key Price Levels:
$344.50 will be a breakout to new highs.
The below support to monitor is $309.
LRCX has been tracking a trend channel since the March lows. Today, LRCX is sandwiched between the 8-day EMA in green and the $344.50 breakout price to new highs, which also coincides with the upper region of the trend channel. We are at a tight inflection point where price will break out, signaling a buy, or we will get a correction before this breakout occurs.
There are notable divergences within the internals. The CCI is making lower highs while price makes higher highs. Also, the RSI cannot breakout above the 70 line as price keeps rising.
If we look at our volume indicators, the buy volume is decreasing as prices rise, which is telling us that buyers are drying up at current prices. Also, the Accumulation/Distribution line is signaling that smart money has moved on from LRCX at current prices, based on the participation at the February highs.
We love LRCX, and expect big things from this semi in the future. However, based on what the internals are telling us, I’d expect LRCX to pullback, creating a nice cup and handle pattern before giving a clear buy signal above new highs. However, if we do get a clear breakout above $344.50, we will happily take that signal to buy, as well.
Analyzing the Trends
Bandwidth (BAND)
Summary:Summary:
There are numerous signals flashing warning signs for Bandwidth right now.
The one bullish signal is how price has broken above the upper trend channel.
Until we see the internals reset or price breakout with force, I will be hesitant to add.
Key Price Levels:Key Price Levels:
Resistance levels to track: $145, $167
Key support that must hold for a continued uptrend is $124
We initiated our first entry with Bandwidth last month. Since then it has been in a steady climb in the right direction, returning a little over 10%. However, it’s been doing so on weakening internals, which gives me pause to add until we see a pullback.
First off, BAND is tracking a clear trend channel in gray. Notice how succinctly the price has tracked this channel. After bouncing along the upper range of this channel, BAND has briefly broken out.
A breakout of a trend channel can go two ways: 1) it can be a brief spill over just before a notable correction. Or, like Docusign, it can move parabolically above the channel, making a new trend channel to track. I’m leaning towards the former simply because of the internals flashing weakness.
For one, the Accumulation/Distribution line is not making new highs with Bandwidth. In fact, it is trending down. Volume patterns along with the MACD and MFI are providing strong negative divergence signals. This suggests that the price at current levels is on weak ground.
Anything is possible in this market, and if we see, for example, BAND gap up from current levels, resetting the internals, we will buy into that strength. But, until this signal, or one similar in strength occurs, I’d look to lower levels to either add.
Livongo (LVGO)
SummarySummary
We are up 40% in one week on LVGO.
We are taking the stops off this position and looking to build.
There are several warning signs that are giving me pause to add more right now.
Key Price LevelsKey Price Levels
$110-$111 is the resistance level that is bottling up LVGO right now.
A break above here and we will look for the $120 then $131 region for the next resistance zones.
The recent gap between $85.50-$82.30 will be the key support for a continued uptrend.
Last week, Livongo was flashing a number of buy signals. We used these signals to go long just before LVGO jumped 40% to the upside. We are now using this cost basis to build a long-term position. This is a stock that we want own going forward and we will use our recent entry to build this position. That means we are removing the stops on LVGO, and will look to build into strength or on the next pullback.
This week, I am not seeing an entry worth the risk. In fact, there are a number of warning signs that we could be close to peaking. For one, notice the three gaps within the uptrend off the lows. In technical analysis, we regularly see patterns occur in 3’s. Regarding Gaps, there are three types of gaps: the breakaway gap, which happens at the beginning of the uptrend, the runaway gap, which happens around the middle of the move, and the exhaustion gap, which happens around the end of the move.
We definitely have a breakaway gap and a runaway gap with LVGO. The question remains, did we just see the exhaustion gap? I never bet against strength, but seeing these three gaps, symmetrically shown on the chart does give me pause.
Secondly, LVGO is clearly in a 3rd wave, hence the strength of the move, on peak technical strength with very few places for entry. This is the key sentiment of a 3rd wave move – and it’s what we always want to participate in. Another key feature of 3rd waves is that they typically peak between the 138.2 – 176.4% extension of wave 1.
