Month: September 2020

Market Report: September 27th, 2020

Posted on by io-fund

In this report we analyze: Roku, Bandwidth, Marvell, Nvidia

Please note the glossary of terms and techniques here and herehere and here

You can access our portfolio here. You can also track in real time our Buyshere. You can also track in real time our Buys/SellsSells/Portfolio Activity in the forum.Portfolio Activity in the forum.

If you want to track us in real time, we recommend that you set up alerts to these 3 topics “Portfolio Activity”, “Buys,” and “Sells” which can be done by clicking on their icon/image, or search for their name in the search bar. Then, click the follow button and it will turn red like the image below.

Please note that we have provided a number of setups in stocks we are targeting in this correction. All of these setups are still active and they include: Netflix, AMD and Teladoc, which you can access here. The setups in Microsoft and Docusign are also active, which you can access here. The setups in Inphi, Shopify, Datadog, Twilio and Okta can be found here.Please note that we have provided a number of setups in stocks we are targeting in this correction. All of these setups are still active and they include: Netflix, AMD and Teladoc, which you can access here. The setups in Microsoft and Docusign are also active, which you can access here. The setups in Inphi, Shopify, Datadog, Twilio and Okta can be found here.here. The setups in Microsoft and Docusign are also active, which you can access here. The setups in Inphi, Shopify, Datadog, Twilio and Okta can be found here.

 

Roku (ROKU)

Summary

  • On heavy volume, Roku has broken out to new highs. Roku has been kept under the $176-$178 resistance zone for just over a year.
  • After receiving a buy signal, we bought a new tranche of Roku as it retested and held the breakout price. 
  • Roku’s relative strength compared to its peers has been very strong during the correction and especially the bounce last week. Signs like this are typically positive for stocks when the correction ends.

Since September of 2019, Roku has been in a relative downtrend, making a series of lower highs and lower lows. After bottoming in March of 2020, the price has steadily been climbing to retest the $176-$178 region, in an attempt to breakout to new highs.

After several failed attempts, not only did Roku’s price breakout to new highs this prior week, but it closed the week above this breakout zone on elevated volume. This is a promising sign that the trend in Roku is shifting.

The above chart shows the weekly candles for Roku. The long-term trend has been tracking a trend channel (in gray) almost perfectly. I have been expecting Roku to eventually make an attempt at the upper region of this channel. However, it needed to breakout of its base first. This recently happened, which triggered a new buy signal in our portfolio.

When a stock makes a noticeable breakout, like Roku just did, out of a large base, I will usually wait for the price to retest the breakout zone. This is exactly what happened on Roku, as shown by the hourly chart below.

After the breakout, the $176-$178 region became support. What made me believe this is not another false breakout in Roku was the movement in the momentum indicator as the price tested the breakout zone.

As price was bouncing along this region, notice how the CCI started trending up, while price kept trending down towards the support region. It was making higher lows as price was making lower lows. This kind of positive divergence is an excellent signal that the selling pressure is giving way to buying pressure.

As a result, we executed a buy at $178.4. We are holding without stops, for now, and believe Roku will be a leader out of this correction.

Bandwidth (BAND)

Summary

  • Bandwidth made new highs while the rest of the market is struggling to breakout of a downtrend.
  • However, the internal indicators are showing more weakness than price is leading on, which I believe can lead to one more retest of the 55-day EMA around $145-$155.
  • This area is also the price that we spotted an institution make a big position in BAND, which should further support a floor at this region.
  • If we do get a retest of this region, we will consider that a buy signal.

In technical analysis, there is a saying that is a basic principle – “price is king.” If you ignore price because the momentum indicators are saying something different, you could miss out on a great run. This saying couldn’t be truer than with Bandwidth right now. The price is undeniably resilient and strong with BAND, while the rest of the market is struggling. Like Roku, it was going down less than the broad market on down days and up more on rebound days.

However, if we look at the internal indicators, they tell a different story.

Internal Indicators

For one, the Accumulation/Distribution (A/D) lines signals what smart money/institutions are usually doing. More times than not, it acts as a leading indicator to price, so divergences are something to pay close attention to here.

Notice how the A/D line has been making lower highs while price continued to make higher highs. The A/D line has been in a downtrend for months while price is still moving up, which is not what we want to see.

We are starting to see a small change in trend with the A/D line last week. For the first time in a while, the A/D line is starting to make a higher high. It’s too soon to tell, if this indicator starts leading price to new highs, it’s a great sign that more smart money is starting to see what we have seen for some time.

Regardless, the price trend is up, and anyone who invested with us when Beth first announced this relatively unknown stock, is up over 40%. We believe that even though the internal signals are weaker than we’d like to see, that BAND’s performance during this correction will attract new buyers, which should propel it higher when this correction ends.

Marvell (MRVL)

Summary

  • Marvell has followed our count almost perfectly so far, allowing us to grab shares last month at $33.
  • However, price is stuck in a symmetrical triangle pattern that can break either way.
  • If it breaks out to the upside (above $39.20), that would be a buy signal. If it breaks to the downside (below $37), we will need to track the following downtrend before issuing a new buy signal.

Marvell is one of our 5G plays. It’s current performance is nothing special, but its positioning for the coming hype cycle in 5G should create alpha in the coming years. So far, it has tracked the count we laid out months ago almost perfectly.

We were expecting a correction around the $36 region, which was supported by a decreasing RSI. We then targeted the $33 range, which we grabbed just a few pennies away from the bottom. If you followed us into this entry, you should be up about 17%. The fact that we were able to grab shares so close to an expected bottom, helps confirm that the count we are tracking is likely correct.

What concerns me is the symmetrical triangle pattern (bull pennant) in blue on the chart. This pattern can go either way. However, the count we used to get shares at $33, is suggesting that it should break to the upside. If this happens, we will consider that a buy signal. If price breaks to the downside, it could suggest a retest of the $33-$32 region, which we would consider a buy signal, as well.

Also, it’s worth pointing out that the daily RSI has not broken 50 the entire correction. This is a strong statement that helps support an upside break, and it’s also rare to see this right now. It’s worth mentioning that any stock in September that has held the 50 line on their daily RSI is worth serious consideration.

Nvidia (NVDA)

Summary

  • Nvidia is consolidating between $530 and $475.
  • The weekly chart as well as the daily chart suggest Nvidia has at least one more leg lower to travel before this correction is over.
  • However, the daily RSI never decisively broke below 50, suggesting unusual strength in light of broad market weakness.
  • If price instead breaks above $530, we will consider that a breakout and signal that its correction/pullback is likely over.

The above image is the weekly chart of Nvidia, which includes over 20 years of weekly price information. Interestingly, the price has been tracking a multi-decade trend channel (in gray). We have seen several significant bottoms and tops at the very edges of this channel, which tells me that it is an important piece to Nvidia’s price movements.

So, seeing price break out of this channel recently is a bullish move. Nvidia is our highest conviction idea. We’ve guided numerous entries in this gem, and recently added at $479. We believe that a new entry should happen soon.

Note the Money Flow Index below the weekly chart. It is quite rare to ever seen then MFI hit 90, and when it does, it signals an extreme overbought condition. Historically, the indicator doesn’t stay in this position long, and has led to a variety of corrections. I believe the likely correction we see in Nvidia is a retest of the trend channel breakout, which is around the $435-$405 level.

This region is further confirmed by a number of signals that are visible in the daily chart below.

For one, the symmetrical, 3-leg correction, would suggest that price tags the $425 region, which coincides with the edge of the trend channel we just discussed. This region also houses many other important price clusters between $435-$405. If price hits this level, we consider it a buy.

Nvidia’s price is currently consolidating between the $530 and $475 region. A break of either of these levels will signal Nvidia’s next move. The weekly and daily chat are suggesting a break below $475; however, just because the downside setup is there, doesn’t mean it will manifest. So, if price breaks back above $530, we would consider that a breakout.

It’s also worth noting how well NVDA has held the 50 line in the RSI. Once again, any stock that has held this level during September in the daily RSI is worth consideration in this market. The strength in this stock is strong, and we only expect it to increase as AI unfolds.

Momentum List: September 2020

Posted on by io-fund

By David Marlin

This is the inaugural momentum list report written by David Marlin. We will release this report on a monthly basis.

Process Overview:

Identifying stocks that have superior momentum is a proven way to outperform the market. The key is evaluating which stocks show the fundamental and technical trends to sustain the type of momentum that will outperform the broader market.

In this report, I use a combination of fundamental, technical, and industry analysis to determine the top momentum stocks in the tech space. Please note, we’ve included one featured stock in this report: Sea Limited.

For evaluating the strength of a stock’s performance, I use a few time frames: YTD performance, performance from key market lows (in our case, the March lows), and short-term momentum.

For short term, I often look at stocks on a quarterly basis as it is very common to see a stock post big gains after earnings and continue that momentum for the rest of the quarter.  With the current sell off in the market, I am also closely looking at how stocks have performed during the market decline as technical strength is best revealed during pullbacks. 

On a technical basis, I like to use a few moving averages to help determine trends – the 8ema & 21ema for short terms trends, the 50 MA for medium term, and the 200 MA for long term.  In the current market environment, many previous leaders are now trading under their 50-day moving averages.  This is a key indicator that there has been a momentum change in these stocks and their previous uptrend has slowed considerably. Many stock trading legends, including William O’Neil, recommend avoiding stocks trading under their 50-day MA’s all together.         

The strongest stocks tend to be in the strongest industries. Identifying growing and evolving industries is a key to finding big gainers.  Companies with large addressable markets that are ideally positioned to capitalize on emerging trends are the focus of this list.  

High growth stocks obviously trade at a premium valuation, so this is not the most important factor in the creation of this list.  However, valuation cannot not be ignored, even for high growth stocks.  For this list, I analyzed historical valuations and valuation in comparison to peers.     

The criteria in the creation and maintenance of this portfolio moving forward is outlined below. Note that I only focus on stocks in the tech space with large addressable markets and market caps exceeding $3B. 

Momentum List Criteria:

  1. Financial Performance & Momentum
    undefinedundefinedundefinedundefinedundefined
  2. Technical Strength & Momentum
    undefined
  3. Industry Analysis
    undefinedundefinedundefined
  4. Valuation
    undefinedundefinedundefined

David’s Top Stocks List:

The top momentum stocks list is listed in order of highest to lowest revenue growth last quarter:

1. Sea Limited (SE)

Rev Growth: 102%
YTD Return: 271%
Proj 1yr Fwd Rev Growth: 39%
EV/Fwd Rev: 13.9x

Summary: Sea Limited is one of the top growth stocks to own based off its strong growth and leadership position in a rapidly growing market that remains underpenetrated.  See the attached PDF for the full report on Sea Limited.    

