Q3 2021 Earnings: Roku and Magnite

Posted on November 9, 2021June 30, 2026 by io-fund

Ad-tech Overview

The chess pieces are being rearranged in ad-tech and I don’t think this quarter is very meaningful in terms of where this will go long-term. These shifts can take a while but our strategy from the beginning has been to stick close to first-party data companies. Magnite is given access to first-party data by representing publishers and the rest of our stocks are firmly cemented in first-party data.

I think it is a false assumption that we have all of the information from 10 days of IDFA changes and iOS 15 being live. The migration towards or away from certain ad platforms can take months, quarters or years. But there is certainly evidence that the shift has begun.

Regarding who will do well long-term, it will be those who work with first party data. There is quite a bit of evidence that this is where the advertising world is headed. Listen to Twilio’s call and you’ll see they are a cloud company banking on this shift.

“Digital growth and digital personalization or how businesses are building their businesses is a tremendous opportunity. And that opportunity is actually accelerated by the [Indiscernible] changes, like on the world of IDFA tags and third-party cookies, and all those things getting change because companies here rely on what's just honestly shenanigans. Like in the changes that have been going on, whether cookies or IDFA tags, these privacy changes are on the right side of history. And so, what Twilio's providing is the antidote to all those changes, which is a personalization and marketing system that starts with first-party data.”like on the world of IDFA tags and third-party cookies, and all those things getting change because companies here rely on what's just honestly shenanigans. Like in the changes that have been going on, whether cookies or IDFA tags, these privacy changes are on the right side of history. And so, what Twilio's providing is the antidote to all those changes, which is a personalization and marketing system that starts with first-party data.”

Here is what Magnite said in their recent call: “It’s been a third-party cookie world with third-party data that has really ruled the ecosystem. And I think publishers are clearly seeing a shift and buyers are starting to acknowledge this is really good information [first-party data]. They have a direct relationship with the consumer.”It’s been a third-party cookie world with third-party data that has really ruled the ecosystem. And I think publishers are clearly seeing a shift and buyers are starting to acknowledge this is really good information [first-party data]. They have a direct relationship with the consumer.” My original thesis on Magnite was centered around first-party data.

Here is what Roku said regarding the shift from third-party data to first-party data in their earnings call, “Yes, as you alluded to and the way you framed up the question, the disruption and the noise around the loss of cookies and device IDs like Apple's IDFA in general is a net benefit to Roku, really for two reasons. First, independent ad tech is very challenged in an environment, where these identifiers are getting more scarce because, they don't have these identifiers. They don't have a direct consumer relationship, whereas Roku does. And so we're always working on our platform with our own first-party data and it's a fundamental advantage for us and ultimately is bringing brands to us.”They don't have a direct consumer relationship, whereas Roku does. And so we're always working on our platform with our own first-party data and it's a fundamental advantage for us and ultimately is bringing brands to us.”

This is what you’ll need to ask yourself – are all of these management teams wrong or is the market wrong? Because clearly the market is penalizing these first-party data companies while rewarding third-party data companies (Snap deeply penalized compared to Facebook which is excessive on third-party data AND Roku penalized vs The Trade Desk which is only third-party data). Granted, the Trade Desk would be more affected by browser cookies being eliminated (this could happen end of 2023) but to have no affects long-term compared to Roku is not the correct outcome.

Hopefully by now, you know we would close a position if we thought the story was materially weaker than we previously estimated. When we close a position, our goal is to move that money into a compounder. However, I also don’t mind standing in front of a train and saying the market is wrong if I think the product isn’t fully understood. How many times will I have to do this with Roku? We can add Q3 2021 to the long string of misunderstood moments in Roku’s history!

We already covered Snap following earnings here, but I will tell you that October 2021 is now branded in my mind as another example of how the market lives in an alternate reality of two extremes. When Snap was experiencing its biggest one day loss, the company was simultaneously launching the most bullish product in the company’s history – Arcadia. This product helps Snap scale AR brand ads beyond its own platform. It’s a critical moment when an advertising company is able to monetize audiences outside of its own feed (or channel), and therefore, it’s bizarre to see a double digit drop during the month of Arcadia’s launch (but will provide a great editorial someday).

Magnite has always been a high flier for us; one where we are counting on the whole being greater than the sum of its two parts. If CTV ads were at saturation like mobile or desktop, then we would not be in Magnite or maybe even Roku. It’s this tailwind that has been able to overcome the current headwinds. Magnite not pictured because a pro-forma was not offered, however, we believe the pro forma growth rate for Magnite is around 25% placing the company between Google and Twitter.

Here is Pay TV ad spend in the United States alone compared to CTV ad spend of $24 billion. When Pay TV ad budgets stars declining like cable TV subscribers has declined, then we know we are finally in the true market for CTV ads.

Roku Earnings

There is a lot to unpack with Roku. Despite headwinds, it’s technically the strongest ad-tech company in terms of forward growth yet the market is going through a serious (and intense) period of doubt. We will need to discuss Player revenue, what supply shortages mean for smart TVs and dongles and competitors such as Google and Amazon and. The supply shortages affect Roku’s active accounts but Netflix also made it clear during Covid that there was a pull forward in terms of subscribers, which is similar to Roku’s situation.

Even despite these near-term risks, Roku is guiding for 37% growth which is the highest of all ad-tech companies above $20 billion in market cap. Notably, Roku is guiding high (comparatively) on a very large revenue base of $890 million at the midpoint for next quarter. Compare this with The Trade Desk, guiding for 21% on revenue of $339 million.

We will quickly go over the financials before breaking down the main issues that the market is concerned about. Then, we revisit our thesis to see if Roku is still on track. The goal is to always figure out where the market is wrong and being inefficient.

Financials:

Roku’s total revenue grew 50% year-over-year to $680 million. Platform revenue increased 82% to $583 million. Gross profit increased 69% and active accounts increased 23% year-over-year. Sequentially, active accounts were low at 1.3 million adds.

Average revenue per user (ARPU) is at $40, representing an increase of 49%. To grow ARPU from $27.00 to $40.00 in roughly a year is unheard of. Here is how Facebook’s ARPU compares with it taking the company 16 years to reach $40 ARPU while it took Roku four years from the launch of its ad exchange to achieve this ARPU. You’ll see the jump from $27.00 ARPU to $40.00 took a few tries between 2017 and 2020 for Facebook while Roku has nailed this incredible monetization growth in one year.

Clearly, Roku does not have billions of users like Facebook but ARPU is a vital sign as to the strength of an ad platform. It’s also helps to elucidate why Roku management is taking it on the chin with Player revenue (see below) and what they mean by flywheel across Roku’s diversified product line, which is an operating system, an ad exchange that extends to mobile and the web, and a publisher.

The $40 ARPU means that Roku can take losses growing its audience and will be able to make up for those losses over time – and that’s exactly what Roku intends to do.

Player revenue is down 26% year-over-year. There are also losses on the player from $20.2 million in profit in the year-ago quarter to $97.4 million in losses in the current quarter. The company stated the following regarding these losses, “While Roku player unit sales were down year-over-year in Q3 2021 (following the extraordinary demand spike we saw in Q3 2020), unit sales were above pre-COVID Q3 2019 levels. Our player unit costs were impacted by the supply chain disruptions. However, we chose to insulate our consumers from these increased costs to prioritize account growth, resulting in Player gross margin decreasing to -15%. We view this Player gross margin erosion as temporary.”

Regardless of transitory issues with player revenue, the substantial increase in ARPU is helping the margins quite a bit with gross margins of 53.5% up from 47.6% in the year-ago quarter and adjusted EBITDA up 132% from $56.2 million to $130.1 million. The gross margins for next quarter are forecast to be weaker at 43% and adjusted EBITDA will be lower between $65 million to $75 million compared to $113 million in Q4 2020. The company explained that the lower EBITDA is from “investing in headcount, product development, and sales & marketing to drive future growth.”

Roku is guiding for quarterly revenue of $885 million to $900 million next quarter or 37% growth, up from $649.9 million in the year-ago quarter. The company is guiding for gross profit of $385 million, or 26% growth year-over-year. To reiterate, what the market doesn’t like is that margin decrease from giving players away at a loss.