Today, LVGO has stretched to the 238.2%, which is not uncommon in high flying tech stocks, but it is worth noting how stretched it is. If price does break above this extension at $111, the above resistance to note above is first the $120 region and then the $131 region.
However, price has struggled for two days to break above this extension at $111. If we do get a pullback at this point, the $82-$83 region will be the crucial line in the sand for a continued uptrend. Below this level will signal that we are in a 4th wave, which we will use to load up on LVGO.
Over the past month or so, we’ve been building an index for our coverage. We realize there is a lot of research on this site and also quite a few trades. Fundamental analysis and all entries/exits are indexed by stock ticker and company name here. The index is fairly exhaustive and we refresh it every two weeks.
Quick Note on Apple’s IDFA:
Before I go into July convictions, I want to mention some news from Apple this month that is quite important for all ad-tech investors to know. The “Identifier for Advertisers” known as IDFA was changed in the recent iOS release to where it will now be more difficult to target and track users. This is much big news than the ad boycotts.
The moat that Google and Facebook have enjoyed comes from having first-party relationships with nearly every user who has a smartphone. This is called first-party data and is a loophole used to collect data even after a user is on another property where there is no relationship. For instance, Facebook uses first-party data to power ads on streaming service Hulu, but at this point, the first-party relationship does not exist with Facebook’s social network once someone is on Hulu, and this is done without explicit consent (by both Facebook and Hulu). Easy-to-navigate opt-ins are not offered, as it’s unlikely Hulu viewers, who pay for the app, would want Facebook accessing their viewing data if they had to opt-in.
Another snippet here …
As of now, Apple has no plans to remove the IDFA, although for a company that insists it is a protector of privacy, at the very least, there should be better opt-ins. The changes made with ITP on the browser may not have had a big effect. However, the implications of Apple restricting IDFAs on iOS becomes more serious with the iPhone having a global penetration of up to 20% of smartphone sales.
Even companies that have fancier IDs, such as Trade Desk with its Unified ID, relies on IDFA to some extent, and any changes to IDFA would limit the ability to collect and stitch together fragments about the user.
That said, perhaps Apple should have addressed those issues before hyping its privacy efforts. As of now, Apple is enabling a lot of tracking with the IDFA, and this may not be an appropriate compromise for attribution as users are completely unaware their activity can be tracked across the entire device.
Furthermore, users don’t have any method for approving the software development kits, from Facebook’s Audience Network or Google’s AdMob.
I also covered Apple’s Intelligent Tracking Prevention for the Safari browser in the Google PDF here.
This is not good news for Google and Facebook. How this affects The Trade Desk is something I will make sure to look into. When first predicting this would happen, it seemed The Trade Desk would also be affected but now that this did happen, I need to review the iOS 14 changes before making any hard and fast conclusions. It would be inconsistent for Apple to allow TTD’s unique identifier long-term as the goal is to get rid of these tracking IDs without explicit consent.
There are also some apps this could potentially affect. I need to look into Spotify, for instance, and any others that rely on advertising. Basically, advertisers may not want to pay as much if there’s less information on who they are targeting.
I’ve covered Facebook’s unauthorized tracking methods for a few years including around the Facebook’s Cambridge Analytica fall-out and followed up a few times here and here.
July Update: Reiterating Two Trends
If you are newer to the site and haven’t read our May Convictions Update, you can find this blog here as it expands on a few more stocks on our coverage list and trends we are following. Quite a bit from this update is still pertinent.you can find this blog here as it expands on a few more stocks on our coverage list and trends we are following. Quite a bit from this update is still pertinent.
After the fantastic run-up we saw off March lows, even the most opportunistic tech growth investors are bracing for a pull back. We may get one or we could march onward to new highs. My goal is not to make predictions but to be prepared for all scenarios.
Despite cloud software being a hot category, it helps to break this down as we move into the second half of the year with elevated valuation multiples, which are at a record median of 12.9 EV/Forward Revenue (typically the median SaaS is around 10 EV/Forward Revenue, at most). Shopify and the top 10 are averaging 35.3.
Below, I shed some light on two major trends that I think still have some runway left (regardless of bear or bull market). I’m choosing one trend in the high valuation category and another more varied trend that should gather strength as we go along this year.