2. CrowdStrike Inc (CRWD)

Rev Growth: 84%
YTD Return: 158%
Proj 1yr Fwd Rev Growth: 36%
EV/Fwd Rev: 33.7x

Summary: CrowdStrike continues to prove it is a secular winner in the cybersecurity industry, displacing the existing participants and gaining significant market share.  The fundamental performance in Q2 confirms this company is a best-in-class business worth owning as security software continues to be the top priority for organizations around the world.        

3. Fiverr International (FVRR)

Rev Growth: 82%
YTD Return: 426%
Proj 1yr Fwd Rev Growth: 37%
EV/Fwd Rev: 23.8x

Summary: Fiverr has seen a surge in consumer demand related to COVID, and the company has now seen 4 consecutive quarter of accelerating YoY revenue growth.  I believe Fiverr is ideally positioned to become a sustained beneficiary of the digital transformation long after the economy reopens and see a tremendous runway for growth ahead of them.  At a roughly $4B valuation, Fiverr is in the early innings of its lifecycle, as management estimates that its TAM is north of $100B. 

4. Square Inc (SQ)

Rev Growth: 64%
YTD Return: 133%
Proj 1yr Fwd Rev Growth: 22%
EV/Fwd Rev: 8.7x

Summary: Square has built a platform around digital payments and commerce, positioning itself to benefit from the transition to a cashless society.  Square is ideally situated for sustained growth with the ongoing shift towards digital payments, both on the B2C and P2P side with its Seller and Cash App ecosystems.     

5. Fastly Inc (FSLY)

Rev Growth: 62%
YTD Return: 311%
Proj 1yr Fwd Rev Growth: 33%
EV/Fwd Rev: 28.0x

Summary: Fastly has proven itself as a disruptive and innovative company focused on creating cutting-edge technology for developers and DevOps teams.  Fastly is one of the main beneficiaries of the digital transformation, as the subsequent increased internet usage in its clientele has led to accelerating revenue growth and net retention rates for the company. 

6. MercadoLibre Inc (MELI)

Rev Growth: 61%
YTD Return: 71%
Proj 1yr Fwd Rev Growth: 32%
EV/Fwd Rev: 13.6x

Summary: MercadoLibre is the leader in the Latin American e-commerce market, and is poised to continue to benefit from the increasing shift to online shopping in those underdeveloped nations.  The company received a massive boost from COVID across all its businesses, including tremendous growth in MercadoPago, the company’s digital payments segment.  MercadoLibre has a long runway for growth ahead of it as the top e-commerce and fintech company in a developing region.

7. Pinterest Inc (PINS)

Rev Growth: 4%
YTD Return: 96%
Proj 1yr Fwd Rev Growth: 33%
EV/Fwd Rev: 13.9x

Summary: Pinterest stock soared after its Q2 earnings report, as management predicted a return to +30% YoY growth levels.  Pinterest has a golden opportunity to accelerate its growth by increasing monetization per-user, particularly internationally.  As advertisers around the globe gradually ramp up their spending again, Pinterest is positioned to be one of the main beneficiaries.

8. Tesla Inc (TSLA)

Rev Growth: -5%
YTD Return: 406%
Proj 1yr Fwd Rev Growth: 42%
EV/Fwd Rev: 13.4x

Summary: A list of the top momentum stocks would not be complete without Tesla.  Tesla is a company with massive potential for growth ahead of it as it attempts to revolutionize the future of the transportation industry.  The top auto companies in the world are all chasing Tesla to catch up to its EV leadership status and the company continues to widen its lead with its proprietary innovation.       

9. Penn National Gaming Inc (PENN)

Rev Growth: -77%
YTD Return: 186%
Proj 1yr Fwd Rev Growth: 39%
EV/Fwd Rev: 3.3x

Summary: Penn Gaming has a tremendous opportunity to become a dominant player in the rapidly growing sports betting industry.  Newly acquired Barstool Sports will be the main driver of this growth, as the company’s social media following allows Penn to digitally reach millions of potential customers.  In its launch last Friday (9/18), the Barstool Sportsbook app was the most downloaded sports app in the US, even as the app is only available for use in 1 state (PA).  I expect Penn will continue to leverage the Barstool brand to acquire a dominant position in the industry, making it significantly undervalued in comparison to its peers.      

Outside Looking In: ETSY, NET, ZS, SNAP

We are starting out with 9 stocks to include in this portfolio, a number that may change based off conviction and new opportunities.  There will be a new tab for monitoring the Momentum Portfolio next to the Active Portfolio moving forward.       

I will be covering the list of the top momentum stocks in depth and releasing an updated report each month.  Businesses and industries are always changing and new opportunities emerge — my goal is to identify them and bring these to your attention.

The portfolio may change at any time due to a change in fundamentals, technical strength, new opportunities for inclusion on the list, etc.  In the coming weeks, I will be releasing in depth reports on each stock included in the momentum portfolio. 

Knox and I will also be working together to provide entries/exits in the names included. Please find me on the forum for any questions or comments on this report.

Momentum List: September 2020

Posted on by io-fund

By David Marlin

This is the inaugural momentum list report written by David Marlin. We will release this report on a monthly basis.

Process Overview:

Identifying stocks that have superior momentum is a proven way to outperform the market. The key is evaluating which stocks show the fundamental and technical trends to sustain the type of momentum that will outperform the broader market.

In this report, I use a combination of fundamental, technical, and industry analysis to determine the top momentum stocks in the tech space. Please note, we’ve included one featured stock in this report: Sea Limited.

For evaluating the strength of a stock’s performance, I use a few time frames: YTD performance, performance from key market lows (in our case, the March lows), and short-term momentum.

For short term, I often look at stocks on a quarterly basis as it is very common to see a stock post big gains after earnings and continue that momentum for the rest of the quarter.  With the current sell off in the market, I am also closely looking at how stocks have performed during the market decline as technical strength is best revealed during pullbacks. 

On a technical basis, I like to use a few moving averages to help determine trends – the 8ema & 21ema for short terms trends, the 50 MA for medium term, and the 200 MA for long term.  In the current market environment, many previous leaders are now trading under their 50-day moving averages.  This is a key indicator that there has been a momentum change in these stocks and their previous uptrend has slowed considerably. Many stock trading legends, including William O’Neil, recommend avoiding stocks trading under their 50-day MA’s all together.         

The strongest stocks tend to be in the strongest industries. Identifying growing and evolving industries is a key to finding big gainers.  Companies with large addressable markets that are ideally positioned to capitalize on emerging trends are the focus of this list.  

High growth stocks obviously trade at a premium valuation, so this is not the most important factor in the creation of this list.  However, valuation cannot not be ignored, even for high growth stocks.  For this list, I analyzed historical valuations and valuation in comparison to peers.     

The criteria in the creation and maintenance of this portfolio moving forward is outlined below. Note that I only focus on stocks in the tech space with large addressable markets and market caps exceeding $3B. 

Momentum List Criteria:

  1. Financial Performance & Momentum
    undefinedundefinedundefinedundefinedundefined
  2. Technical Strength & Momentum
    undefined
  3. Industry Analysis
    undefinedundefinedundefined
  4. Valuation
    undefinedundefinedundefined

David’s Top Stocks List:

The top momentum stocks list is listed in order of highest to lowest revenue growth last quarter:

1. Sea Limited (SE)

Rev Growth: 102%
YTD Return: 271%
Proj 1yr Fwd Rev Growth: 39%
EV/Fwd Rev: 13.9x

Summary: Sea Limited is one of the top growth stocks to own based off its strong growth and leadership position in a rapidly growing market that remains underpenetrated.  See the attached PDF for the full report on Sea Limited.    

2. CrowdStrike Inc (CRWD)

Rev Growth: 84%
YTD Return: 158%
Proj 1yr Fwd Rev Growth: 36%
EV/Fwd Rev: 33.7x

Summary: CrowdStrike continues to prove it is a secular winner in the cybersecurity industry, displacing the existing participants and gaining significant market share.  The fundamental performance in Q2 confirms this company is a best-in-class business worth owning as security software continues to be the top priority for organizations around the world.        

3. Fiverr International (FVRR)

Rev Growth: 82%
YTD Return: 426%
Proj 1yr Fwd Rev Growth: 37%
EV/Fwd Rev: 23.8x

Summary: Fiverr has seen a surge in consumer demand related to COVID, and the company has now seen 4 consecutive quarter of accelerating YoY revenue growth.  I believe Fiverr is ideally positioned to become a sustained beneficiary of the digital transformation long after the economy reopens and see a tremendous runway for growth ahead of them.  At a roughly $4B valuation, Fiverr is in the early innings of its lifecycle, as management estimates that its TAM is north of $100B. 

4. Square Inc (SQ)

Rev Growth: 64%
YTD Return: 133%
Proj 1yr Fwd Rev Growth: 22%
EV/Fwd Rev: 8.7x

Summary: Square has built a platform around digital payments and commerce, positioning itself to benefit from the transition to a cashless society.  Square is ideally situated for sustained growth with the ongoing shift towards digital payments, both on the B2C and P2P side with its Seller and Cash App ecosystems.     

5. Fastly Inc (FSLY)

Rev Growth: 62%
YTD Return: 311%
Proj 1yr Fwd Rev Growth: 33%
EV/Fwd Rev: 28.0x

Summary: Fastly has proven itself as a disruptive and innovative company focused on creating cutting-edge technology for developers and DevOps teams.  Fastly is one of the main beneficiaries of the digital transformation, as the subsequent increased internet usage in its clientele has led to accelerating revenue growth and net retention rates for the company. 

6. MercadoLibre Inc (MELI)

Rev Growth: 61%
YTD Return: 71%
Proj 1yr Fwd Rev Growth: 32%
EV/Fwd Rev: 13.6x

Summary: MercadoLibre is the leader in the Latin American e-commerce market, and is poised to continue to benefit from the increasing shift to online shopping in those underdeveloped nations.  The company received a massive boost from COVID across all its businesses, including tremendous growth in MercadoPago, the company’s digital payments segment.  MercadoLibre has a long runway for growth ahead of it as the top e-commerce and fintech company in a developing region.

7. Pinterest Inc (PINS)

Rev Growth: 4%
YTD Return: 96%
Proj 1yr Fwd Rev Growth: 33%
EV/Fwd Rev: 13.9x

Summary: Pinterest stock soared after its Q2 earnings report, as management predicted a return to +30% YoY growth levels.  Pinterest has a golden opportunity to accelerate its growth by increasing monetization per-user, particularly internationally.  As advertisers around the globe gradually ramp up their spending again, Pinterest is positioned to be one of the main beneficiaries.

8. Tesla Inc (TSLA)

Rev Growth: -5%
YTD Return: 406%
Proj 1yr Fwd Rev Growth: 42%
EV/Fwd Rev: 13.4x

Summary: A list of the top momentum stocks would not be complete without Tesla.  Tesla is a company with massive potential for growth ahead of it as it attempts to revolutionize the future of the transportation industry.  The top auto companies in the world are all chasing Tesla to catch up to its EV leadership status and the company continues to widen its lead with its proprietary innovation.       