You can read our previous analysis on Roku’s ARPU becoming decoupled from active accounts.

Player Sales:

Player sales is the main reason that Roku got clobbered. I don’t believe it was over active users as they were up 23% year-over-year, which in the face of declining player sales is quite impressive. It’s important to remember that earnings are relative and Q3 of last year saw very strong Covid tailwinds where users were buying hardware and staying home. Apple is the bellwether on this issue of the electronics and consumer hardware boom that is now tapering off.

Roku management emphasized the fact the growth is stronger this quarter than pre-Covid levels. “Meanwhile Roku player unit sales remained above pre-COVID levels and the average selling price decreased 7% year-over-year as we chose to insulate consumers from higher costs.” However, with player unit sales down 26% in the face of tough Covid comps, the market is concerned.

Logically, analysts and investors know they are not invested in Roku for the player yet the player can weigh on margins. The gross margin in this quarter was strong for Roku at of 53.5% but the guide of 43% is why there was a sell-off (in my opinion). Wall Street has always been worried about Roku’s margins relative to its player revenue.

Roku is a growth machine – comparatively speaking, it’s heads and shoulders above other ad-tech companies in terms of revenue size (roughly $900 million for Q4) with the strongest guide in our universe at 37%. This communicates how management views headwinds or tailwinds – both are an opportunity for a land grab. Here’s one way Roku is seizing the supply shortage: “As mentioned earlier, we chose to insulate our consumers from increased component and logistics costs, resulting in player gross margin decreasing to negative 15% in Q3.” In addition, the company plans to keep dongles stocked so that if smart TVs sell-out or are too expensive for consumers, they can upgrade their current television with a Roku player.

Here's a question from Laura Martin on the call that is important to understand why Roku could come out ahead in light of supply issues: “But if you're going to sell out of those [dongles] anyway because TVs are running out why would you cut price [of the dongles]? Why wouldn't you double price and still sell out and just and still add as many subs, but at a higher price because you've got dongles in stock when all the TVs smart TVs are running out of inventory at the retail level?”

Here was the answer: “So the supply chain — in the case of players we're not — our goal wasn't to not sell out. We are paying more for expedited shipping for — to get chips get in front of the line for chips. So the results of all that is our costs are going up. But we haven't sold out yet. We've just been paying for air shipping and we've been spending money to insulate the retailer and the end customer from pricing issues and supply issues. So far we've been doing that relatively effectively.”

The translation is that they can air ship boxes of dongles and keep them on the shelves because of their small size while TVs sell-out and/or are cost prohibitive for consumers with average of 42% increase in price. “That [TV sales] is down. The market is down 31% year-over-year in part because pricing on U.S. TVs on average is up 42%. And the U.S. TV market is actually down below pre-COVID levels in the corresponding period in 2019.”

When asked why they aren’t doubling the price given the supply constraints (i.e., and appeasing Wall Street on the margins), the answer is that they are actually going to take a hit on the players at about (15%) because they want to keep costs low, which in turn, will grow active accounts. This goes back to the $40 ARPU. Once someone is a Roku user, there are high switching costs and Roku’s advertising flywheel can make up for the loss on hardware.

Competitors:

What management said on the call exactly matches my understanding, which is that Roku has always been competing against Google and Amazon. There is no change to the story here. Here is what an analyst asked: “First, just coming back to TVs for a second. Obviously, there's some new kind of incremental competition in market between Google TCL, Amazon Fire TV branded TVs and kind of what Comcast is doing. It remains to be seen how successful that will be. But I guess the question is that that narrative is there and I'm curious what you guys think about to kind of offset that narrative?”, there's some new kind of incremental competition in market between Google TCL, Amazon Fire TV branded TVs and kind of what Comcast is doing. It remains to be seen how successful that will be. But I guess the question is that that narrative is there and I'm curious what you guys think about to kind of offset that narrative?”

Here is what management said, “But we've been competing very successfully with large companies, all the companies you mentioned since the beginning. And if you look at where we are in terms of that competition, we've gone from no market share in TVs to the number one licensed TV OS brand in the US with about a-third of all TVs sold now running the Roku operating system. We've built an incredibly strong brands around streaming. We've achieved large scale with lots I believe lots of scale growth to continue in front of us. Most of our growth is in front of us.

… So we've been competing very effectively. We take competition very seriously. I don't see any particular dramatic change in the competitive landscape, with all the stuff that's going on. It's just more of the same, and we will continue to compete in market share.”I don't see any particular dramatic change in the competitive landscape, with all the stuff that's going on. It's just more of the same, and we will continue to compete in market share.”

They also stated Amazon Prime was not up for negotiation at this time. “As for the — your Amazon question, we have renewal discussions with hundreds of partners each year. It's normal course of business. Our goal in these discussions is always to reach an agreement that's good for our partner, good for our customers, delivers a great user experience. Despite what you may have read, our Amazon agreement is not up for renewal or in negotiations at this time.”

We had a Member post on recent stats on the Wire from Conviva. Here is what Roku’s lead looks like:

Here is how Roku looks on a Global scale – Roku is green, Amazon is white and Samsung is yellow.

That picture is worth a thousand words as to why we are long Roku. Our thesis here is that Roku is the royal flush in terms of its positioning. You can view our webinar here.

Lawsuit with Google:

Who hasn’t Roku fought (and won against?) – Peacock, HBO Max and Fox have all threatened to remove access before eventually folding. Google is especially in a bad position here as they are asking for search data from Roku customers to be shared with them, which Roku does not do for other apps. They also want preferential treatment in search results. Keep in mind, that YouTube TV has been off Roku platform since April and Google created a workaround for YouTube TV to be accessed through the YouTube app. The percentages shown above help illustrate why Roku fights these apps – they are the top dog in this space.

The chances that Google goes up against a well-informed tech CEO in the court of law on data requests and preferential treatment with search results is very low. Roku can expose Google in ways that a Congress Vs. Zuckerberg was not able to as Congress does not know enough about data collection to handle Zuckerberg. Meanwhile, Roku representatives can easily describe the issues with Google. The discovery process will be enough for Google to fold, in my opinion, so let’s see if this prediction turns out to be true. It will also leave Google wide open to have an example made of the company in terms of Big Tech’s overreach. Google tends to play things safe in this regard as there’s a whole lot of data issues lurking beneath the surface; no reason to wake a monster.

CNBC and others are also publishing favorably for Roku, including viewing a 2019 email that shows Google did ask for preferential treatment: “But a 2019 email from Google to Roku that was viewed by CNBC shows Google did ask for preferential treatment for YouTube in Roku’s search results.” And, two members of Congress are already salivating at the idea of taking Big Tech to court.

Let’s Revisit the Thesis:

Now that we’ve dissected why Player revenue is struggling and why Google is small beans in the Connected TV world (and very unlikely to go to court), let’s revisit why we are here. What management said towards the end of the call sums it up: “I mean, if you think about the big picture, we believe all TV is going to be streamed. That means, there's one billion broadband households around the world. They're going to get all their TV through streaming. So, a pretty small percent of those are actually doing that todayThat means, there's one billion broadband households around the world. They're going to get all their TV through streaming. So, a pretty small percent of those are actually doing that today.”

Here's another way to frame the growth that is in front of Roku: “I think if you just think about the drivers of our ad business because some of your questions were about our ad business, the biggest driver of the ad business is not these kinds of details. It's the fact that if you look at TV time in the US today adults 18 to 49 spend 42% of their TV time streaming. But if you look at the amount of ad spend on streaming versus traditional TV, it's only 22% has moved to streaming. So there's this big gap still and that gap is starting to close, but has a long way to go. That — the rate of that closure because they will catch up eventually and the rate of all viewers moving to streaming those are the biggest drivers of our ad business which is a $60 billion opportunity.”It's the fact that if you look at TV time in the US today adults 18 to 49 spend 42% of their TV time streaming. But if you look at the amount of ad spend on streaming versus traditional TV, it's only 22% has moved to streaming. So there's this big gap still and that gap is starting to close, but has a long way to go. That — the rate of that closure because they will catch up eventually and the rate of all viewers moving to streaming those are the biggest drivers of our ad business which is a $60 billion opportunity.”