The first trend is productivity and also cloud-native communications. I did cover this in the May update but the mark of a good thesis is that it shouldn’t change very often.
This is more of an offensive group with rapid top-line growth. I also discuss infrastructure stocks across the board (not only cloud) and some of the strategies around those recommendations as a defense for longer-term horizons.
When I say offense, what I mean is that I think it’s great to continue advancing in trends where there is momentum but it’s also good to look at trends that aren’t in play yet as a means of generating more gains on a long-term portfolio.
Productivity or Cloud Communications: Offense/Momentum
When you think of productivity tools, you should think of eliminating the need to endlessly look for an email you can’t find, engage on long threads with many people CC’d in nested messages, when you have to dig up contact information, switch between apps to reference conversations, or when teams are attempting to collaborate but things get lost, forgotten, or become disorganized and siloed.
There is such a clear need for this on a cost-benefit level, that this category is leading all of cloud right now including cloud infrastructure on spending. This is because the products are cheap compared to what productivity tools and cloud communications can save in regards to time and efficiency.
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.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.
Meanwhile, the media and anyone who missed out on this trend will have you believe the growth is random or temporary. There are obvious stocks such as Zoom Video and Slack that fall into this category. I’ve also covered Microsoft Teams although obviously not a pure play. However, when I feel strongly about a trend, then I will expand to include more stocks within that category.
This prompted us to include Twilio (PDF from December but reiterating this) and Bandwidth (new coverage in June). Twilio has underlying financial strength that institutions can get comfortable with. The company also has a strong moat evidenced by its high retention rate and revenue growth (that goes beyond the 10% accretive revenue from SendGrid that rebounded from 38% to 58% from Twilio alone).
Twilio’s moat is high switching costs as to switch from Twilio, you might have to port numbers, negotiate contracts with a new carrier, determine if the carrier covers all of the countries needed for your applications and whether the call quality and sending SMS is reliable. Uber might have the capability to do this in-house and/or to source many different vendors in different regions very few applications will have this size of team.
Regarding Bandwidth, if the company can beat and raise on the next earnings report, then I think we will see quite a bit of momentum here due to the company being perfectly situated across all three mega players in cloud native communications at scale. You can read this PDF here. Not only does Bandwidth serve every competitor, but all three (Microsoft, Zoom and Google) companies are capable of competing with telcos for B2B voice.
Notably, Bandwidth requires the video conferencing trend to extend to audio calls, which I believe it will. When I drive by the empty office buildings in San Francisco including high rises and SMB shops, like attorneys or dental offices, I wonder why any of them would have a traditional phone bill rather than a cloud-native phone system. There is really no need for communications equipment or telecommunications services. Cloud voice is cheaper, can be scaled depending on immediate needs, and can be built into collaboration platforms or used as a stand-alone.
On that note, I also covered Teladoc recently and this was put on the top of the list for entry. When I look at the momentum list, this one stands out to me.
Telehealth is the trend that shows the most evidence of overnight, digital transformation ushered forth from covid-19. According to a new report from S&P Global, telehealth patient volume has increased 3,000 to 4,000 percent during the early months of the Covid-19 outbreak.
In times of indiscriminate buying and indiscriminate selling, things can get noisy. As we continue to focus our efforts on breakouts that become buy and holds, we believe this is a trend that will outperform and are eying an entry despite a run-up in some names.
According to the report from S&P Global, providers that rarely employ remote care options have switched over to telehealth services. Facilities such as NYU Langone Health saw 7,000 video visits per day or about 100,000 video visits in April compared to 300 visits per month pre-pandemic.
The company also has a large and immediate addressable market with competitors attempting to quickly pivot. I’m actually encouraged by this because venture capitalists are great at identifying trends with long runways (i.e. I am not discouraged by the competition here at all). I think Teladoc has too much of a first mover advantage and there is a need for a company with credibility due to the urgency of the situation.
Livongo makes sense too, especially for growth around the behavioral health and inroads to remote monitoring. Similar to the above, we have a company moving into a new market and innovating on new territory.