9. Penn National Gaming Inc (PENN)

Rev Growth: -77%
YTD Return: 186%
Proj 1yr Fwd Rev Growth: 39%
EV/Fwd Rev: 3.3x

Summary: Penn Gaming has a tremendous opportunity to become a dominant player in the rapidly growing sports betting industry.  Newly acquired Barstool Sports will be the main driver of this growth, as the company’s social media following allows Penn to digitally reach millions of potential customers.  In its launch last Friday (9/18), the Barstool Sportsbook app was the most downloaded sports app in the US, even as the app is only available for use in 1 state (PA).  I expect Penn will continue to leverage the Barstool brand to acquire a dominant position in the industry, making it significantly undervalued in comparison to its peers.      

Outside Looking In: ETSY, NET, ZS, SNAP

We are starting out with 9 stocks to include in this portfolio, a number that may change based off conviction and new opportunities.  There will be a new tab for monitoring the Momentum Portfolio next to the Active Portfolio moving forward.       

I will be covering the list of the top momentum stocks in depth and releasing an updated report each month.  Businesses and industries are always changing and new opportunities emerge — my goal is to identify them and bring these to your attention.

The portfolio may change at any time due to a change in fundamentals, technical strength, new opportunities for inclusion on the list, etc.  In the coming weeks, I will be releasing in depth reports on each stock included in the momentum portfolio. 

Knox and I will also be working together to provide entries/exits in the names included. Please find me on the forum for any questions or comments on this report.

Featured Stock: Sea Limited

By Knox Ridley and David Marlin

This week, we initiated a position in Sea Limited at $150.10. We believe Sea is positioned for significant future growth because of its leadership status in e-commerce and gaming in Southeast Asia. This region is among the fastest growing in terms of internet usage in the world. With Sea establishing itself as the region’s dominant internet company and extending its lead over competition, we have been looking for a proper entry in the stock. 

Since the March 23rd lows, SE has been a leader among tech stocks. After climbing over 350% over the last trailing 1-year period, SE is currently down just 10% from its 52-week high, while the NASDAQ is down about 13%. Also, it’s worth noting that SE has, so far, bottomed on Sept. 8, making a series of higher highs and higher lows since. This is compared to the NASDAQ, which found its lowest level of Sept. 22, and is still in a downtrend posture. This is notable strength that we look for during pullbacks.

With a deeper look into the chart, we can see that SE appears to be setting up for a move higher. Note the base that the stock has built, which is outlined in blue, with the breakout spot being around $50.50 – $51. This is accompanied by decreasing volume, with more green bars than red. This is signaling that the sellers appear to be drying up.

Usually I wait for confirmation of a breakout before I move; however, the internals had me anticipate one instead. For one, we are seeing the 50-line hold in the RSI during this selloff, meaning that the momentum is still positive to flat, while the NASDAQ is clearly losing momentum. Recently, the RSI is starting to trend up.

This is coupled with positive divergence in the CCI and the MACD in a classic coiling pattern. Furthermore, the Accumulation/Distribution line is indicating that smart money is buying into this dip. When this indicator makes a new high before price, it’s a good sign that price will soon follow.

There is additional risk within the broad market right now; however, we like the setup forming in SE. We placed a stop about 10% below our entry, which is just below the base SE built. If this stop is hit, we will exit and regroup for the next move up. With momentum, the key is to have hard stops and exit when the momentum is still up.

Beating Smart Money & Bloomberg Video

Posted on by io-fund

I realize you have a choice in the newsletters you subscribe to and my way of saying thanks is to offer original analysis. Most newsletters will wait for breakouts and price momentum and then backfill the analysis. This creates a few issues from my perspective. The first is that conviction gets shaky when basing investments on price only as it requires a herd mentality to remain in a stock. The best gains come from getting in front of the herd. The second issue is that many tech companies go through periods of high growth yet can’t sustain this long-term unless there is excellent product market fit. Momentum investors and trend followers struggle most when it comes to FAANG-like gains because they can’t determine the true gems from those that are simply doing what most tech does (disrupt a market for a period of time).   

Case Study: Zoom Video

On a recent Bloomberg interview, I discussed Zoom Video as the stock that is “sitting right under everyone’s nose” due to growth that we haven’t seen in my lifetime or yours and likely won’t see again over the next decade.

Tech Sector Is Only Going to Grow: Beth Kindig

Access Bloomberg Video here.

This is a stock tip I released in the wake of the coronavirus shut-downs on April 3rd. There was a lot of noise in the market at that time due to the bull/bear market tug-o-war. I said, “If Silicon Valley unicorns are rare, then Zoom Video is a Pegasus.” The company then went on to accelerate from 78% year-over-year growth to 169% year-over-year analysis to 355% year-over-year growth. Keep in mind, I wrote this and maintained conviction even as the market began to question Zoom Video’s security issues.

We track institutional money flows by large volume spikes accompanied with a long candle pattern. We got out first indication that smart money was buying Zoom in bulk as indicated by the black arrow.

Case Study: Bandwidth

Bandwidth is a stock I covered on August 13th with a thesis around archaic telecom hardware becoming eradicated during and following the pandemic. I stated, “One trend I am monitoring closely for the more permanent effects is the disruption of telecom hardware systems through cloud-native communications” while spelling out why everything from SMBs to enterprises would seek to cut their telecom bills. From there, I wrote why I thought Bandwidth could out-perform long-term due to a solid list of customers, including Zoom, Google, Cisco, Microsoft, Skype, RingCentral and Square. I also discuss how Twilio is different from Bandwidth as this is a comparison that often comes up despite there being key differences at the product level.

This trend is still early yet we recently saw large institutional spikes in the stock. This is a great example as to why product-first analysis is key and how I try to give this to my free newsletter readers to help get them in front of trends the market may be overlooking.  

Notice the large volume spike below accompanied with a large candlestick.

 

In conclusion, thanks again for being a newsletter subscriber. We hope to deliver more original analysis in the months and years to come.

Warm regards,
Beth

p.s. If you’re not a free newsletter subscriber yet, you can sign up here.

Snowflake IPO: In-Depth Analysis

Posted on by io-fund

This article was originally published on Forbes on Sep 11, 2020,03:02am EDTForbes on Sep 11, 2020,03:02am EDT

Snowflake is the most anticipated IPO of the year. Investors should decide in advance how much they are willing to pay as Snowflake will test the upper limits of what it means to have a stretched valuation. Heck, the company has even inspired value-legend Warren Buffet to change his thesis and invest in an IPO prior to profitability (!)

Perhaps because the company delivered sky-high revenue growth last fiscal year of 173% and 121% in the most recent quarter with a record-breaking net retention rate of 158% — which is the highest of any public cloud company at time of listing.

Graph: Net Dollar Retention at IPO

David Marlin

These industry-leading numbers are due to the company disrupting the data warehousing market with a superior cloud data platform that delivers across key differentiators (we review this below). Despite Snowflake demonstrating excellent product-market fit, clear competitive advantages, and strong management — no company is perfect. We go over a few key risks that investors should keep in mind as the bidding becomes fierce on opening day.

Snowflake Financials

Snowflake has strong financials for a tech IPO, yet it’s important to remember the product has been available for only six years and tech growth is typically strongest in the early days. The company delivered 173% growth in the fiscal year ending January 31, growing from $96.7 million to $264.7 million with gross profit margins of 56.2%.

These gross margins are below what cloud companies are capable of yet improved in the most recent period. Revenue grew 133% year-over-year in the first six months of fiscal 2021 ending in July, growing from $104 million to $242 million with improving gross profit margins of 61.5%.

In the most recent quarter, the company reported growth of 121%. Here, we already see the effects of age within a short time period as Snowflake settles from 173% growth to 133% growth and now to 121% growth. This is not a negative by any means (triple-digit growth is to be celebrated) but keep in perspective it’s age when comparing Snowflake to any high-growth cloud SaaS peers.

Graph: Revenue Growth at IPO

David Marlin

The bottom line has been varied depending on what period you look at. The losses doubled from fiscal year 2019 with net losses of $178 million increasing to net losses of $348.5 million in fiscal year 2020.

More recently in the first six months of fiscal 2021, the net losses were flat period-over-period at $177.2 million compared to losses of $171.3 million. This could be an encouraging sign or it could be Snowflake tightening the belt temporarily for the public offering before returning to the original pace of worsening losses. There is not enough history to know if the more encouraging flat rate of losses is sustainable. Adjusted EPS was negative $1.63 in the fiscal year ending in January compared to negative adjusted EPS of $0.72 in the first half of fiscal 2021.

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Net retention rate for Snowflake is a record 158% — the highest of any company when going public. However, it’s important to remember that net retention rate lowers over time as customers become harder to retain long-term (I cover net retention rates more in-depth here).

The company was founded in 2012 yet the product came out of stealth mode in 2014. When considering the product launch, Snowflake is a very young company of only six years old.

Stock Companies Revenue Growth in Year #

David Marlin

You can see evidence of how net retention is affected by number of years in Snowflake’s S-1 filing as the company had a rate of 223% in the first half of 2019 compared to 158% period-over-period. Annually, the company lost 11 percentage points in net retention rate from 180% to 169%.

Snowflake S-1 Filing

SNOWFLAKE S-1 FILING

Regardless, Snowflake has impressive numbers. Perhaps the most impressive key metric in the S-1 filing is the growth in the percentage of customers with product revenue greater than $1 million. This has grown considerably from 14% in fiscal year 2019 to 41% in fiscal year 2020. There is evidence high-end accounts are continuing to grow with the first six months of 2020 at 56% compared to 22% in the year-ago period.

The new CEO, Frank Slootman, clearly knows how to make a company attractive to investors. Not only did the company quicky tighten its belt in regard to net losses, the company also doubled customers from 1,547 to 3,117 over the past twelve months. This includes 7 of the Fortune 10 and 146 of the Fortune 500.

Cash used in operating activities decreased from $110 million to $45.3 million in the first six months of fiscal 2021. The company has cash and investments of $591 million and no debt.

As outlined in the S-1, IDC places the addressable market for Analytics Data Management and Integration Platforms and Business Intelligence and Analytics Tools at $56 billion in 2020 and $84 billion in 2023.

In an effort to narrow this addressable market, I dug up a few more sources. According to MarketsandMarkets, the addressable market for Data Warehouse-as-a-Service is much smaller at $1.2 billion in 2018 and set to grow to $3.4 billion by 2023 at a CAGR of 23.8%. P&S Intelligence reports a similar CAGR of 29.2%, estimating the Data Warehouse-as-a-Service market to reach $23.8 billion by 2030. When combining on-premise, Allied Market Research places the data warehousing market at $34.7 billion by 2025.