Magnite Earnings

Magnite has gone through a streak of acquisitions (2020-2021) following a large merger in the previous year (2019) and also a name change. The company uses pro-forma to indicate growth for the combined company of Magnite and SpotX. Ex-TAC refers to revenue that excludes acquisition costs. For our purposes, pro-forma is what the Street will be judging Magnite on moving forward.

If the acquisition comes together nicely then we can reasonably expect this growth to accelerate (assuming the whole is greater than the sum of its two parts). Usually in tech growth, acquisitions are strategic rather than accretive yet financial analysts are only able to model the accretive growth post-acquisition. Magnite’s strategy is to become the strongest supply-side player globally and to circumvent the need to figure out hardware (like Roku) by going direct to publishers.

SpotX was a strong company coming into the acquisition and it almost resembles more of a merger in that regard. This is why pro-forma growth is low in the first year at 26% in Q3 and CTV revenue is up 51% on a pro-forma basis. Compare this to 290% CTV growth if we look at only Magnite last year. SpotX brings about $30 million per quarter to Magnite and this is primarily CTV revenue.

Losses are widening on Magnite to a total of $24.3 million, up from $10.5 million. The adjusted EBITDA margin of 35% is based off ex-TAC revenue, so the comparison to last year pre-SpotX is not as meaningful. Operating cash flow was $34 million in Q3.

We’ve covered SpringServe in the past here and more about Magnite’s product.

Magnite did state in normal conditions, they calculate the growth for CTV ads would have been about 40% year-over-year in the upcoming quarter. “From a comp perspective, if you were to remove political from 2020 Q4, our guide – so our guide straight up is about a 23% year-over-year growth in CTV. If you were to remove the political comp, you get to the low 30s in a year-over-year growth scenario. And if we look at the weakness that Michael mentioned in travel, in automotive, we believe that’s impacting us to perhaps $3 million to $4 million in CTV in Q4. And if you factor that in, we’re at about a 40% year-over-year growth rate.”

For Magnite, the company was more insulated because Android revenue helped make up for any loss on iOS revenue. The company estimates that their exposure is in the single digits and they are seeing a high opt-in rate (likely through the publishers). Magnite’s big risk comes at the end of 2023 when Google will end cookies on Chrome. In the meantime, Magnite plans to build solutions for “first-party publisher segments collected in a privacy compliant manner.” It’s something to monitor but not a concern at this time as it’s two years away.

Magnite’s earnings call is one of my favorites to listen to as the management is often asked industry questions and they give very insightful answers about what they think is going on in the ad industry. Here’s an example of where they were asked about Snap and Facebook.

Analyst: “Hi guys. Obviously, Snap and Facebook felt the brunt of Apple’s privacy changes. And I think you kind of alluded to this and talked about it before, but do you believe ad spend shifted out of social media in totality where you don’t play and into the open Internet or CTV as you talked about earlier? And does that – did that benefit results at all, or it sounds like this could be a long-term issue for social media players. So, is this a catalyst for the open Internet as we push forward?”

Answer: “Yes, Nick, this is Michael. Good question. I believe so long-term, yes. But there is a class of advertisers that really became expert at advertising in the mobile ecosystem and relied heavily upon IDFA that they are not going to be able to shift their spend overnight, right. They are just so used to that ecosystem, the attribution measurements. They have grown to trust their models are based upon from a conversion and lifetime value of the acquisition. All those things have to be reworked not unlike an advertiser that’s lived on Nielsen household ratings and linear TV having to get used to more of the measurement in CTV. And so – so, I think there is no question in the open web will be a beneficiary from that. I just think there will be an evolutionary – an evolution period where these marketers will have to treat their models, get comfortable with new methodology, new attribution and continue from there.”

Here's another explanation:

“We read a lot about the advertisers that have stalled their campaigns or stock spend or decreased spend because they are having a really challenging time working with attribution and customer acquisition costs, etcetera. Those guys are extraordinarily lower funnel. They are extremely sophisticated mobile advertisers. To think that they might jump from that world right into the world of CTV is probably a bit of a stretch. And those are the guys that spend $1,000 a day, $5,000 a day on the Facebook, Instagram, etcetera. But then there is a whole other slew of marketers that do social video advertising, that have much larger campaigns, that also take into account brand attribution, that I think are perfect. And our team is set up for that, Jason.”To think that they might jump from that world right into the world of CTV is probably a bit of a stretch. And those are the guys that spend $1,000 a day, $5,000 a day on the Facebook, Instagram, etcetera. But then there is a whole other slew of marketers that do social video advertising, that have much larger campaigns, that also take into account brand attribution, that I think are perfect. And our team is set up for that, Jason.”

Those quotes are actually bullish for Snap as what Magnite is communicating is that savvy mobile marketers need time to rework measurement and attribution but that doesn’t necessarily mean they will jump ship to CTV ads. They did indicate the push for CTV ads could come from smaller advertisers and we saw this with Roku’s Shopify announcement, as well.

You can read more about Magnite’s private market place here.

Addt’l Earnings Reports Write-Ups:

· Snap’s earnings were covered here. You can view our LTBH webinar on Snap here.

· Twilio’s earnings were covered on the forum here. You can view our LTBH webinar on Twilio here.

· Regarding Atomera, this story centers around the announcement of the JDA. Until that happens, there’s not much to update. Knox is watching this one closely on technicals.

· Bradley covered Sunrun Earnings and ZoomInfo on the forum here.

· Royston covered Cloudflare earnings and AMD earnings here. You can view our LTBH webinar on AMD here. The Dark Horse! Which means a competitor that is greatly underestimated.

· Keep an eye on the forum for a Palantir update today/tomorrow and any others that would require a response on what the ER offered. If there’s a beat, we actually de-prioritize these as it means our thesis is playing out and we prefer to spend our time writing analysis on any misses.

I/O Fund’s Overview 6 Cloud Stocks for Q3 Earnings

Posted on November 5, 2021June 30, 2026 by io-fund

Cloud stocks continue to do well in the market as these companies are growing very fast. This quarter we chose Cloudflare, Datadog, Dropbox, Bill.com, Five9, and RingCentral with some already reporting today and some reporting soon.

To understand valuations across cloud stocks and how the sector is positioned, please refer to our analysis “I/O Fund’s Cloud Q3 2021 Earnings Overview”

Cloudflare Inc – Earnings on November 04

Cloudflare’s Q3 sales grew 51% YoY to $172 million, which beat the consensus estimate of $166 million by 4%. The company also expects Q4 sales to grow 47% YoY to $185 million, which is 5% higher than the Street’s initial forecast of $176 million.

Source: Earnings report and YCharts

Cloudflare’s revenue grew from $85M in 2016 to $431M in the year 2020, a compounded annual growth rate of 50% during the period. In the second quarter revenue grew 53% YoY to $152M, it was primarily helped by the strong growth in paying customers. At the end of the second quarter, it had 126,735 paying customers (+32% YoY) and it also witnessed a significant addition of large customers. This growth continued into Q3 as Cloudflare beat topline estimates by 4% after reporting strong YoY sales growth of 51% during the quarter.

Going into earning, Jefferies analyst Brent Thill had downgraded the company to a hold rating from a buy with a price target of $195. The analyst is concerned of the valuation after the strong share gains. However, he continues to view Cloudflare as the "most disruptive cyber vendor with strong fundamentals," he is of the view that “the company has the richest multiple in his coverage universe at 56 times enterprise value to consensus 2023 revenue estimates” and he "would look to get more constructive at a more reasonable valuation."

Needham analyst Alex Henderson has said that the company’s move into email security as a positive. He says “just one more example of why Cloudflare will become a major company.”

Please note, the I/O Fund is objectively reporting what the Street is saying. We covered Cloudflare previously here: Pinterest and Snap Show V-Shaped Recovery; Cloudflare Guns for Zero-Trust

Datadog Inc reports on November 04th

Datadog reported that Q3 sales grew 75% YoY to $270 million, which bested the consensus estimate of $248 million by 9%. The company expects Q4 sales to grow 64% YoY to $291 million, which is 10% higher than initial expectations.