Regarding Slack, I covered this in-depth on the May Convictions blog and my thoughts on this haven’t changed. (Getting a lot of questions on Slack). Please read that update for more information on why the lack of momentum right now doesn’t bother me long-term.
Infrastructure: Defense/Diversification
The one area where I am very bullish is infrastructure and the need for better connectivity. There are many ways to look at this microtrend but the way I’ve chosen to do this is all encompassing. Whether it’s hyperscalers, edge computing, virtualizing networks, lower latency/faster application delivery, increased internet speeds for the end user or if you choose to think of this in buzzier words like “5G” and “Artificial Intelligence” … all of the above is very interesting to me right now from a longevity perspective (i.e. not sure what the July returns will be but looking for returns next year or next five years).
There are two reasons why this is important right now. The first reason is that we have maxed out our capacity and what we are capable of with 4G and our current wireless infrastructure. In July, I will dedicate more time to covering edge computing. This is a topic where I began holding interviews in Q1 2019 with companies like Mutable and Schneider Electric – Mutable is the AirBnB for hyperscalers and Schneider is tackling the power and cooling issues edge computing will need to overcome with micro data centers.
In a nutshell, the purpose of edge computing is to bring the power of cloud computing closer to the device. This goes beyond delivering content faster or small edge applications. This is about opening up new use cases with an overhaul to the current paradigm to bring data and compute closer. No company today is truly doing edge computing the way this will be done to open up new use cases in the next three to five years. I plan to cover this in-depth both editorially and also for my premium readers, as well – probably mid-to-late July.
The second reason infrastructure is important is that we will lag China if we are not careful about upgrading our infrastructure for new use cases; most especially artificial intelligence. For about a decade now, leaders at security conferences have been discussing why wars will no longer be fought on the ground, rather they would be fought in cyberspace. Improving our infrastructure is not simply a convenience for streaming faster Netflix movies, rather it’s a matter of the United States remaining a world super power. Regardless of political opinions, China is gaining strength through infrastructure. This is what the Huawei ban is about.
Therefore, we should see serious pressure from a wide range of demand: the government for defense purposes, enterprises who want to stay competitive, SMBs who want to scale, startups who want to innovate including a new class of graduates who develop AI applications, and the end user who will consume a wide range of products and solutions that come from the new AI and 5G hype cycle.
What lies beyond the bigger infrastructure players (Amazon, Google, Microsoft) is a big mess of hardware companies, semiconductors, price wars, high capex, exposure to trade wars and geopolitical tensions and earnings that can often miss the mark. No wonder everyone likes cloud software!
With that said, it’s a bit contrarian to recommend companies with 7% or 10% year-over-year revenue growth to tech investors who are accustomed to a minimum of 40% and upwards to 100% revenue growth for their top performers. I explain below why my counter-trend analysis on individual stocks may be bold in this momentum-frenzy environment but important to consider.
Keep in mind that when an infrastructure company does well, it can become a 10-bagger with many restful nights. These typically aren’t momentum stocks and that has some major benefits. You can think of cloud software as hitting singles and doubles that keep the game going but a great infrastructure stock is a grand slam that creates a lasting and rewarding impact.
For example, I can rest easy with my Nvidia and Microsoft calls from 2018 knowing these companies will stand the test of time. In fact, I believe they will both be among the world’s most valuable companies in ten years from now. The switching costs are so high and moat so defensible that there’s little question or debate as to where the returns will go (i.e. up and to the right). I covered a similar concept in my recent Microsoft article that pointed out how hundreds of cloud software stocks funnel into cloud infrastructure (it’s like the neck of a funnel).
Point being, imagine if we can pick the right infrastructure stocks this year with 5G, artificial intelligence and cloud computing applications built on these companies over the next decade? That’s what I’m doing when I cover some of the stocks below and what I’m doing when I cover stocks that show very little revenue growth now but have a serious shot at being a foundational piece to the new paradigm.
Keep in mind that out of ten infrastructure stocks, maybe I will nail five and the other five will need to be considered part of the process. This stuff isn’t obvious basically and it’s complicated. If you want a higher success rate, then momentum stocks and more temporary gains are the only way to go. This can be accessed through my most recent cloud update: “Top Cloud Stocks for H2 2020.”