You’ll find larger addressable markets in tech but the weight Snowflake brings to the category is considerable.

Snowflake’s former CEO, Bob Muglia, grew the company from 80 customers in 2015 to 1000 customers in early 2018 when he was replaced by Frank Slootman. The change likely happened due to pressure from private investors who want a grand slam exit (and looks like they’ll be getting just that).

Slootman is known for resuscitating Data Domain from nearly running out of money in 2003 to an acquisition in 2009 after the company “grew to sell more than all its competitors combined.” This was detailed in a book that Slootman wrote called: “TAPE SUCKS: Inside Data Domain, A Silicon Valley Growth Story.” Three years later, Slootman took over the CEO role of ServiceNow between 2011 to 2017 and grew the company from $75 million in annual revenue to $1.5 billion. This was achieved by diversifying the product beyond the IT department.

For many investors, management is a key factor in deciding to invest or not. Here, Snowflake fires on yet another cylinder.

Product:

Snowflake’s decoupled architecture allows for compute and storage to scale separately with the storage provided from any cloud provider the customer chooses. By processing queries using massively parallel processing (MPP), where each node in the cluster stores a portion of the data set locally, the virtual warehouses can access the storage layer independently so as not to compete for compute power. With the competitors, such as Redshift, where compute and storage are coupled, more time is spent reconfiguring the cluster. 

Snowflake calls this offering a virtual data warehouse where workloads share the same data but can run independently. This is crucial because Snowflake’s competitors combine compute and storage and require customers to size and pay based on the largest workload.

Data warehouses are centralized data repositories that collect and store information across many sources that are both internal and external. The raw data is ingested into the data warehouse and processed to answer queries. To ingest data, warehouses follow the ETL process, which is: (1) Extract the data from the internal or external database or file, (2) Transform by cleaning and preparing the data to fit the schema and constraints of the data warehouse and (3) Load into the data warehouse. The ETL method helps to organize the data into a relational format. Notably, Snowflake supports both ETL and ELT, which allows for data transformation during or after loading.

One key product differentiator is that Snowflake is not built on Hadoop, rather the company uses a new SQL database engine with cloud-optimized architecture. Overall, this translates to faster queries and also reduces costs by scaling up or down for both capacity and performance. This also allows the shift to the cloud while still honoring traditional relational database tools. Just like cloud infrastructure does not require you to hold server space for peak times year-round, a cloud data warehouse does not require you to plan, acquire or manage resources for peak data demand (i.e. elasticity).

The need for resources could change by either increasing or decreasing (scaling up or down). Customers that have a need for storage but less of a need for CPU computations do not have to pay up front and can shrink the environment dynamically. Users either pay for terabytes or are billed on a per-second basis for computations. Notably, Snowflake charges by execution-based usage and is not a cloud SaaS-company that charges by subscription.

Snowflake has a multi-cluster architecture which is unique from single cluster databases. The multi-cluster approach allows the clusters to access the same underlying data yet to run independently. This allows for heavy queries and operations to run very quickly and with fewer errors because the queries are not accessing the same data warehouse.

Queries are made with standard SQL, for analytics, and integrates with R and Python programming languages. The company delivers the ability to handle all incongruent data types in a single data warehouse. Because the data is accessible through SQL, there is widespread developer uptake as it’s the most common database language.

Snowflake supports both structured data and semi-structured data. As machine-generated data grows to include applications, sensors and mobile devices, Snowflake allows semi-structure data to be handled without preparation or schema definitions. The result is handling JSON, Avro, ORC, Parquet or XML data as if it were relational and structured.

Snowflake uses a compressed columnar database. Columnar databases are optimized for the fast retrieval of columns of data and is used for analytic data queries.  Other features include centralized metadata management that is stored in a single-key value store that allows cloning of tables and databases. Security is baked into the platform to where Snowflake automatically encrypts all data to the point where unencrypted data is not even allowed. There is third-party certification and validation for security standards like HIPAA.

Beyond the value proposition of separating storage from compute for speed, and also scaling up or down to reduce costs, the third takeaway is that Snowflake is also much easier for customers to use as it’s designed to remove the role of a database administrator for monitoring and/or to tune query performance.

The end goal of choosing Snowflake is that you load data, run queries, and do little else – which is an immense value proposition due to the amount of time wasted prepping, balancing, tuning and monitoring traditional data warehouses originally built for on-premise.

Snowflake is capitalizing on the multi-cloud trend and growing rapidly with customers who want a choice in public cloud provider despite the cloud giants having their own data warehouse systems, such as Amazon Redshift, Azure Synapse and Google Big Query.

Generally speaking, Big Query is a closer competitor as Google’s offering also separates storage and compute. The differences between BigQuery and Snowflake include pricing structure where Snowflake is a time-based pricing model where users are charged for execution time and BigQuery is a query-based pricing model, where users are charged for the amount of data returned from the queries. BigQuery has a serverless feature that makes it easier to begin using the data warehouse a the serverless feature removes the need for manual scaling and performance tuning. Dremel is the query engine for BigQuery.

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When it comes to deciding between BigQuery and Snowflake, it can come down to what you do with the database due to pricing structure differences. For instance, Snowflake is a better choice for concurrent users and business intelligence. It’s also a great choice for data-as-a-service, where you might give client access to your data in the form of analytics. BigQuery is perhaps a better choice for ad hoc reporting, where you have occasional complex reports on a quarterly basis or recommendation models and machine learning that require high idle time. Again, these examples are mainly due to pricing structure.

Despite BigQuery having a strong following with nearly twice the number of companies as Snowflake and growing around 40%, it tested slower than Snowflake in field tests performed by GigaOm in 2019. Vendor lock-in from BigQuery is also undesirable as companies may prefer AWS or Azure and/or more interoperability or best-in-breed solutions – we can see this in the growing trend of multi-cloud. AWS Redshift has the biggest market presence but growth is nearly flat at 6.5% and AWS is the leading partner for Snowflake.

Here's a great write-up from the Hashmap Engineering and Technology Blog that points out why implementing optimized row columnar (ORC) format data loads is ideal for either Snowflake or Amazon Redshift due to the ORC file format. Again, ultimately the choice in which system you use comes down to the individual needs for implementation although Snowflake is designed to be a competitor in nearly every case.

There’s a great write-up from analyst David Vellante that discusses how Snowflake competes with cloud native database giants. His analysis discusses survey responses from CIOs and IT buyers with Snowflake having a lead over the tech giants in spending intentions. The Enterprise Technology Research study he highlights showed 80% of AWS accounts plan to spend more on Snowflake in 2020 relative to 2019 with 35% adding Snowflake as new compared to 12% adding Redshift as new. In Azure, 78% plan to spend more on Snowflake with 41% adding new. On Google Cloud, 80% plan to increase spending on Snowflake. We can see the people have spoken.

A few risks …

Due to Snowflake’s product strengths, the public cloud providers offer Snowflake while at the same time being in competition. The main risk being discussed is that public cloud providers have competing databases, but in reality, the risk may be pricing pressure over time. Snowflake has a great top line; however, the bottom line is affected by its partnership with the competitors. Plus, tech giants can greatly undercut Snowflake on pricing. Therefore, margins may be an inherent issue.

The company pays quite a bit for sales and marketing, which is typical for a company going public as this strengthens the top line yet could make it hard to balance this growth with profitability in the future. (But hey, if Berkshire doesn’t care, why should we!)

In the S-1 filing, it was noted that Salesforce will buy $250 million in stock in a private placement. This could be a risk if Salesforce becomes too intertwined with Snowflake as it’s best possible growth will be achieved by stating neutral, in my opinion. This involvement is something to monitor.

As stated, Berkshire Hathaway is also intending to purchase $250 million in shares in a private placement plus an additional $300 million from an unnamed stockholder in a secondary transaction. As Business Insider pointed out, this involvement from Berkshire is “rarer than a unicorn” and will be viewed as a strength by both institutions and retailers. 

There could be risk in Snowflake being cloud-native only and not offering hybrid or on-premise. This can limit the customer pool as enterprises prefer hybrid options. Perhaps the bigger picture for Snowflake’s strength will be leveraging artificial intelligence in applications and business intelligence, and in this case, a hybrid and on-premise offering won’t be as necessary.

Valuation

Snowflake’s amended filing on September 8th shows the company will be priced at $75 to $85 per share with a valuation between $20.9 billion and $23.7 billion. This would raise $2.7 billion. The last private valuation for Snowflake was $12.5 billion when the company raised a Series G for $479 million.

When we look at various scenarios, we see Snowflake hitting 40 forward price-to-sales in the $30 billion valuation range.

Snowflake IPO Valuation Table

Snowflake IPO Valuation Table – BETH KINDIG

Snowflake is not profitable while Shopify, Zoom Video and Datadog are profitable with some showing accelerating revenue. These three have commanded above a 40 forward price-to-sales in perfect conditions only. The majority of their trading history has been beneath a 30 forward price-to-sales. Being profitable should come with a premium yet Snowflake will likely inch its way into this valuation range without demonstrating profitability.

Forward price-to-sales chart shows Snowflake is not profitable

Snowflake's IPO opening price will test the upper limits of high growth valuations. – BETH KINDIG

When we look at Zoom Video, Crowdstrike and Datadog, we see these three traded at or beneath their opening IPO price many times in the year following IPO. Crowdstrike saw roughly a 50% drawdown from its opening price.

Chart showing stock price of Zoom Video, Crowdstrike and Datadog

Snowflake's IPO opening price may not sustain if history is any indication – BETH KINDIG

Therefore, if Snowflake trades at a 30 forward price-to-sales and sustains this valuation, it will be the first high growth company with negative earnings to do so. Even those with positive earnings growth have only traded above this valuation for a brief period over the last three months.

A better strategy would be not pay over this amount and count on history rhyming. At NTM revenue of $750 million, that means Snowflake would have to open at the price listed in the prospectus in order to remain within a reasonable $25 billion valuation (“reasonable” being used loosely here as only a few companies have traded at this valuation in the most ideal conditions/tech market and these comparables were profitable).

Conclusion:

When you were a child, your parents probably asked, “are you going to jump off a bridge if everyone else does?” The goal of the question was to get you to think for yourself in the face of peer pressure.

In this situation, the question that should be asked is, “are you going to invest in a company with triple-digit growth, clear product differentiation, key metrics that prove product-market fit and gravity-defying management … if Berkshire does?” The answer is probably “yes.”

The issue is that we aren’t Berkshire or Salesforce so we will probably overpay. Therefore, the biggest risk of all is how much alpha will be left in the first year of trading by the time retailers are offered the crumbs.

I’ve participated in IPOs out the gate and the only ones that have paid off were under-hyped (Roku). Those that were over-hyped, such as Zoom Video and Crowdstrike, either retreated back to their opening price or saw up to a 50% haircut from the opening price.