Source: Earnings report and YCharts

In the prior quarter of Q2, Datadog reported strong second quarter results. It beat the analyst’s revenue estimates by $21M and the adjusted earnings by $0.06. The company had also raised the full-year revenue guidance to $938M-$944M, up from the previous guidance of $880M-$890M. Datadog continued this momentum and reported a 9% top line beat during Q3 and guided Q4 sales 10% higher than initially expected.

It also witnessed strong growth of large customers (annual recurring revenue of over $100,000) as they grew to 1,610 from 1,015 from the same period last year in Q2. This quarter, large customers grew to 1,800, up 66% from 1,082 in the prior year quarter.

RBC Capital analyst Matthew Hedberg has raised the company’s price target to $176 from $154 and has kept the Sector Perform rating on the shares. The analyst expects the company to report "strong" Q3 results with upside, building off last quarter's acceleration. The analyst adds that he expects Datadog to continue to benefit from continued traction in multi-module sales, strong new customer adds, and favorable cloud adoption trends.

Our previous analysis on the company:

Podcast with Motley Fool: Big Tech Plus the 1 Stock I’d Buy Right Now

Tech Growth Earnings Review for Q3 2020 – Part 2

Video: Our Stock Picking Strategy

Dropbox Inc reports on November 04th

Dropbox reported Q3 sales of $550 million, which grew 13% YoY and came in 1% higher than the consensus estimate of $545 million. The company’s outlook for Q4 forecasted sales to grow 12% YoY to $563 million, 2% higher than the Street’s initial estimate of $553 million.

Source: Earnings report and YCharts

The company’s revenue growth is not very strong when compared to other cloud stocks. However, the company has got good free cash flow and it’s profitable. In the last quarter, the management has raised the full-year revenue guidance to $2.136B-$2.142B from $2.118B-$2.130B. It aims to generate annual free cash flow of $1B by the year 2024. The management revenue guidance for the third quarter is $543M-$546M, which represents a growth of 12% YoY at the mid-point.

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Jefferies analyst Brent Thill has a price target of $40 and a buy rating on the stock. He believes that the company’s increased full year guidance is still conservative.

Bill.com Holdings Inc reports on November 04th

Bill’s Q1 FY22 sales were $116 million, which beat the consensus estimate by 11% and represented a 166% YoY growth rate (organic growth was 78% YoY). Bill.com guided for Q2 sales to grow 141% YoY to $131 million, which was 12% higher than initial estimates.

Source: Earnings report and YCharts

The consensus analyst’s revenue estimates are strong for the next quarter. However, we cannot compare to the previous periods as the results will include Divvy. It completed the acquisition of the spend management solutions provider Divvy, on June 01, 2021, and the 4Q results included Divvy results. The stock has been one of the best performers in the sector. However, it would be interesting to watch how the company faces competition from other players and justifies its valuation. Bill.com reported Q1 FY2022 sales that beat top line estimates by 11% and guided next quarter sales well above consensus estimates.

Jefferies analyst Samad Samana had a buy rating going into earnings and a price target of $350. The analyst anticipates organic core revenue growth to "decelerate modestly" against a tougher comp, but his 60% growth outlook is still "very healthy". Bill.com should be a "core" long-term growth holding, with the stock offering "solid upside" based on his potentially "conservative" assumptions.

Deutsche Bank analyst Bryan Keane initiated coverage of Bill.com with a Buy rating and $360 price target. He believes that “BILL is uniquely positioned in the market due to its end-to-end offering, including accounts payables (AP) and accounts receivables (AR) automation as well as electronic payment offerings like virtual cards, instant transfers and cross-border FX. He further states “We see potential for ~70% Y/Y core organic growth in 1Q22 and ~57% Y/Y for FY22 compared to guidance of ~60% Y/Y and ~45% Y/Y driven by new customers, higher engagement, and increasing take rates from mix shift with reported growth reaching as high as +124% Y/Y in FY22 including Divvy and Invoice2go.”

Five9 Inc reports on November 08th

Source: Earnings report and YCharts

The consensus analyst’s revenue growth is slower than the second quarter and also from the previous year. The company did not have an earnings call in the last quarter due to the pending merger transaction and the next call would have more details about growth prospects as a standalone company.

Analysts have been positive after the Zoom-Five9 deal failed to materialize. Barclays upgraded FIVN to Overweight, saying the deal's breakdown refocuses the investment case back on fundamentals. And “We don’t think lack of a deal hurts Five9’s positioning with enterprise customers."

Evercore has an overweight rating on the stock and in the words of analyst Peter Levine, "firing on all cylinders, the pending acquisition was not a distraction, partner contributions remain strong, and the numbers released in the proxy are a fair representation of the current trends in the business."

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Jefferies analyst has a $180 price target and a hold rating. His checks throughout Q3 suggested demand remains solid across both UCaaS and CCaaS, he thinks Five9 "has a tough setup" given that management not providing guidance last quarter has resulted in "a wider than normal estimate dispersion." Management's 10-year financial plan in their merger proxy raised buyside expectations, but he does not expect the company to guide to the proxy levels, which may disappoint some investors.

We have covered Five9 stock in our premium site in the past.

Please find our semiconductor earnings preview here.

RingCentral Inc reports on November 09th

Source: Earnings report and YCharts

RingCentral has been showing steady growth. The management had raised the full-year revenue guidance to $1.539B to $1.545B, which represents a growth of 30% to 31%, which is up from the prior guidance of $1.5B to $1.51B. The third quarter revenue guidance is in the range of $390.5M to $393.5M.

Source: Earnings Slides

Jefferies analyst Samad Samana has a buy rating on the stock with a price target of $360. His checks throughout Q3 suggested demand remains solid across both UCaaS and CCaaS, which he thinks should translate into solid Q3 results.

Barclays analyst Ryan MacWilliams initiated coverage of RingCentral (RNG) with an Overweight rating and $350 price target. “RingCentral shares are attractive and RingCentral Office remains the most applicable as well as marketable solution for mid-market enterprise customers, even though Zoom Phone (ZM) and Microsoft (MSFT) Teams adoption has unfairly changed investor perception of the stock, leading to a disconnect in valuation to the company's recent quarterly performance.”

The I/O Fund is a team of analysts that share their research publicly as they build a portfolio of 30 stocks. Our team has record results for a retail Fund and we also have four-digit gains on some of our free newsletter coverage. You can learn more about our premium service by clicking here or sign up for our free newsletter here.by clicking here or sign up for our free newsletter here.

Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.

I/O Fund’s Cloud Q3 2021 Earnings Overview

Posted on November 5, 2021June 30, 2026 by io-fund

In the analysis below, we give a brief overview of our universe of cloud stocks and discuss key metrics that investors should be aware of heading into Q3 earnings.

Cloud Stocks: Top 10 EV/FWD Revenue Multiples

Below is a table of cloud stocks ranked by their EV/FWD sales multiples, along with their most recent YoY growth rate, gross and free cashflow (FCF) margins. Cloud has been a strong category for growth recently, which has rewarded the top performers with premium multiples

Cloudflare (NET) has the highest EV/FWD sales multiple in our universe of cloud stocks. The company has made some announcements around object storage costs recently, which could be impactful for the company going forward.

Snowflake is right behind Cloudflare at a 91x EV/FWD Revenue multiple. Snowflake grew sales over 100% in Q2, and its net revenue retention rate was 169% during the quarter, highlighting the company’s success in capturing market share. Management attributed the strong results to increased customer data consumption, a trend that will likely continue into the future.

Cloud Stocks: Top 10 Three-month Forward YoY Growth Rates

Looking forward, Bill.com (BILL) and Snowflake are expected to be the fastest growing cloud stocks in our universe. BILL’s expected growth rate is skewed by its recent acquisition of Divvy, and excluding the acquisition, organic growth is expected to be ~60% next quarter. Snowflake is expected to continue to report strong growth of 92%, similar to the 104% growth it reported in the most recent quarter. As mentioned above, Snowflake is benefitting from a secular tailwinds as enterprises increase their data consumption.

Top 10 Weekly Share Price Movements

In the table below, we ranked the cloud stocks that saw the largest one week increase in their share price. Shopify (SHOP) has been a top performer this past week, as the stock rebounded after a slight sell-off following its Q3 results. Microsoft (MSFT) also reported last week and the market reacted by increasing its market cap to $2.5T, surpassing Apple as the most valuable company in the world.