Marvell:
Marvell is at the center of many important trends with a $23 billion market cap. One thing to keep your eye on is Nokia and Samsung ramping up to provide telecom infrastructure where Huawei has been banned.
Here’s a recent press release from Nokia and its partnership with Marvell. The new partnership will provide customized chips based on processor designs by ARM. The new chipsets will be placed in Nokia’s 5G radio access technology. These chipsets will replace the field programmable gate arrays (FPGAs) that Nokia chose for its products and turned out to be very expensive. According to Barclays, Nokia was also affected by Intel’s delay on the 10-nanometer (which we covered on the AMD report on this site – see below). This led to the nasty $6 billion post-earnings plunge Nokia saw in the its market cap.
Nokia’s products based on its system-on-a-chip technology made up 10% of shipments in 2019 and are expected to grow to 35% by the end of 2020. By 2021, Nokia’s SoC and infrastructure processors, currently branded as ReefShark, is expected to reach 70%.
In addition to Nokia, I outlined that Samsung could also grow quite rapidly from the fallout with Huawei and included the following chart.
Samsung looks tiny here but that doesn’t tell the full story as Samsung reportedly took first position in global sales in the first part of 2019 with 36% sales compared to Huawei’s 28% and Nokia’s 14%. Also, Huawei and Samsung are the only end-to-end providers of 5G infrastructure.
Marvell supplies components for 5G base stations and both Nokia and Samsung are customers. In turn, Samsung works with Verizon, AT&T, SK Telecom, and KT. Samsung has been able to capture business that Huawei has lost, and the level of this future growth is an important catalyst.
According to Gary Mobley of Wells Fargo, Marvell can generate $600 million in incremental revenue from 5G base station customers compared to the $2.9 billion over the past four quarters (20%) of revenue.
Marvell management confirmed they expect $600 million per year from 5G revenue on the last earnings call. The speed of this growth depends on Samsung and Nokia’s market share.
Marvell worked with Samsung on 4G infrastructure. These two companies are now collaborating on delivering compute power for massive MIMO beamforming. You can access more information on this in the 5G Part 1 PDF.
“Massive Multiple Input and Multiple Output (MIMO) sends the data through multiple data streams called layers, which increases parallelism and throughput. MIMO helps avoid lost signals with multipathing, which allows the base station to send multiple copies of the same signal for increased redundancy. Note: The antenna array is one fundamental change to 5G infrastructure. The initial 5G rollout will use existing cell towers, however, newer, dedicated 5G network infrastructures will require many more antennas than used in previous generations.
Beamforming: Rather than broadcast all of the signals in all directions, telecommunications beamform the signal towards the receiver. This helps to minimize interference and increase the data rate. Wi-Fi routers employ beamforming now, and this will become an essential component for 5G. The FD-MIMO uses both horizontal (Azimuth) and vertical beamforming (Elevation).”
Intel plans to also extend from the core through access to the edge to compete with Marvell, yet Marvell is more experienced in the access network. According to this analyst from Moor Insights and Strategy, the decision between the x86-based SoC from Intel and the Arm-based SoC from Marvell will “last for multiple generations” due to 5G being more software based and written for one or the other.
In my opinion, the reward for owning Marvell is taking a calculated chance the company locks up the 5G access network with Arm-based SoC. To me, there is enough evidence this can happen and is well worth the risk – especially as Nokia has already experienced a setback from Intel.
AMD:
AMD has accomplished a feat of innovation and progress against the 800-lb gorilla, Intel. This company is exhilarating by crushing the competitor on performance and price (in my little world, it’s exhilarating, anyways!). Here’s what I said in the AMD PDF Report:
“Intel is playing catch-up with a comparable 10nm release planned for Q2 or Q2 2020. The Ice Lake Xeon Scalable Processor with 38 and 48-core options could be pushed into 2021, according to a Wells Fargo note. By the time Intel catches up to AMD’s August 2019 release of the 7nm Radeon and Rome processors, AMD will likely be releasing its next feature line codenamed Milan.
It’s important to note that Intel’s upcoming 10nm can be comparable to a 7nm chip, as stated by Taiwan Semiconductor as the naming of chips is becoming less important over time. One area where Intel’s chips outperform is they can draw up to 300 watts compared to AMD’s maximum of 225 watts.