I did not participate in either of these over-hyped IPOs but I did snag Zoom Video later in January of 2020. I was able to put that money to use elsewhere while waiting for the lock-up period to expire and the right entry in the low $60s nearly 9 months after Zoom Video had listed.

Even as a Snowflake enthusiast. I may back-off after 30 forward price-to-sales (and most certainly at 40 forward P/S) as I’m confident I can find many great tech companies that are less hyped while I wait it out. We will always see periods of indiscriminate selling across high-growth and I don’t think Snowflake will escape those rotations.

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.

IPO Round Up

Posted on by io-fund

IPO Report card:

As of late, the underlying goal of IPOs appears to be how to get retailers to pay as much as possible until the lock-up expires. It doesn’t matter if Berkshire invests unless you get a chance to buy at the same price. Your shares could lose 50% and Berkshire would break even. That’s not a public offering by any stretch of the word. Please keep in mind, that many winners in tech retrace well below their opening price (up to 50% below opening price in the case of Crowdstrike).

Prior to Snowflake raising its opening price (for the fourth time), I had cautioned that: “the biggest risk of all is how much alpha will be left in the first year of trading by the time retailers are offered the crumbs.” When I wrote that, I did not imagine we’d see the opening price of $245. It was, in a word, astounding.

Like Warren Buffet says, the best part of investing is you don’t have to hit every ball. On that note, I can confidently say Berkshire would not be hitting the ball at 98X NTM revenue – but they sure hope you do.

Snowflake went public with an IPO price of $120. It opened at a 105% premium of $245, and closed on its first day of trading just under $254. Based on its opening price, this gave the stock a valuation of 98x NTM revenue if generously calculating 121% growth across all four quarters.

Keep in mind, in the chart below, companies over 40x NTM revenue are profitable.

Regarding their business, Snowflake reported 121% revenue growth YoY with a net retention rate of 158%. As stated, the company is not profitable. In the six months ending in July, they spent roughly $190.5 million on marketing while making $149 million in gross profit.

I discussed Snowflake’s product strength in detail in my previous analysis, stating it demonstrated: “triple-digit growth, clear product differentiation, key metrics that prove product-market fit and gravity-defying management.” However, the price of the stock has become untethered from reality. As stated in the Forbes article, there is little alpha left over the next year and that is the primary risk.

JFrog

JFrog opened trading at a $71.20, which is 62% above its offering price. This gave the stock a valuation of 40x NTM revenue, which was the highest forward multiple in enterprise software at time of IPO until SNOW started trading about an hour later. The company provides DevOps software to organizations globally, enabling those businesses to build and release software faster and more securely.

JFROG posted an impressive 50% growth rate in its latest quarter with 81% gross margins and  positive 11% FCF margin, which is why they commanded such a high premium. However, the company faces a bevy of competition including Google Cloud, Amazon Web Services, and Microsoft Azure.  JFROG is a pure play, which I tend to favor; however, this IPO valuation is over its skis.

Sumo Logic

Sumo Logic began trading September 17th with an initial offering price of $22 a share. The first trade was 21% above the premium at $26.50 and closed at $26.88. Regarding key metrics, Sumo Logic stated that its dollar-based net retention rate has fluctuated between approximately 120% and 135% for each of the past nine quarters, which is notable. Their forward price/sales based on their opening price gives the stock a valuation of 8.3x NTM revenue.

Sumo Logic’s biggest risk is their competition. Companies such as Splunk, Elastic, Datadog, Dynatrace, Microsoft and Google all have bigger budgets, greater name recognition and a larger customer base.

Amwell

Amwell (AMWL) is a mobile and teleheath platform that connects patients with doctors over video. The stock went public on September 17th with an IPO price of $18. It began trading with 42% premium at $25.51, and closed the day at $23.95.

Amwell’s YoY revenue growth accelerated from 31% year-over-year in 2019 to 77% year-over-year in H1 2020. Based on their opening price, this gave the stock a valuation of 8.4x NTM revenue.  

Unity

Unity (U) is set to open trading September 18th at an expected price range of $44-$48. This would value the company in the range of $11.6B-$12.6B. At the high end of the proposed range, Unity would trade at 14.2x NTM revenue. 

Unity grew revenue 39% YoY in the first half of 2020 and increased its net-retention rate to 142%, a strong indication of increased spending within its existing customer base.  With 93 of the top 100 gaming studios already Unity customers, it is crucial for the company to continue to drive higher spending among existing customers. 

Here’s how the string of tech IPOs stack up this week:

Amwell: IPO Analysis

Posted on by io-fund

5b24e693-08e2-4c1c-9f3a-b33b510925c4_Amwell-IPO-Analysis.pdf

Amwell: IPO Analysis

Introduction:

Please reference the Telehealth PDF which discusses why we are bullish on the telehealth trend and reviews three additional companies in the space: Teladoc, Livongo and Veeva. Telehealth PDF which discusses why we are bullish on the telehealth trend and reviews three additional companies in the space: Teladoc, Livongo and Veeva.

We are very interested in the Amwell IPO and will attempt to initiate on opening day. Please see the valuation section for the range we are targeting. 

Amwell’s mobile and telehealth platform connects patients with doctors over video and handles administration. As of June 30th, 2020, the company powers the digital care programs of 55 health plans – which equates to 36,000 employees and 80 million insured. The company also works with 150 of the nation’s largest health systems, encompassing more than 2,000 hospitals. 

Amwell’s growth has accelerated substantially from 31% year-over-year in 2019 to 77% year-over-year in H1 2020. Net losses increased in both the fiscal year and the first six months of 2020. We review this in more detail below.

There are three classes of shareholders with Class A common stock, Class B held by the founders at 51% of voting power and Class C common stock. Google Cloud has agreed to purchase $100 million of the Class C common stock in a private placement. 

There was an announcement in late August announcing Google Cloud’s partnership with Amwell. The announcement discusses how Google Cloud plans to merge AI with health care, including digital waiting rooms, language translations, offloading tasks from the provider to conversational AI and to help manage chronic conditions. The announcement is worth a read.  

Telehealth is a microtrend we covered in June with an increase of 3,000 to 4,000% in telehealth patient volume. 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. According to American Telemed, three-quarters of U.S. hospitals are using digital technology to reach their patients via video, audio, chat, or email. You can read more here in the Telehealth PDF.  

According to Amwell’s S-1 filing, healthcare expenditures in the United States more than doubled from $1.3 trillion to $3.6 trillion from 2000 to 2018. In 2019, the average employer health insurance was $20,576 representing an increase of 54% over the last decade. Meanwhile, health system operating margins declined by 39% as margins were impacted by reimbursement pressures and increased cost structures. 

Telehealth addresses these issues and mitigates rising costs. An urgent care telehealth visits costs $79 before insurance compared to a visit cost of up to $150 for urgent care and $1,389 for the emergency room plus any additional services rendered on-site. Some plans will offer telehealth visits at $0 to avoid the high cost of these in-person visits.

The temporary federal policy changes that allowed health care providers to expand telehealth and mHealth for the covid-19 emergency had an expiration date that was extended by HHS secretary Alex Azar from July of 2020 to mid-October. 

There is pressure from all sides to approve a dozen or more telehealth bills that would make telehealth coverage permanent and/or to expand coverage for Medicare. For instance, the Telehealth Modernization Act, the CONNECT for Health Act, Protecting Access to Post COVID-19 Telehealth Act, and many more.  According to reports in July, there were 340 health care organizations that published an open letter asking Congress to enact permanent changes to telemedicine regulations. The pressure is bi-partisan. 

Anthem is a large client for Amwell and accounted for 23% of 2019 revenue. The risk of high concentration in one customer is muted as Anthem owns 3% of Amwell’s outstanding shares. Furthermore, AMG clinical visits represented 51% of H1 2020 revenue (see below).

We expect the telehealth trend to continue being a dominant trend this year and into next year due to patient demand, easing government regulations around telehealth coverage, and from more doctors and health care providers seeking to reach as many patients as possible as quickly as possible. 

Amwell Overview:

The Amwell platform is a complete “digital care delivery solution” that provides tools to enable new models of care for patients and members. Amwell’s primary function is to facilitate consultations between patients and providers.

The company sells the Amwell platform on a subscription basis. In order to support the Amwell Platform, the company offers professional services on a fee-for-service basis and a range of patient and provider access Carepoints that support hospital and home use cases. 

The company’s customers often deploy telemedicine through a variety of proprietary Carepoints, which are medical carts and kiosks designed for various clinical and community settings. This is digitized approach is likely why Google is interested as these access points range across desktop, mobile devices, console kiosks, enclosed kiosks, polycom-codec based carts and Cisco-codec based carts (pictured below).

Module offerings include Acute Behavioral Health, Urgent Care, Speciality Consult, School Health, Telestroke, Behavioral Health Therapy, Retail Health, Triage in the ED and Dialysis.

The company offers software development kits (SDKs) and APIs to integrate telehealth digitally and to embed into workflows. This includes web and mobile apps, 24-hour nurse and customer support, electronic health record (EHR) systems — including Cerner and Epic – with the ability to launch telehealth visits from within the EHR, and administration functions, like enrollment.

Subscription fees are recurring and are determined by the initial forecast of the number of overall consultations throughout the entire health system on the Amwell Platform and net patient revenue of the health system. 

Subscriptions include a maximum number of consultations, when it exceeds the contractual maximum, overages result in higher subscription fees in the following annual period.

The company also provides access to AMG, the company’s affiliated medical group that provides clinical services on a fee-for-service basis. Amwell’s contracts are typically three years in length or longer. AMG services are provided on a fee-for-service basis. These clinical fees vary significantly from $59 to more than $800 per consultation or case based on the specialty and may require an additional module subscription, such as telepsychiatry.

Amwell’s partner AMG has built a network of over 5,000 providers who are registered and credentialed to deliver care on the Amwell Platform. AMG earns fee-for-service revenue for each episode of care delivered on the Amwell Platform by its providers with fees varying by physician specialty or clinical program. Health systems often choose to purchase clinical services from AMG to deliver care for certain specialties, such as telepsychiatry, behavioral health therapy and general urgent care, or as backup for off-hours. 

Amwell’s Growth:

Here’s a visualization provided by the company in the S1 that shows how the telehealth microtrend is playing out on the provider level and the tailwinds this has provided to Amwell:

Here’s how monthly visits across customers has grown with some of the numbers retreating once shelter-in-home restrictions were lifted. Visits in April 2020 were as high as 40K per day compared to 3K per day in April 2019 and 5,500 visits in January and February.