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The I/O Fund has covered Microsoft in detail since 2018 when Beth explained Microsoft’s hybrid strategy when she boldly stated that Azure could overtake AWS on cloud IaaS. Microsoft’s hybrid cloud approach has allowed the company to outperform its peers and positions Microsoft well to continue to take share in the hyper-growth cloud market.

Top 10 Changes in sales growth estimates – last 90 days

The table below ranks the cloud companies that have had the largest revisions to their forward topline growth expectations over the last 90 days. As mentioned above, Bill.com (BILL) recently completed a series of acquisitions which contributed to an outsized increase in its sales expectations. Similarly, Qualtrics (XM) recently completed its acquisition of Clarabridge, which has led to an upward adjustment in its growth rate. Datadog’s (DDOG) estimates have increased 9% over the last 90 days and its stock price has also increased nearly 50% over the same time period. The market is likely pricing in strong growth for the company as Datadog continues to lead in the cloud observability category.

Update on EV/Fwd revenue multiples:Update on EV/Fwd revenue multiples:

Overall stats:

Overall Cloud forward median: 16x
Top 5 Cloud forward median: 65x
Overall Cloud forward average: 22x

EV/FWD SALES:

As shown below, the median and average cloud EV/Fwd revenue multiple has trended up throughout the year. The average multiple has started to increase faster than the median, as the top valued cloud companies have experienced a sharp rise in their multiples in recent months.

Top 5 EV/FWD SALES:

In the chart below, we can more clearly see the large dispersion in cloud valuations, as the top 5 premium valued cloud stocks have had their EV/Fwd sales multiples rapidly expand since May 2021 and are now at new highs. The cloud category is often considered to a be a “winner gets most” market, where the market leader captures the majority of the addressable market. This dynamic helps explain why the top 5 valued cloud stocks have grown their multiples much faster than the median.

EV TO FWD SALES Growth Buckets:

We can further dissect the changes in cloud valuations by breaking up the group into high growth (>30% growth), mid growth (>15% and <30%) and low growth (<15%). The below chart shows that higher growth cloud stocks receive a higher multiple from the Street. Furthermore, high growth stocks used to be valued more richly back in Q4 2020 but have since seen their valuations normalize to a lower multiple. If Q3 cloud earnings come in strong, then the market may push valuations back up to their historic highs.

Top 30 EV TO FWD SALES:

The below chart provides a more holistic view of the top 30 valued cloud stocks based on EV to Fwd revenue estimates. Cloudflare (NET) and Snowflake (SNOW) have the highest valuations of the group and are valued more than 500% higher than the cloud median of 15x. As mentioned above, NET and SNOW are benefitting from trends that are expected to continue to result in robust growth going forward, such as cloud storage costs and data consumption.

Growth adjusted EV/Fwd Revenue (EV/Fwd Rev/Fwd Growth):

The last chart is based on EV to FWD sales but also takes into account forward growth expectations. By scaling valuation relative to forward growth, we can more clearly see which companies are cheapest relative to forward growth. A low value in the chart below means that a company is cheap relative to growth. For example, SNOW dropped from being one of the most expensive stocks to being valued closer to the median once we take into account its strong growth expected next quarter.

Finally, the last table we will be discussing includes aggregate cloud operating metrics. The below table shows that cloud is performing strongly as the median forward growth rate is above 20%, while gross margins are high at over 70%. The median cloud company is also FCF positive with a 6% FCF margin.

Strong growth and positive cashflows signal that the cloud category is healthy and performing well. The I/O Fund expects this strength to continue going forward. Find out which the Street has been saying about cloud stocks heading into earnings. “Overview of 6 Cloud Stocks for Q3 Earnings”

The I/O Fund is a team of analysts that share their research publicly as they build a portfolio of 30 stocks. Our team has record results for a retail Fund and we also have four-digit gains on some of our free newsletter coverage. You can learn more about our premium service by clicking here or sign up for our free newsletter here.premium service by clicking here or sign up for our free newsletter here.

Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.

I/O Fund – Bill.com Reports Another Blockbuster Quarter

Posted on November 5, 2021June 30, 2026 by io-fund

In the video below, I quickly go over Bill.com’s Q1 FY2022 results, which pushed the company’s stock to a new all-time high. Bill.com’s business model is bifurcated between subscription sales and transaction fee revenues, both of which accelerated in the most recent quarter. In fact, transaction revenues have exploded and grew over 300% YoY!

The company’s balance sheet is also clean as Bill.com operates an asset light business model. Cash is over $1 billion and the majority of assets on the balance sheet relate to cash held for clients. With sales accelerating and a strong cash balance, Bill.com appears poised for strong growth going forward. Watch the video below to find out more!

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New LTBH Position: Stars are Aligning for Palantir

Posted on November 5, 2021June 30, 2026 by io-fund

A few notes before we look at Palantir:

We are looking to close Atomera and will look to get back in when the timing is better. We feel the message in the earnings call is that during supply shortages, things are moving slowly for Atomera. Meanwhile, small caps are looking like they could break out (follow Knox on the forum and on webinars) and we prefer to put our money elsewhere for now. Atomera could still move but we have to make these decisions to keep the portfolio at a reasonable size.
There’s a chance we re-enter Vuzix as small caps are starting to break out. Knox might be seeing a setup he wants to take and the company had some good quarters in the past. Note: this is likely good news for many small caps, not only the ones we own.
Confluent is a strong company. We stepped aside until the lockup expires as a matter of discipline. Look for us to put MongoDB in the LTBH portfolio and Confluent at some point, as well. We are encouraged by cloud results so far this earnings season (so far, so good).

Palantir Analysis:

We break down Palantir’s product below and we believe the Apollo layer is especially interesting, competitively speaking. We also point out that government contracts will likely boost the company’s revenue in the near term. The Obama Administration used Palantir for many government projects and we believe the Biden Administration is a tailwind for the company in the near-term. With a company that is two-thirds deal value from the government, this piece cannot be ignored.

The company has as many risks as opportunities. We go through those risks below, mainly the price of the product, the unusually high stock based compensation, widespread ethical concerns (for 10+ years), and more agile AI/ML competitors sprouting up to compete for commercialized accounts. Due to these risks, we may not hold for the 3-5 year time frame that we typically target, rather are entering as a LTBH for the 6-month to 1-year tailwinds that we are expecting from increased government spending. This is distinguished from momentum positions that are often higher beta and/or moving in price. In this case, we think Palantir being off 50% from its all-time high of 39.00 does not reflect the current tailwinds from the government segment. We are encouraged by the commercial growth, as well, but it’s the government spending in the near-term that could cause a material change to the story. The upcoming earnings report will tell us more.

Palantir has two platforms: Gotham and Foundry. There is a layer between the two platforms and applications called Apollo. The Apollo layer is where innovation has been rapidly occurring and helps contribute to Palantir’s competitive edge (more on this below).

Gotham and Foundry create a unified data set for actionable insights across industries such as manufacturing, product development, and customer experience. The data that Palantir gets is from the customer database although the company may use other data sets for government customers, such as scraping social media or other publicly available information on the web. The traditional deployment includes hosting Palantir’s servers in a customer’s data center.

The difference between Palantir and competitors, such as Tableau, Alteryx or Cloudera is that Palantir is able to answer questions a model cannot answer. Traditional business intelligence companies require a complete data set whereas Palantir is able to tackle situations where there is not a complete data set.

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.

The Graph product allows data to be seen as nodes and edges to visualize and plot characteristics in a logical manner.

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

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

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

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:

brings volumes of data into one place,
transforms the data into a format that analysts can work with and enables validation in a number of programming languages
the “ontology layer” allows datasets to be turned into real-world concepts
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.

Apollo is the Linchpin:

The company has a third platform or layer called Apollo and also Apollo for Edge AI. This product provides continuous delivery and an automated configuration layer that allows Foundry and Gotham to work across all cloud environments and also in places where there is little to no connectivity. On top of Palantir being able to form conclusions from incomplete data sets, the company can also deploy its platform and applications anywhere.