However, marketing names aside, AMD has blatantly stated the second-generation EPYC server processors had 1.8 to 2 times the performance advantage of Intel’s Xeon processor line and is half the cost in some instances. Companies like Hewlett-Packard, Google and Twitter were part of this launch.”
There are a few reasons AMD could become the “it” stock again. The first is the launch of the 7 nm EPYC CPUs which are expected to hit in August. Mercury Research believes AMD can grow market share from the low single digits to the low teens. Next Platform thinks AMD could hit 20 percent of market by 2021:
An article in Next Platform frames AMD’s forward data center revenue well: ‘The question is can [AMD] double it again in 2021 and get what would be its rightful share of datacenter CPU capacity, which should be somewhere around 20 percent of the pie … We think that given the desire for competitive pricing in the datacenter and the issues that Intel has had in getting its 10 nanometer “Ice Lake” processors in the field, there is a very good chance for AMD to have that 20 percent share in 2021.’
AMD’s forward revenue guidance for 2020 is very strong at $8.68 billion under the assumption the data center will be about $1 billion. In the financial analyst day that took place earlier this year, AMD provided projections of $14 billion in annual revenue by 2023 based on 20% CAGR (slide 11). The company placed the projection for data center revenue at 30% of total sales by 2023 (slide 12). Compare this to $6.73 billion in revenue for 2019.
This summarizes my thoughts:
To recap, I like cloud infrastructure and chips powering cloud IaaS for the current public cloud market (now), the near-term growth in the hybrid market (next 1-2 years) and the AI market (3-5 years). To me, this is well diversified across budgets and enterprise needs.
F5 Networks:
The analysis on F5 Networks hinges on the company expanding beyond the partnership with Rakuten Mobile to virtualize radio access for reduced capex. Here’s what the PDF said about this partnership:
“Rakuten is Japan’s biggest mobile virtual network operator (MVNO). In early 2019, the company announced plans to build a network in 12 months without significant capex. The reduced capex is made possible through a cloud- native network.
The goal is to shift towards Network Functions Virtualization (NFV) technology, which uses the principles of cloud computing to create service delivery platforms “with greater agility and customization.” The end result is a Radio Access that is virtualized and running as a virtual network function on a private cloud. You can read more here and the press release regarding Rakuten’s partnership with F5 here.more here and the press release regarding Rakuten’s partnership with F5 here.
What F5 proposes is to use a mix of public and private cloud (i.e. hybrid) to optimize networks through the concept of network slicing. Network slicing is the practice of running multiple networks as virtual independent operations on common infrastructure.
The main thing to understand here is that our current infrastructure does not allow for computational-intensive tasks and workloads to deploy with low latency. The solution is network slicing, which is a way of using multiple operators and dedicated or shared resources to deliver processing power, storage and bandwidth.
This will help 5G networks serve customers with different needs ranging from automotive to manufacturing.
Connected vehicles
Robotics automation
Enhanced security can occur with authentication at the network slicing level
IoT can have different slices for different IoT users
Live broadcasts including AR/VR – or even just cloud gaming
Network slicing can help continuity in a fashion similar to international roaming. Rakuten is getting a head start by using a software-defined cloud network to decrease capex and scale quickly. This moves away from high-capex hardware infrastructure to more of a cloud computing architecture. F5 is essentially working at the telco level to help further the footprint for 5G service.
This month, according to F5’s more recent announcement, Rakuten mobile was increasing the partnership to include application security services.
The takeaway is that what Rakuten and F5 are doing is quite ambitious. If they nail this, expect others to follow. This sums up F5 well from the PDF:
However, as companies seek to scale application deployment, there are infrastructure-level issues that cloud software companies will struggle to solve. F5’s experience with hardware and a pivot towards software could be a winning combination. This goes beyond end-to-end application infrastructure, where the company already has a solid reputation (i.e. Datadog and IBM’s RedHat both favor F5 as a partner here). F5 is also doing a good job of staying in front of the trends of microservices and the Kubernetes platform.