There is overlap with Teladoc and Amwell, yet Amwell has more of a slant towards emergency and urgent care services. The company is also distributed across more kiosks and “care points” and is centered around two major partnerships (AMG and Anthem). Anthem began using Amwell for urgent care in 2013 with psychology and integrated EAP added in 2016 (this is where Teladoc competes). According to the S-1 filing, if the Anthem-Amwell product “LiveHealth” had not been offered, then 6% would have gone to the emergency room, 42% to urgent care and 33% to a physician’s office. 

Finances:

Amwell reported revenue growth of 31% year-over-year to $148.9 million in 2019. The company saw phenomenal revenue acceleration of 77% in the first six months of 2020 from $69 million to $122.3 million for an annual run rate of $244.6 million.

There are worsening losses in both periods. Net losses increased year-over-year from negative $52.7 million in 2018 to negative $87.2 million in 2019. For the first six months of 2020, net losses increased from negative $40.7 million to negative $111 million, or $222 million annual run rate for losses. This will represent an increase of over 200% year-over-year.

The company had cash and investments of $262.7 million and no debt as of June 30th.

Subscription fees received from health system clients totaled $27.3 million for the year ended December 31, 2018, and $38.8 million for the year ended December 31, 2019, respectively, and $17.9 million for the 1H 2019 ended June 30, 2019, and $23.6 million for the 1H 2020 ended June 30, 2020.

According to the S-1 filing, the subscription revenue market for health plan and health system customers is $8.7 billion and $3.7 billion, respectively. The company believes the 290 million that are insured in the United States are potential customers. They have identified 802 health systems that could benefit from Amwell. 

The urgent care market is $18.2 billion. According to a 2016 report referenced in the S-1, there are 883 million ambulatory care visits in the United States. Amwell states 35% of these visits, or 309 million could be handled through telehealth. 

Revenue Mix

The company has a mix of revenue from health systems, health plans and AMG paid visits. As of June 30th, the company had 55 health plans (covering 80 million lives) and 150 health systems (more than 2,000 hospitals). AMG’s active provider network grew 145% year-over-year to a total of 3,800 active providers. 

For the year ending 2019, where total revenue was $148.9 million, 57% was platform and 27% clinical visits. 

•       $38.8 million in Health Systems revenue, or 26% 

•       $30.6 million in Health Plans revenue, or 20.5% 

•       $40.7 million in AMG Paid Visits, or 27.3% 

•       11% Sales of additional services

•       5% Care Points/Hardware

In 2020, the Amwell platform (Health Systems and Health Plans) represented 38% of revenue while clinical visits represented 51% of H1 2020 revenue. Here we see that the 2020 growth was primarily driven by AMG. 

Risks:

The relaxation of regulatory and reimbursement barriers could be temporary without support from Congress, especially for Medicare. Telehealth is a new trend that could slow once there is a vaccine and treatment for the coronavirus. Amwell believes their partnership with AMG and adherence to HIPAA regulations will cause them to stand out over time and even in the face of a return to tighter regulations. 

AMG is a very large concentration of revenue although this partnership does not appear to be at risk at this time. Per the Revenue Mix section in this analysis, it should be noted the revenue acceleration we saw in H1 2020 came from AMG clinical visits rather than the platform. 

The net loss increase is substantial, with the net loss-to-revenue ratio increasing from 46% to 93% between FY2018 and H1 2020.

Valuation:

Amwell plans to raise $525 million by offering 35 million shares at a price range of $14 to $16. The company will raise an additional $100 million in the private placement with Google. At the midpoint, this places Amwell’s diluted market value at $3.6 billion.

Amwell Valuation Table

$3.6 billion $4.0 billion $4.5 billion $5.0 billion

TTM Revenue $202 million 17.8 19.8 22.2 25

Current Year 70% $330 million 10.9 12.2 13.6 15

Forward Revenue 70% $415 million 8.7 9.6 10.8 12

1-year Forward 60% $665 million 5.41 6 6.8 7.5

1-year forward 80% $747 million 4.8 5.4 6 6.69

We can comfortably go up to a $6.6 billion valuation and still trade at the forward P/S of Teladoc, which saw a similar range of revenue acceleration from 30-40% pre-covid to 85% post-covid. Livongo is not the best comparable as the company reported much higher revenue growth of 100%+ both pre-covid and post-covid.

Therefore, we will go as high as $6 billion market cap on opening day. The risk is that the addressable market is not very large at this time relative to market cap. We are comfortable with this risk in light of the strength in the telehealth trend.

Market Report: September 13th, 2020

Posted on by io-fund

In this report we analyze: Roku, Microsoft, Docusign and BigCommerce

Please note the glossary of terms and techniques here and herehere and here

You can access our portfolio here. You can also track in real time our Buyshere. You can also track in real time our Buys/SellsSells/Portfolio Activity in the Portfolio Activity in the forum.

If you want to track us in real time, we recommend that you set up alerts to these 3 topics “Portfolio Activity”, “Buys,”  and “Sells” which can be done by clicking on their icon/image, or search for their name in the search bar. Then, click the follow button and it will turn red like the image below.

The setups we outlined in Netflix, AMD and Teladoc last week are still active. You can access them here.here.

Roku (ROKU)

SummarySummary

  • Even though Roku is 16% off its high, the force behind the drawdown is not strong. Volume is light, and smart money is not selling.
  • If $150 breaks, we will target the $144-$140 region.
  • We will also look for the 37 mark on the RSI for a bottom, as well.

After breaking out at the $175-$176 region, Roku fell back below this major resistance, confirming a false breakout. We stopped out of our recent tranche in an attempt to play this breakout, and currently setting up our next plan to buy more shares for our long-term position.

Roku is currently down 16% from its highs and found support at the $151-$150 price range. Also, note the blue trendlines. These are Anchored Volume Weighted Average Prices (AVWAP)that are tied to the major swing lows within the recent uptrend. This tool helps determine the health of a trend and also determines key supports for when that trend changes.

Roku found support at the June 29th AVWAP and is currently holding this price. Even with a 16% correction, these AVWAPs show we are still in a healthy uptrend.

Further signs of strength can be found in the volume. Notice how the volume trend has been decreasing with the selling. This is telling me that the drawdown is not backed by excessive selling, but more of a lack of buyers.

The Accumulation/Distribution line supports this. Note the lower lows while ROKU’s price makes higher highs. This is not what you want to see prior to a breakout; however, note how that lows in the A/D are moving higher. This is confirming that even though “smart money” is not buying, they are also not selling.

For the sake of simplicity, if Roku breaks the $150 support, it will confirm a downtrend is in place. If this happens, my targets are from $144 – $140. The question will be – how low does price have to go before the smart money steps back in? It’s not at $150, so we will likely look lower for a bottom.

The RSI will also be key for finding a buying spot. With no positive divergences showing up on the daily chart (or hourly), we will look to the 37 mark for a bottom. This has been major support in the RSI throughout Roku’s history. If the RSI finds this support while price is also on a key support, that will be a buy for us.

The long-term chart lines up with the fundamental thesis here. We are long-term bulls, and will use this period to further accumulate shares in one of our favorite stocks.

Microsoft (MSFT)

SummarySummary

  • After crossing the $220 resistance, Microsoft invalidated the possibility for a large degree downtrend that we have been tracking for several weeks.
  • This is great news for the long-term outlook for MSFT and the market. However, the chart suggests we are now in the 2nd wave, which could be rough in the short-term.
  • We will be buyer in the $192-$185 region.

We’ve been tracking Microsoft extensively this year. I suggest you look at my deep dive into the long-term chart to get an idea of the trends at play. You can access that here. We’ve held off on buying MSFT into this rally because of the risks we outlined below the $218-$220 price. Below here the slight possibility for a larger than normal downside setup was on the table.

As of now, there is good news and bad news with Microsoft from a technical perspective. The good news is that this large downside setup has been invalidated once MSFT crossed the $220 mark. For the long-term prospects of Microsoft (and the market), we are expecting higher levels once this correction plays out.

Furthermore, the 5 wave move off the March low is arguably the most classic example of a standard 5 wave pattern that I’ve ever seen. For example, the most common extension for the 3rd wave to end is the 161.8% extension, which for MSFT was around $213. We then look for the 4th wave to end around the 23.6% or 38.2% retrace of the 3rd wave. Microsoft’s 4th wave ended at the 23.6% retrace exactly. We then look for the 5th wave to end at the 200% extension with the MACD showing negative divergence. For Microsoft, the 200% extension was $232 with the MACD diverging. If I was going to teach someone how Elliott Wave mapping works, I’d start with this 5 wave pattern because of how text book it is.

Now for the bad news – what follows the 1st wave is the 2nd wave drawdown, which we have been planning for. If you look at the downtrend in MSFT, we have a clear A wave with a B wave that followed. It then gave way to price just briefly making a lower low, which is key. If the downtrend was over, we would’ve looked for a retest of the recent low and a hold above it, setting up for a move up. Once Microsoft breaks the $201 region, the C wave will be in play.

I’ll target the $192-$185 region for entry. This is a heavy confluence of important prices as well as the symmetrical move for this correction, which we’ve used successfully to get shares of many stocks in corrections close to their lows. There is also an open gap at $192, which should lead to a bounce.

Also, the Anchored Volume Weighted Average, which I anchored to the low in March, will be in this region this week. This is the best gauge for testing the health of an uptrend, and even with this pullback, the bulls are still in control according to this indicator. Expect heavy buying in this region, which we will participate in.

Docusign (DOCU)

SummarySummary

  • DocuSign is down 35% from its all-time high, and just broke another key support at $205.
  • The largest volume spike in its history happened at all-time highs, setting off a wave of selling.
  • The structure suggests that the large degree 3rd wave is over, which puts the 4th wave targets at $185 – $140.

We outlined our plan for buying DocuSign in the forum last week, which you can access in the DOCU topic. Since the March low DocuSign has been in a clear 3rd wave. Third waves are powerful trends, which anyone invested in DocuSign since March is aware of. It has returned nearly 350% since the March low before hitting a top $6 below our target price at $298.50.

Confirmation that the 3rd wave is over and that we are now in the large degree 4th wave (in red) comes from a few signals:

  • Notice the massive volume spike. This is the largest move in volume in DocuSign’s history, and it’s predominantly selling. This means a large number of buyers have sold in unison, reducing the demand for shares. We will need buyers to step back in to stop the correction, which hasn’t happened even after a 35% drawdown.
  • Price has closed below the 55-day EMA
  • The RSI is clearly below 50 and holding, indicating that momentum has shifted to the downside.
  • Price closed below the key support of $205.

For DocuSign, the most common targets for 4th wave supports are at the $185 for a shallow 4th wave and $140 on the deep side. The AVWAP, tied to the March low in blue, appears to be moving into the $185 region while the 200-day SMA is moving into the $140 region. The momentum indicators will be crucial for determining supports. They have their own support regions that I will be following, as well. We’ll be looking for signs of a bottom while both are hovering around key supports.