Palantir’s marketing team says Apollo “goes where no SaaS has gone before” because it allows what is done on-premise to also run on multi-cloud SaaS with code that is deployed across all environments rather than written for a specific environment. The orchestration allows for on-hardware AI models to consume real-time data from sensors, radio, geo-data and time series data. Where bandwidth is not an issue, the company transmits all raw inputs and enriched metadata from models. Where there are constraints, the platform transmits meta-data only which can reduce bitrate by 20X. At times, a simulated environment can be created with Palantir’s Edge AI from historical data to help train AI models. The simulated environment is then deployed at the edge. With Apollo, Palantir’s centralized operations team is capable of 41,000 updates per week at no additional cost.

Apollo Edge AI links together satellites to lower latency for the AI-enabled decision chain by orchestrating up to 237 satellites in what the company is calling a “meta-constellation.” This meta-constellation optimizes hundreds of orbital sensors and AI models to power Palantir’s models. One example they provide is tracking submarines that pose a threat to the U.S. and its allies. In this case, submarines are being tracked on a granular level in areas where there is no bandwidth available. These are the kinds of obstacles that Palantir overcomes while being independent of one cloud environment, such as AWS or Azure.

Financials:

Palantir is growing its annual revenue of roughly $1 billion by 50% for estimates of $1.5 billion in 2021. This looks like it will be accomplished with the last two quarters at revenue growth of 49% year-over-year growth. Current estimates for Palantir in the upcoming quarter are at $386.53 million, or growth of 33.5%. To me, these estimates seem low considering the commercial growth the company has been posting. On top of revenue > $1 billion and growth > 40%, Palantir is free cash flow positive with a 13% adjusted free cash flow margin and adjusted EPS of $0.04.

The main metric for Palantir is commercial revenue, which has accelerated nicely over the past few quarters. In the last quarter, commercial revenue grew 90% year-over-year. The company is also adding commercial customers faster than overall customers at 32% compared to 13% for total customers. In the quarter ending in March, the company reported revenue growth of 72% year-over-year. This was slightly lower than government revenue growth of 83% YoY.

The company also grew total contract value booked from $337 million to $925 million, although this is a mix of both government and commercial contracts. According to the fine print, the maximum potential revenue from commercial contracts is $348 million and an additional $195 million in commercial contracts that are subject to negotiation and approval.

The deal value also increased 63% to $3.4 billion, however, of this $428 million comes from commercial contracts and $195 million comes from commercial contracts currently under negotiation. Therefore, the majority of the deal value increase came from the government.

For FY 2021, the company plans to double its adjusted free cash flow in the upcoming quarter from $150 million to $300 million.

Stock Based Compensation:

Palantir has some of the highest rates of SBC in the cloud universe. Over the last twelve months, SBC was 114% of sales, which is well above the peer median of ~18%. The issuance of SBC is dilutive to shareholders and can weigh on the share price in the near term. However, Palantir recently completed its IPO, which is typically a period of outsized stock-based compensation.

Looking forward, Palantir’s rate of SBC will likely normalize to a more sustainable rate, which will lessen the impact of dilution and should benefit shareholders going forward.

A key benefit of high SBC is that employees become owners in the company and have a vested interest in the company’s success, which can even help reduce turnover and improve productivity. The biggest concern Bradley sees with high rates of SBC is if the SBC is repurchased via stock buybacks but is still excluded from adjusted EBITDA and earnings. This accounting trick can cosmetically improve the presentation of profitability by excluding payroll expense from non-GAAP metrics. However, Palantir does not appear to be playing these games, as it has not repurchased any stock during the year.

Catalysts:

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 have used Palantir’s data analysis to identify troubled properties and ensure employees are not committing fraud (and in turn, the management team was actually spied on instead).

Pharmaceutical companies use Palantir to expedite the development of new drugs – this being a substantial use case during Covid and partly why Palantir’s revenue has accelerated. In the last earnings report, Palantir discussed companies leveraging Palantir’s software for R&D and manufacturing to accelerate development. The software helps health care data be shared to share trial data.

Utility companies use Palantir to monitor equipment, such as to monitor equipment in mining shafts or for grid management and safety. The powerlines from PG&E in California created wildfires and experience ongoing power outages during heavy winds. PG&E partnered with Palantir in early 2021 to help assess where the most danger is for power shutoffs and for wildfire risk assessments.

Climate change initiatives coming from the government will also be a tailwind for Palantir as the company’s software is used to help companies de-carbonize and achieve low carbon footprints. The more spent here, the more Palantir will see additional tailwinds.

DataRobot is a popular company used for unifying data for AI and they are partnered with Palantir to help forecast demand.

As stated, Palantir was first hired by Obama for border patrol with the New York Times reporting “Palantir’s technology was used extensively by the Obama Administration.” It is not clear as to whether the Trump Administration used Palantir or if the agencies, such as the FBI and CIA did during the years the Trump Administration was in Office. In other words, I am not sure if Palantir is bipartisan or not but my understanding is the company saw more government contracts during Obama and now Biden. We also saw Biden place a former Palantir advisor as the director of national intelligence. The DNC is headquartered in Denver and the company recently moved to this city. Alex Karp attempted to state sensational reasons for this move, which I called out as simply creating headlines. I believe the move was strategic for Palantir to be closer to the money.

Risks:

The closest competitor for Palantir is Semantic AI, which supplies graph-based analytical platforms to the DoD and other government agencies. There will likely be more competitors in the near future as the AI/ML market is built out. For instance, there is energy-specific software such as Stem that uses AI software to optimize energy resources and battery usage by using algorithms to issue forecasts that then work across the grid, batteries and solar for optimal output. Stem claims to have taken over 100 energy storage systems that were previously managed by competitors and is also used across Big Tech, such as Facebook, Amazon, Apple and Home Depot. In this case, one could argue Stem serves the commercial market whereas Palantir is more suited for larger utility companies due to its government-sized solution. Essentially, the risk is that Palantir could be “too much product” for commercialized companies that prefer a simple solution. You can read our analysis regarding Stem here.

Tiberius is a database used for administering the Covid vaccine. USA Today reported complaints from a few healthcare agencies that Tiberius was often wrong and did not improve results compared to their own in-house databases.

Palantir greatly centralizes datasets and AI/ML — which is a risk. You’ve likely read my analysis on the Blockchain is Going to Eat the Internet and why decentralization is important. Using Palantir for defense is one thing, but now that Palantir is beginning to move into other industries, the blurring of the lines as to where the government ends and the free market begins is problematic with a company like Palantir. Palantir’s greater loyalty will be with the government (it’s biggest customer) yet their software is now inside company databases. The United States tends to prefer a separation across government bodies whether it’s church/state or state/federal or judicial/executive/legislative, when possible. What Palantir is proposing is that a heavily government-funded company be the middleman.

What affect could this have? Already, Palantir has been used to hunt down illegal immigrants and to enter their homes for arrests. This article is worth a read for more information. Uber has been in a string of never-ending lawsuits over the independent contractor/employee debates – another human rights issue that a tech company faced. These lawsuits threaten Uber’s business model, and even after getting the measure on a ballot which passed in California, the class action lawsuits are still ongoing after the State of California decided to sue the company. We predicted this would be troublesome long-term for Uber as part of our bear thesis at the time of IPO. As Palantir moves outside the government, I expect we could see some States and non-profits fight the company on the use of its software. There is a history of non-profits, such as Amnesty International, calling out Palantir on how the software is used in terms of targeting specific individuals. The bigger Palantir gets, the more the public and critics will see how powerful (and invasive) the software can be. As of now, Palantir has chosen to target illegal immigrants who can’t bring a class action lawsuit – hence non-profits stepping in. If the company were to target United States citizens, I would fully expect lawsuits to pop up.

To help illustrate, the week Palantir went public, Hootsuite stated the company would terminate its ICE contract due to disagreements within the company. The CEO of Hootsuite tweeted: “We typically do not make public facing statements about specific customers or contracts. However, due to the attention around this particular case we can confirm that Hootsuite has decided not to do business with the U.S. Immigration and Customs Enforcement.” Tech companies often see employees engage in protests when a company contracts with the government on AI-driven war missions and privacy issues.