Lam Research:
Lam Research is a cash flow machine and has serious top-line growth potential, as well. The market right now is driven by momentum but when bottom lines start to matter again, Lam Research will make for excellent diversification in high growth portfolios.
“Applied Materials reported $14.6 billion in revenue last year yet similar cash reserves of $3 billion as Lam Research with $9.6 billion revenue. The 5-year free cash flow growth rate for Lam Research is 38.12% compared to Applied Materials at 12.47%. The 5-year free cash flow growth rate for KLA is 7.52%. This is a significant spread on free cash flow and the comparables.”
And regarding top line growth:
According to the recent investors day presentation, the company expects revenue to reach $14.5 billion to $15.5 billion for 2023/2024. This assumes a water fab equipment market assumption of $60 billion up from a market of $46 to $47 billion in the current year. If the market is more bullish by this time frame, the addressable market estimate for WFE is $70 billion with Lam Research’s revenue at $17 billion and EPS of $36.
In 2019, Lam outperformed water fab equipment growth (WFE) 2:1 with CAGR of 16%.
The markets that Lam serves are set to rebound:
“According to IC Insights, NAND Flash sales declined 27% in 2019 and will rebound at 19% in 2020. DRAM sales declined 37% in 2019 and will rebound 12% in 2020.”
Future catalysts for Lam include the Sense.i platform that produces a 50% improvement in etch output density. Upgrades to 3D NAND have been an ongoing catalyst.
Lam’s moat comes from the lead the company has with service contracts and customer collaboration. Lam’s customers include Micron, Samsung, SK Hynix, Toshiba and TSMC.
Datadog and Dynatrace:
Although Datadog and Dyntrace are lumped in with cloud software right now, I view their revenue as more resilient as it’s tied to infrastructure monitoring. These are companies I reiterated in April in two updates that I was keen on them for the solid trend of cloud IaaS.
In addition to the productivity and cloud communications trend above, these two stand out from the H2 Cloud Stocks momentum list as they fall into the infrastructure trend, as well.
Inseego creates more connectivity between the device and the tower. The fixed wireless access market is expected to grow 98% CAGR between 2019 and 2026. That growth is eye-popping. We originally covered Inseego for 5G but the coronavirus and stay-at-home have ignited the company for 4G uses. About two weeks ago, we wrote at the top of the market update that Inseego will do well if stay-at-home ordinances are implemented again. I
“The HEROES Act was passed by the House and the bill is now moving towards the Senate, where the $3 trillion may not pass. Regardless, a bipartisan provision in the bill is the “Emergency Connectivity Fund” with $1.5 billion going towards the funding for “Wi-fi hotspots, other equipment, connected devices, and advanced telecommunications and information services to schools and libraries.” There’s another $4 billion to be allocated to emergency broadband service.”
The takeaway is that Inseego should be a nice hedge if states start to implement stay-at-home orders again. Will that lead to a bear or bull market? I’m not sure but Inseego should do well either way.
Atomera and Boingo:
These companies are high risk-high reward as they are dependent on partnerships. Atomera is very volatile as it’s based on Phase 4 contracts. This is an all-or-nothing situation with a decent management team trying to solve engineering challenges for enhancing transistor capabilities and reducing chip size. The Investors Presentation in March stated the company is engaged with 50% of the world’s top semiconductor market.
Management stated on the recent earnings call that the Phase 4 deals could be delayed. This is one to watch. High risk/reward would be entering prior to Phase 4. Lower risk/reward would be waiting for a Phase 4 deal. I favor the second scenario because if the team can make this happen, then there will be a lot of runway left for the stock.
Boingo defies financial analysis and relies entirely on product. Essentially, Boingo solves the issue of indoor connectivity for 5G for arenas and large spaces. Boingo’s main competitor was Huawei, who admittedly had a better product but at the cost of security concerns. Now that Huawei is out of the picture, Boingo becomes an even more obvious choice for Verizon, AT&T and T-Mobile. The risk here is if the ordinances against big group gatherings from the coronavirus has shelved this concern (i.e. arenas are closed for now).