We started buying at $205 of Friday, and will be heavy buyers at the $185 region if we get there.

BigCommerce (BIGC)

SummarySummary

  • BIGC is in a deep drawdown.
  • It broke the $80.60 support, and thus means there is likely more downside ahead.
  • Until price gets into the mid-$70s, the valuations are just too rich compared to other fast-growing stocks we own.
  • The structure is unfortunately setting up for two extreme scenarios – either we are in a deep 2nd wave, which will give way to a strong 3rd wave to new highs. Or, we break to all new lows (below $64), at which point the price structure could be setting up for an even deeper drawdown.

We’ve been tracking BigCommerce since it topped a few weeks back. So far, it has been in a complex series of symmetrical corrections. My chart above outlines this path, and it assumes that BIGC is in a 2nd wave correction. This implies that the recent uptrend was it wave 1, which actually lines up well.

The problem with BIGC is that there is no indication that the correction is done. The second wave can go as low as the all-time low and still be valid, but this is an additional 25% from current prices. Furthermore, until it gets into the mid $70s, from a P/S standpoint in the E-commerce space, it’s not worth the risk.

Also, note the AVWAP, which I tied to important swing highs in the downtrend. Until BIGC stops making new lower highs, and starts taking back some of these AVWAPs in blue, the trend will remain down.

If BIGC can continue into the $70s and show some sign of bottoming, then we may take another shot at BIGC with stop just below the all-time low. If the price breaks to new lows, we will step away.

Analysis of Asana’s Upcoming IPO

Posted on by io-fund

This article was originally published on Forbes on Sep 3, 2020,11:33pm EDTForbes on Sep 3, 2020,11:33pm EDT

When considering if I should buy into a SaaS public offering, my first thought is the company better be special because there are some very solid choices already on the market. Despite Asana having investable growth, the company may be in too-crowded of a space for the size of the addressable market. This is evident in the widening losses and the need to double R&D and sales and marketing to keep their revenue growth competitive. Furthermore, in the most recent quarter, there was notable deceleration in revenue from 86% for the fiscal year to 71% year-over-year in the April quarter. Below I go over some of Asana’s strength and the maximum valuation I’m willing to pay.

History of Asana:

Asana was founded by Dustin Moskovitz, who is best known for co-founding Facebook with his Harvard roommate, Mark Zuckerberg. Asana filed its S-1 last week and is expected to list directly on the NYSE in late September. The company ranks at No. 17 in this year’s Forbes Cloud 100, the annual ranking of the world’s top private cloud-computing companies, up from No. 41 a year ago.      

Asana is workplace collaboration and planning software that is designed to help teams orchestrate their work so they can achieve their goals more efficiently. The company’s software is used by more than 75,000 companies including AT&T, Google and NASA. Asana has 1.2 million paid users and an additional 3.2 million free activated accounts, according to the filing

The product provides teams with effective tools to coordinate their workflows and increase productivity. According to Asana’s filing, 28% of work time is spent answering emails, 19% is spent gathering information, and 14% is spent on internal communication.  

Citing IDC data, the work management market that Asana addresses is expected to grow from $23B in 2020 to $32B in 2023. The company believes they have the opportunity to reach 1.25 billion global information workers and that their existing customer base represents less than 3% penetration of the total addressable market. Forrester research has listed Asana as one of three leaders in the collaborative work management space. You can view this here.

Notably, there are many competitors missing from the evaluation, for example Atlassian and Jira, Basecamp, Trello, Click Up, Pivotal Tracker – plus Salesforce with its project management applications.

Financials

For fiscal 2020, Asana’s revenue came in at $142.6 million, representing growth of 86% YoY. In its most recent quarter ending April 2020, Asana recorded 71% YoY revenue growth. The company also saw its losses grow from $50.9 million in 2019 to $118.6 million in fiscal 2020. 

In its most recent quarter, net losses grew 138% year over year. The increase in losses can be attributed to the company more than doubling its spending on research & development as well as sales & marketing.

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Asana’s dollar-based net retention rate, which measures how much existing customers spent on the platform today versus how much they spent a year earlier, was over 120% in 2019. For customers with an ACV greater than $50k, Asana’s net retention rate expands to over 140%, indicating that its biggest customers are spending significantly more than they did a year ago. 

Asana’s gross margin is 86.1%, which is among the best in the software industry. However, the company’s free cash flow margin is -33%. In 2020, the company’s sales & marketing expenses accounted for 74% of its revenue and its research & development spending accounted for an additional 63%. 

Risks

Asana operates in a highly competitive industry with many companies competing for a share of the market. The company states the following, “The market for work management solutions is increasingly competitive, fragmented, and subject to rapidly changing technology, shifting user and customer needs, new market entrants, and frequent introductions of new products and services. We compete with companies that range in size from large and diversified with significant spending resources to smaller companies.”

To compete for market share in such a crowded space, Asana will have to continue to allocate a large portion of its revenue to customer acquisition strategies. 

The company outlined this strategy in its S-1, stating that it expects to increase its operating losses in the future to prioritize growth. The issue is that Asana saw a deceleration of sales growth in its most recent quarter to 71% from the 86% it recorded in fiscal 2020. Continued deceleration of this growth will be troublesome for the company’s ability to become profitable in the future. 

Valuation

Sources say Asana has been trading at a roughly $5B market value in the secondary market. At a $5B valuation, Asana would be valued at approximately 26.2x forward revenue using its annual run rate. Two of the company’s closest public competitors are Smartsheet (SMAR) and Atlassian (TEAM), for comparison purposes:

David Marlin

With the recent froth we have seen in the IPO market, Asana could open trading at a $6B-$7B valuation. At the midpoint of this valuation, the stock would be valued at 34x forward revenue, which would be among the highest valuations in the entire software industry.

Asana has widening losses and decelerating revenue growth in a highly competitive industry. I believe a fair valuation for Asana would be closer to Smartsheet’s, but we are unlikely to see that until the initial hype and excitement wear off. Asana will be an exciting growth stock to watch in the future, but I believe anything above an initial $5B valuation is too rich.  

Palantir

Posted on by io-fund

Details on Palantir’s Investor Day held September 9th are here.held September 9th are here.

The Economist was correct when it recently stated that Palantir is “more than a technological project, it is a philosophical, even political one.” Palantir has a mythical and esoteric reputation in the Bay Area. The name is well-known and what the company does has circulated for years, which in a nutshell, is data mining for the government.

But until now, a customer list and any level of transparency has gone against the core purpose of the company. Therefore, I was somewhat surprised at the leak in 2018 that Palantir was considering a public offering as it seemed odd the company would operate openly and transparently. In fact, about five years earlier, the CEO had said an IPO was unlikely as it would make “running a company like ours very difficult.”

Nonetheless, the company is wanting to attract more commercial accounts and going public should help facilitate this. The old adage, “you can’t sell a secret” may be hindering Palantir’s growth especially as artificial intelligence startups raise their first and second rounds. Now is a good time to make sure to penetrate commercial accounts before AI bring more direct competition.

Below, I go over some of the folklore that surrounds Palantir and then I discuss S-1 filing. We aren’t dealing with a company where one has to wonder if the company or product will be popular on the public markets. Rather, we need to drill down into valuation and decide how much we are willing to pay.

The Folklore

Palantir can neither confirm nor deny if the software was used to kill Osama bin Laden, but the CEO required a body guard as of 2013, and it was generally understood for about a decade that Palantir had only one customer: the CIA. The company then grew to have three customers: the CIA, the FBI and the NSA.

By 2015, a leaked document from TechCrunch dated in 2013 confirmed twelve government agencies were using Palantir, including the “CIA, DHS, NSA, FBI, the CDC, the Marine Corps, the Air Force, Special Operations Command, West Point, the Joint IED-defeat organization and Allies, the Recovery Accountability and Transparency Board and the National Center for Missing and Exploited Children.” Palantir’s leaked document was the first time the CIA and the FBI had databases linked rather than siloed.

Nearly twelve years after Palantir was founded in 2003, that leaked document was the only record that indicated who used the company’s software. Palantir can be a divisive company that draws strong opinions from supporters and critics. Regardless of how you feel about the work Palantir does, one thing is for certain: as the IPO approaches, the company will dominate headlines.

Often those headlines will get it wrong in an attempt to frame Palantir in various lights. For instance, I don’t think anyone in Silicon Valley batted an eye at Alex Karp’s letter when the company exited for Denver. He stated that engineers “may know more than most about building software but they do not know more about how society should be organized or what justice requires. Our company was founded in Silicon Valley. But we seem to share fewer and fewer of the technology sector’s values and commitments.” These sensational headlines and CEO-centric storylines are distracting (i.e. who, then, does know how society should be organized and what justice requires? This is fairly presumptive and one of the many dramatic sentences from the filing).

When looking at things rationally, it’s probably better that Palantir be in Denver as government is a major industry in Colorado and being centered in the country will position the Palantir closer to Washington D.C. Palantir’s investors are not traditional Silicon Valley VC-firms, either. The company was likely there to attract top talent.

Palantir’s venture firm, In-Q-Tel, is located in Virginia and is funded by the CIA. This group has funded many projects, including Google Maps, Gitlab, Pure Storage, MongoDB, Cloudera and FireEye – but Palantir is on a different level as the CIA was the primary customer for many years. For these other companies, the CIA was not a primary customer. In-Q-Tel does not typically disclose funding rounds, amounts or dates. However, according to CNBC, Palantir received a $2 million funding round in 2004. Other investors include Peter Thiel, Stanley Druckenmiller and Tiger Global.

On the positive side of things, Palantir is believed to have helped with counter-terrorism, human trafficking and disaster response. On the more questionable side, the company has helped to deport immigrants and allegedly track law-abiding United States citizens without consent (i.e. spy software).

The company embodies “taking the good with the bad.” A former Marine, Samuel Reading, was quoted saying “it’s the combination of every analytical tool you could ever dream of. You will know every single bad guy in your area.” That, of course, implies having to know every good guy in the area too.

In the past, the Board has included Condoleeza Rice and former CIA director George Tenet, who said “I wish we had a tool of its power” before 9/11. The software was also allegedly used to convict Bernie Madoff.

Just when you think Palantir couldn’t be steeped in any more controversy — there’s more. In 2016, the company sued the United States Army for unlawful procurement solicitation for the Army’s internal intelligence software suite. Palantir argued the Army should be stopped from developing a risk-prone software project that would cost more than using Palantir’s software. In the end, Palantir won and the Army signed a $800 million contract over the course of 10 years.

So, why is Palantir going public now? Well, for one, it will be easier to gain corporate clients when (not if) the company becomes a stock market darling. The stock market is becoming a phenomenal source of free press and Wall Street will glamorize the company if it produces solid returns. This, in turn, will help Palantir attract more commercial customers and perhaps bury any ethical opposition.