In the past, 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. Palantir could become subject to competing for talent with companies that are more privacy-compliant or viewed as being more ethical. Here’s an example about how they describe their hiring process: “We spend time thinking about exactly what gamma radiation your incoming Bruce Banner needs to turn into the Incredible Hulk. And then we irradiate them.” The hyperbolic description of using “gamma radiation” is likely just the stock-based compensation.

Conclusion:

The stars (and satellites) are aligning for Palantir, and with government spending, it has the ingredients to become a stock market darling if the revenue accelerates. The product is often framed as captivating and the company will likely sell Wall Street on commercial growth. Regardless, the ethical issues can mire the company long-term, and at its core, Palantir is still a government contractor. We are more likely to be 3-10 year bulls for decentralized blockchain companies that handle data in privacy compliant ways over a heavily centralized company. However, for the sake of the current tailwinds, we have entered the stock and added it to our LTBH portfolio.

ZoomInfo Q3 2021 Update

Posted on November 3, 2021June 30, 2026 by io-fund

ZoomInfo reported 11/1/2021 and beat on both the top and bottom -line. Q3 sales increased 60% YoY to $198 million, which was also 8% above the Q3 consensus estimate of $184 million. The 60% YoY growth rate represented an acceleration from the 57% and 50% YoY growth rates in Q2 and Q1 2021, respectively. However, after adjusting for recent acquisitions, organic sales grew 54% YoY in Q3, which was static to the 54% YoY organic growth rate in Q2. Enterprise customer count and organic bookings growth also deaccelerated during the quarter, which has moved us to the sidelines. I touch on these trends in more detail below.

Continuing down the income statement, gross margin increased 250 bps YoY to 81% while adjusted operating margin fell YoY from 47% to 39%. A rapid 225% YoY increase in research and development expense drove the margin compression, as the company invests in new products such as conversational intelligence. On the Q3 call, CEO-Founder Henry Shuck explained that the company is investing heavily in conversational intelligence, a market that ZoomInfo believes can be an $18 billion opportunity. As shown below, recent acquisitions and expansion into new verticals such as conversational intelligence, recruiting, and training have expanded ZoomInfo’s total addressable market to $70 billion. Finally, adjusted Q3 EPS doubled YoY from $0.07 to $0.14 and also bested the consensus estimate of $0.12 by 2 cents.

During the quarter, management also cleaned up its corporate structure by eliminating its multi-class share structure, resulting in the same economic and voting interest for all shareholders. The improved corporate governance and reduced complexity is expected to enable the company to be included in stock indices, which should increase demand for its shares going forward. This event also created a taxable event as pre-IPO shareholders saw a step up in their cost basis. The company recorded a $4 billion tax asset and $3 billion tax liability as of Q3, with the net $1 billion tax asset lowering future cash taxes over time.

Increased Outlook and Strong Customer Metrics but a Slight Deacceleration in Growth

ZoomInfo’s topline beat also led to a rise in guidance. Management raised their FY2021 sales guide by 4% to $732 million (at the midpoint). The guide implies 54% YoY revenue growth, up from the prior guide of 48% and also implies an organic growth rate of 50%.

Given the recent challenges in the advertising market related to changes to IDFA, it is great to see that ZoomInfo continues to expect robust growth going forward. CEO-Founder Henry Shuck explained during the Q3 call that explained that “our continued investment in privacy is a competitive differentiator.” The company’s roll out of ‘privacy clusters’ in 2020 and its focus on B2B company data, rather than individual level data, has likely helped it navigate the changing market place around data and privacy.

Furthermore, the company’s focus on B2B data is a direct result of its strong growth with enterprise customers. Customers with over $100,000 in annual contract values (a proxy for enterprise customers) grew 74% YoY to 1,250 customers, an acceleration from the 69% YoY growth in Q3 and also outpaced the 60% YoY growth in Q3 sales. The growth was also robust on a sequential basis, as enterprise customers increased 14% QoQ, however this was a slight deceleration from the 16% QoQ increase in Q2, but faster than the 9% QoQ rise in organic sales (shown below).

The acceleration in enterprise customer growth is important as it helps support a premium multiple and highlights how ZoomInfo is increasingly becoming known as a category-defining company in B2B sales and marketing. However, the deacceleration on a sequential basis is something to note and may signal that growth will slowdown in the near term. Dollar based net retention remained static at 108%, which has room to improve as ZoomInfo has made a series of acquisitions that have expanded the amount of products that customers can expand into.

Finally, the company’s revenue quality has also improved, which also supports a premium multiple. We can measure revenue quality by observing trends in both accounts receivables and deferred revenue. Accounts receivables increased just 22% YoY, while deferred revenue increased 63% YoY during Q3, which outpaced the 60% YoY increase in Q3 sales. The relatively faster pace of growth for deferred revenue signals that ZoomInfo is collecting more cash from its sales than in prior years, a sign of strength.

Bookings were also strong during Q3, but did deaccelerate during the quarter. For instance, Q3 organic bookings increased 49% YoY in Q3, a deacceleration from the 71% and 65% growth rates reported in Q2 and Q1, respectively. Bookings can be lumpy, and management stated on the Q3 call that bookings “can be imprecise metrics to assess in-period activity and forward momentum”. Nevertheless, the deacceleration in bookings is something we will need to be mindful of going forward, especially considering ZoomInfo’s premium forward sales multiple of 29x.

The deacceleration in organic growth, sequential enterprise customer growth and organic bookings moved ZoomInfo to the ‘chopping block’ as the company was in our momentum portfolio and we did not want to hold the company if growth starts to slow.

In summary, ZoomInfo beat both top and bottom -line Q3 estimates and also raised its FY21 sales guide. During the quarter, ZoomInfo reorganized its corporate structure, which allows the company to be included in more indices going forward. The company has also been able to navigate the changes to the data privacy landscape well, evident by the robust growth in enterprise customers. The strong growth with enterprise customers provides support for future sales growth. However, organic sales growth slightly deaccelerated during the quarter (growth was static at 54%), as did sequential enterprise customer growth and YoY organic bookings, a trend we will need to be mindful of going forward, especially considering ZoomInfo’s premium multiple. Since we do not want to hold a company in our momentum portfolio that may be slowing down, we decided to cut our ZoomInfo holdings.

A Fubo Q3 Earnings Beat Means That The Market Will Have To Relent

Posted on November 3, 2021June 30, 2026 by io-fund

According to critics, the riskiest quarter for fuboTV (FUBO) ("Fubo") was Q2 due to the off-season for major sports in the United States. The company went on to report a 196% YoY jump in its revenue to $130.9M. It was primarily helped by the strong growth in subscription revenue and advertising revenue. Subscription revenue grew by 189% to $114.4M and advertising revenue grew by 281% YoY to $16.5M. It was the fastest advertising sales growth in the company's history.

So much for a tough quarter – but how did Fubo accomplish this? That will be important to look at as the market has overlooked Fubo for its growth and the company has not been rewarded for the ongoing beats and guidance raise. We should clarify and say we think it's the retail market that has overlooked the company while institutions are quietly moving off the sidelines with ownership doubling since February from 229 to 470 institutions.

Source: Ycharts

Below, we will look at Fubo's recent history to form an opinion on why Q3 could be quite strong. We also pulled Apptopia data on downloads and sessions to look at engagement trends. Lastly, we revisit the major catalyst in Fubo's future: sports betting.

Why Fubo Crushed Q2

To call Q2 a seasonally light quarter for sports would mean only the United States is being factored into the analysis. This mistake was also made in Q1 when critics predicted the downfall of Fubo based on March Madness, a tournament that has roughly 17 million viewers.

Fubo's roots are in soccer. Fubo has the exclusive rights in the United States to stream the remaining 70 Qatar World Cup 2022 qualifying matches of the South American Football Confederation. This began in June. Obviously, Fubo will not capture this full TAM, but even a small percentage can have a larger impact than a tournament like March Madness.

Fubo was also able to score some major league baseball deals, such as a carriage agreement with Marquee Sports Network which gives access to the Chicago Cubs games.

Advertising grew from 10% of revenue to 13% of revenue for Fubo in Q2. We have seen the company re-accelerate from 70% during the Covid quarter to 281% in the most recent quarter (that is serious acceleration). Although those high triple-digit numbers can't last forever, it shows how the demand for advertising on the platform will help offset licensing costs as time goes on.