On that note, Qualcomm can charge more for 5G chips. Analysts estimate 5G smartphones will offer Qualcomm the opportunity to sell 50% more dollar chip content per device versus the prior 4G generation, due to the increasing complexity and higher pricing. Dollar chip content refers to the dollar value of chips that a device holds. (source: Barrons).50% more dollar chip content per device versus the prior 4G generation, due to the increasing complexity and higher pricing. Dollar chip content refers to the dollar value of chips that a device holds. (source: Barrons).
There are debates over how significant 5G will be for consumers and if they’re prepared to pay for upgraded smartphones. Regardless, Qualcomm is well-diversified across 5G modem chips, 5G New Radio (NR) mmWave private networks, XR devices for AR and VR, and cellular vehicle-to-everything (C-V2X) for autonomous driving.
Micron:
We’ve covered Micron on this site. The company had a nice earnings beat this week with strong guidance. The company forecast adjusted fiscal fourth-quarter earnings of $0.95 to $1.15 EPS on revenue of $5.75 to $6.25 billion. Analysts were expecting earnings of $0.79 EPS on $5.46 billion revenue in the upcoming quarter.
In the current quarter, the company beat on revenue and missed on EPS. Revenue came in at $5.44 billion with EPS of $0.71 EPS compared to analyst expectations of $5.27 billion in revenue and EPS of $0.75.
My main hesitation with Micron is that the company is third behind Samsung and SK Hynix on NAND/DRAM. With that said, the company is priced better when looking at PE ratios and EV/sales compared to Lam Research.
As most of you know, I’ve covered Roku very (very) extensively. We are early to this trend and the market is confused by this. I had said on a previous occasion the stock could become a 10-bagger. You have to think very long-term as Roku does advertising-on-demand (AVOD). The market is confused because Netflix does SVOD (subscription video-on-demand) which has been around for 10-15 years. AVOD has been around for 2-3 years.
Here is a message I recently wrote on Roku explaining some of the more recent questions:
The reason I mention Pay TV ad dollars is because the market mistakenly thinks OTT is very mature bc Netflix has been around awhile. The AVOD market is quite nascent. Rather than look at cord cutters, I am looking at the migration of ad dollars to judge where we are in the cycle (i.e. very early).
My understanding is Roku is covering all angles from the OS to the app channel to the demand-side ad platform. It’ll be tough to outsmart Roku’s management from a strategy perspective. If Google just throws a lot of weight into this (and cash) then I am okay with Roku being number two due to the size of the opportunity as a pure play.
Regarding global, Roku has a really solid OS for very cheap. They put TCL on the map not the other way around by providing TCL with a super solid connected TV operating system. I don’t think Roku needs one manufacturer that badly.
Globally, there are lots of cheap television manufacturers that should view Roku as an asset to boost sales.
On the topic of Netflix, I think this company could become very strong through the coronavirus situation at a time when Disney is relatively weak. If you have questions on Netflix, feel free to ping me on the forum under the stock category.
If you’re new to the site, check out Chainlink for blockchain. Might be trading a bit high right now but blockchain smart contracts are very interesting and a trend we are very early to cover.
Thanks everyone! Really appreciate the readership and your support for this website.
About a week ago, Dan Shvartsman from Seeking Alpha interviewed Knox Ridley and I about the Zoom call we made last Fall, the trade made In January in the low-$60s, and the subsequent trades made in March in the low $100s and mid-$100s on our premium site. We discuss whether the company’s valuation matters now, and how our research site determines if we should hold on or add to the position amidst the rally.
We also discuss the hard questions about Zoom, including the security issues the company faced in April and why removing friction from video conferencing is what led to my high conviction prior to the coronavirus.
The interview touches on the cloud software market as a whole, where I discuss why I’m cautious on Fastly for its edge computing product despite the stock price being neck-to-neck with Zoom Video. I also expand on my strategy for analyzing tech stocks, including why I lead with product first, as well as understanding early adopters and user behavior.
Knox explains his technical strategy regarding Zoom and the importance of letting your winners run. He also discusses other topics, including the effects of the coronavirus, the cloud sector, and also touches on Datadog.
Knox’s strategy is to open trades on breakouts, while maintaining a very tight stop loss. He sets up a 5% to 10% risk stop loss, but does not put trailing stop losses on winning stocks.