The markets came close to burying the ethical issues around Uber. Perhaps this time it will succeed with Palantir. I also personally believe Palantir’s wide lead and lack of direct competitors (moat) will erode with artificial intelligence and machine learning. Time is of the essence to go public as AI startups need another few years before they can compete on this level.

Product:

Founded in 2003, Palantir is described as a company specializing in big data analytics. Palantir’s specific expertise in government intelligence and its existing ties to national security and the intelligence community differentiate its offering from competition.

The company has two platforms: Gotham and Foundry. These platforms allow organizations to combine core data with critical tools into a single platform to help users obtain actionable insights from a unified data asset. What Palantir tackles is the issue of data being siloed and ineffective for problem solving. These problems may relate to manufacturing, product development or customer experience.

The data Palantir gets is from the customer themselves and their existing databases although Palantir can crawl and scrape data that is freely available. For instance, Palantir can easily scrape public social media profiles but probably does not have access to private profiles except when the FBI issues government requests to Facebook.

The traditional deployment involves hosting Palantir servers in a customer’s data center. There is a cloud-based offering, as well, so the company can work across a range of hosting environments.

The company differs from a business intelligence solution like Tableau, Alteryx or Cloudera by answering questions that a model cannot answer. An example might be “how do we service car loans to people least likely to default” or “how do we catch fraud before it happens.” With traditional BI, it’s assumed you have the complete data set. Palantir tackles situations where a company may not have the complete data set. This is a crucial difference.

Palantir Gotham was the company’s first platform, built for government operatives in defense and intelligence sectors. The platform enables users to identify patterns hidden deep within datasets using semantic, temporal, geospatial and full-text analysis. Here are some ways the platform is used:

Graph: This application allows data objects to be seen as nodes and edges. Users can visualize events, filter objects and plot characteristics in a logical manner.

Source: Palantir.com

Map: This brings geospatial capabilities to track geo-located objects and events and to create heatmaps for the density of the objects.

Source: Palantir.com

Object Explorer: This feature is powered by the Horizon in-memory database, which competes with Apache Spark by letting users query billions of objects. The database provides further analysis for Map and Graph data.

Source: Palantir.com

Browser: This enables search queries for investigations and surfaces information, runs relevant searches, displays key data points and answers analytical questions.

Source: Palantir.com

Palantir Foundry is the commercial offering and has four layers of tooling: Foundry Core, Data Foundation, Ontology and Workflows. This four-step process does the following:

  1. brings volumes of data into one place,
  2. transforms the data into a format that analysts can work with and enables validation in any number of programming languages
  3. the “ontology layer” allows datasets to be turned into real-world concepts with the ability to accelerate on the company’s core ontology to reduce redundancy
  4. workflows is where it all comes together in an integrated environment for object exploration, point-and-click top down analysis, code authoring, time series analysis, data science and application development. When a user has a question, it answers it using all layers and tools available.

Palantir describes Gotham and Foundry as the “ability to construct a model of the real world from countless data points.” Unlike a SQL database, natural language is used to query data and return results in real-time rather than through strings. To some extent, Palantir resembles Elasticsearch in its ability to use a search stack to answer complex questions. For instance, Elastic is used to pair a passenger with an Uber driver or to process billions of log events from Sprint for outages or Fitbit to validate failures and for data discovery. Kibana can be used with Elastic to visualize the data. Another company where Palantir could potentially share the customer pool is Splunk or perhaps Sumo Logic. It’s not clear though if Palantir is price competitive with these other tools to be used in their place for analysis or if Palantir’s offerings are overkill for the analysis most companies require (to justify a higher price).

The truest, closest competitor for Palantir is Semantic AI, which supplies graph-based analytical platforms to the DoD and other government agencies. As stated, I think Palantir’s real competition is being developed as we speak as it will machines will answer questions from incomplete data sets once the AI/ML market is built out.

Some real-world uses for Palantir include Hershey’s using the software for global food distribution and to correlate weather patterns with snack consumption. Chase Bank and other financial firms use Palantir’s data analysis to catch fraud. Pharmaceutical companies to expedite the development of new drugs – this being a substantial use case this year and perhaps why Palantir’s revenue has accelerated.

Financials

The company grew revenue 25% year-over-year to $742 million in 2019. This accelerated to 49% year-over-year to $481 million for the six months ending June 30th. According to a Reuters article in June, the company is expecting $1.5 billion in 2021, which looks easily achievable. The company’s annual run rate based on the current quarter is about $1 billion.

Bloomberg reported from an unidentified source that Palantir’s revenue in the second half of the year is often larger during the fourth quarter due to government contracts being finalized. According to the article, Palantir books roughly 60% of revenue during the fourth quarter. For valuation purposes, we will run three instances between $1 billion and $1.5 billion. The higher number assumes Q4 is strong and the revenue acceleration we are currently seeing will continue. To simplify things, we will offer a scenario with $1.25 billion in revenue (see below).

Net losses for 2019 of $579 million were flat year-over-year compared to net losses in 2018 of $580 million. On an adjusted basis, net losses in 2019 were $337 million. The losses are shrinking with H1 2020 reporting a loss of $164.7 million compared to $280.5 million in the year-ago period.

On an adjusted basis, the company was profitable in the first six months of this year at $17.2 million compared to a loss of $167.6 million in H1 2019. This improvement in operating results was driven by increasing revenue and reducing the number of engineers needed to install and deploy software programs.

Gross margins for H1 2020 are at 73% and the company spent only 42% of revenue on sales and marketing.

The company has cash of $1.5 billion and debt of $297.6 million as of June 30th.

Contribution margin is a Non-GAAP key metric that represents the revenue the company generates relative to the costs incurred. It strips out variable costs related to deploying and operating the software and identifying new customers.

You can think of it as falling somewhere between gross margins and operating margins. For comparison purposes, Palantir’s gross margins are at 72.3%for the six-month ending June 30 and the company has negative operating margins of -48.5% and negative net margins of -78%.

The company states the addressable market is $119 billion across commercial and government sectors. The TAM in the government sector is $63 billion and the TAM in the commercial sector is $56 billion. Within the government TAM, domestic is $26 billion and international is $37 billion.

The commercial sector is the growth story. For example, Skywise is a solution that connects in-flight, engineering, and operations data to break down siloed systems around maintenance, flight management and aircraft monitoring and safety. Palantir is partnered with Airbus who offers this solution as “the leading data platform for the aviation industry.”

This example can extend to many industries, such as pharma for drug development data to better understand population dynamics and drug outcomes. This is for the pre-clinical and clinical stages, mapping treatment pathways, and automating reporting. Manufacturing can benefit from Palantir Foundry by managing inventory, saving on distribution costs and prevent delays while increasing sales.

There are also solutions for financial compliance, insurance, automotive and sales.

Valuation

Palantir is doing a direct public offering (DPO), which means there will be no new shares offered and no underwriters. The goal of a direct listing is not to raise money rather to allow existing investors to sell their shares. However, unlike Spotify and Slack who did DPOs, Palantir will have a lock-up period. I find a lock-up period to be more favorable for retailers Spotify took nearly two years to break out from its opening DPO price and Slack is taking about a year to break out beyond its opening price.  

The company’s founders, Peter Thiel, Alex Karp and Stephen Cohen, own 30.2% of the company’s stock. Peter Thiel owns additional stock through various investment management funds that own stock, such as Founders Fund. Thiel has 28.4% corporate voting power, Karp has 8.9% and Cohen 3.1%.

There will be three classes of stock: Class A, Class B and Class F common stock – which is unusual to have three tiers. Class A will allow for one vote, Class B will allow for 10 votes and Class F will share 49.99% of the voting power for Palantir. Class F is for the founders who will retain just under 50% of the voting rights at all times. This is reminiscent of Facebook where insiders control about 70% and Zuckerberg controls 58%.

Palantir’s last valuation at $20 billion from 2015 is outdated as is the $26 billion valuation from last year. There were rumors in 2018 that Palantir was privately valued at $41 billion and this is probably closer to where it will trade on the public markets.

If we give Palantir a generous $1.5 billion in forward revenue, it’ll be trading at 20 price-to-sales at a $30 billion valuation and 27.3 price-to-sales at the $41 billion valuation. At the more reasonable $1.25 billion in current revenue, Palantir will be trading at 24 price-to-sales at the $30 billion and 32.8 price-to-sales at the $41 billion.

We can see below that trading higher than 32 forward EV/Revenues is very rare with most trading between 16 and 24.

However, IPOs have a way of pushing emotional buttons and there have been a few recent IPOs that have traded at exorbitant valuations. Zoom Video, Agora, Datadog and Lemonade have all hit the 50 EV/Revenues level.

Palantir is not profitable like Zoom Video and Datadog were at their IPOs. In fact, it’s a bit strange that Palantir has the losses it does with its vintage and guaranteed government contracts. I prefer to not pay over 40 P/S for any IPO as all of them have eventually settled under this number. I’m evaluating Snowflake next, which is a company I would value higher than Palantir due to fewer risks.

Point being, I’m a buyer in the $35 billion to $40 billion valuation on Palantir and then will respectfully wait on the sidelines. Beyond this valuation and I prefer to put my money to work elsewhere.

Risks

Palantir’s biggest risk is customer concentration with the top 20 customers accounting for 67% of revenue and the dependence on government contracts at 54% of revenue. The Army attempting to develop a more expensive in-house solution illustrates there is a risk that government agencies eventually move away from Palantir in the future.

Reputation and social acceptance is also a risk. Tech companies often see employees engage in protests when a company contracts with the government on AI-driven war missions and privacy issues that potentially threaten human rights. Palantir’s biggest obstacle today is the work it does with ICE which pits the company’s internal employees against the CEO on social issues.

For instance, Google ended a contract with the Pentagon when employees protested using AI for lethal purposes. Karp became controversial and challenged Google on this decision, saying it was a “loser” position. This can backfire as Palantir may not be able to attract top talent as AI companies begin to compete from a small pool of AI developers and engineers who have proven to protest and walk-out of company projects they feel are unethical. Amazon, also, banned facial recognition for law enforcement for one year following the George Floyd protests. Therefore, Karp’s personality could be considered a risk as the tech world begins to explore and support ethical AI development.

Despite government-backing, Palantir’s products are certainly not bulletproof. The company attempted to launch a platform called Metropolis to help hedge funds with trading, among other things. This platform did not succeed as hedge funds already possessed AI tools that were more of a complete package and the project was shut down. There are also rumors that the CIA has been cold towards the company since the CEO chose to be more in the public eye, especially around Osama bin Laden’s death. Palantir began linking to articles asserted their software was responsible for bin Laden.

To conclude, Palantir must be sensitive enough to win over commercial clients and top talent yet must not lose government contracts from being too overt. For valuation, I’ll cap it at $35 to $40 billion max.