Source: Fubo earnings reports; chart from I/O Fund

The average revenue per user (ARPU) increased 30% YoY to $71.43 and advertising average revenue per user showed a substantial 62% YoY growth to $8.70. Increasing ARPU and an increasing number of subscribers is a solid combination to have when taking market share as it shows the company does not need to discount the product to be competitive.

In addition to the advertising opportunity, the company is also the fastest-growing SVOD platform and is taking market share from competitors. The company had total subscribers of 681,721 (up 138% YoY) at the end of the June quarter, a net addition of 91,291 from the previous quarter. Meanwhile, according to the data from Statista, the global SVOD market in 2021 is expected to grow 23% YoY to $70.8B in 2021 and the US SVOD market is expected to grow 18% YoY to $32.1B.

This supports our original thesis in December that live sports audiences are the last to cut the cord and are the most coveted audience right now for this reason.

The streaming increased in the last quarter as monthly active users (MAUs) watched about 134 hours per month on average, which is reasonable considering Q2 2020 was a quarter where many people spent increased time indoors.

Source: Fubo earnings reports; chart from I/O Fund

Quick Note on Gross Margins

We have noted many times that the company is in a high growth stage and the street is discounting the company for its weak gross margins. However, the company's margins are improving.

In the last earnings call, it was mentioned by the CEO, "50% gross margins will be our long-term target. We will also look to target about $10 to $15 of advertising ARPU based on that 50% margin."

The net loss came at ($94.9M) when compared to ($73.6M) for the same quarter last year and adjusted EBITDA came at ($47.4M) when compared to ($41.9M) for the same period of the previous year. The adjusted EBITDA margin was -36% in Q2 2021 compared to -95% in Q2 2020.

Source: Earnings Presentation

The company's launch of Fubo Sportsbook is an important event to track in Q4. We've covered the sports betting opportunity in detail, including the projection that the industry could reach $155 billion by 2024. fuboTV has a better position than its rivals as they own their audience and it's an upsell rather than a new user acquisition loop. The company acquired Balto Sports and Vigtory to help release the free-to-play and sports wagering. When sports betting launches, we think we will then see Fubo's full monetization potential by combining subscriptions, advertising, and betting for global sports on one platform.

fuboTV CEO David Gandler predicts that nearly 40M to 50M people in the USA will subscribe to digitally delivered video networks in the next five years. He believes that his company can target about 10% of the market.

Q3 Earnings Preview with Apptopia Data

Fubo increased their full-year revenue guidance to $560-$570M, representing a 116% YoY growth at the mid-point, up from the previous guidance of $520-$530M. The subscribers for full-year 2021 are estimated at 910,000 to 920,000, up from the previous guidance of 830,000 to 850,000.

Third-quarter revenue guidance is between $140-$144M, representing 132% YoY growth. Subscribers are expected to be 810,000 to 820,000. The consensus analysts' revenue estimates are close to the higher end of management guidance.

Source: Fubo earnings reports and Ycharts

In the past, we analyzed app downloads and sessions using Apptopia data to look at the health of the mobile app. Please keep in mind, this is not an earnings call as there can be other earnings surprises in terms of gross margins and profits that can cause a stock to sell off after an earnings report. We are also reporting on downloads and sessions, whereas Fubo reports subscribers.Please keep in mind, this is not an earnings call as there can be other earnings surprises in terms of gross margins and profits that can cause a stock to sell off after an earnings report. We are also reporting on downloads and sessions, whereas Fubo reports subscribers.

According to the Q3 data from Apptopia, Fubo's downloads accelerated 98% YoY and 82% QoQ to 2.29M.

Source: Apptopia

The sessions data shows 161% YoY growth and 43% QoQ growth to 176.79M. Please note, downloads show us a glimpse as to new activity but they do not represent subscribers who already have the app downloaded. Sessions help to provide more color, if we assume sessions were comparatively equal across subscribers in previous quarters.

Source: Apptopia

The data below shows a spike in September. The start of the NFL season likely contributed, as well as exclusive coverage for the South American World Cup 2022 Qualifiers (CONMEBOL) in the US.

Source: Apptopia

Fubo also announced its free-to-play games and FanView live stats feature for its September CONMEBOL matches. The players who answer questions correctly during the match get points and have the chance to win cash prizes. The integration of free games and FanView increased the engagement in fuboTV during its beta testing in June and this might also have led to the spike in demand in September.

In the words of David Gandler, co-founder and CEO of Fubo, "We believe this will mark the first time any company has integrated live streaming television, free games and live stats within the same platform, on the big screen. With free games and our upcoming Fubo Sportsbook real-money wagering app, we intend to deliver a truly interactive streaming experience, one that we expect will improve engagement and retention to fuboTV while also driving advertising revenue."

Source: Apptopia

The most important thing we see in this data is that fuboTV broke out of its trendline on monthly sessions and downloads as the month of September marks an all-time high for the year. We will get a quarterly report from the company yet the data helps substantiate on a more granular level that Fubo is capable of sizable growth in a single month. The key takeaway is that September is 46% higher than the previous all-time high met in January during the Super Bowl.

As stated, downloads and sessions don't guarantee an earnings beat, however, as a long-term buy and hold investor, growth like this is what I look for. I also look for evidence that the thesis I formed is playing out. Therefore, I see this data as a positive and the flurry of announcements around sports betting is also a positive.

More Fubo Announcements …

While the market is aptly rewarding DraftKings with a 1-year forward P/S of 11, Fubo has quietly been gathering strength in sports betting while at a 1-year forward valuation of 4.4. We covered why we like Fubo better than DraftKings.

In the third quarter, Fubo completed the Market Access Agreement in Arizona. It also received approval to offer Online Sports Wagering in two states namely, Iowa and Arizona. On November 3rd, the company announced that Fubo Sportsbook is live in Iowa.

Fubo Sportsbook also entered a multi-year partnership with the New York Jets. There will also be a Fubo Sportsbook Lounge at MetLife Stadium for the NFL team's home games.

Fubo Gaming partnered with the Cleveland Cavaliers to promote its brands through various marketing avenues. More recently, it also announced a partnership with NASCAR (The National Association for Stock Car Auto Racing) to become the authorized gaming partner of NASCAR.

Fubo's distribution is also growing. The company announced in September that fuboTV will be available on VIZIO SmartCast TVs. Earlier in June, it launched in LG Smart TVs. fuboTV also announced a distribution agreement with AT&T SportsNet Rocky Mountain.

ROOT Sports and fuboTV announced a distribution agreement in September which will give fuboTV customers access to Seattle Mariners, Seattle Krakken, and Portland Trail Blazer Games. We think these regional adds are important to watch as one metro area has the capability to boost Fubo's user base.

Conclusion

According to the data, September was Fubo's best month this year by nearly 46% (i.e., it's not even a close call with January's Superbowl month). This does not guarantee quarterly performance but we certainly like to see growth trending upwards and we like it when this happens concurrently with new catalysts, such as sports betting. If you think of where this company was during the Covid quarters when live sports was shut down, the comeback has been quite incredible.

On that note, tech growth investing is not for the faint of heart and Fubo has certainly tested investors who prefer clearer financials. However, I've been analyzing OTT tech startups since 2011 and there are certain indicators I look for in terms of analyzing the strength of a product. Fubo hits on many of those indicators and I think investors will either relent if Fubo puts up a Q3 beat or they will get left behind in the dust once sports betting launches. One thing is clear, Fubo is not letting up.

Lyft Could Become Covid Rebound Winner With These Key Metrics from Q3 Earnings

Posted on November 3, 2021June 30, 2026 by io-fund

In the short video below, I go over Lyft’s record Q3 results. The company appears poised to exit covid much stronger, as revenue per ride and contribution margin reach all time highs during the quarter. Adjusted EBITDA has also been positive for two quarters in a row, a trend that will likely continue going forward.

Key trends should improve in 2022, which should benefit Lyft’s top and bottom -line. For example, business travel is still subdued, and a continued recovery in business travel is expected as vaccination rates increase. This should support an increase in rides, allowing Lyft to continue to scale its operations. I also discuss broader macro trends that contribute to Lyft's business model. Watch the find out more!

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