AEHR Fiscal Q3: Strong Earnings Report, All Eyes on Next Fiscal Guide

Posted on March 31, 2023June 30, 2026 by io-fund

Aehr has been a wild ride since it’s last earnings report. The orders that came in were substantial, including a $25 million order from ON Semi. This order alone is 50% of last year’s $50M in revenue. The company was in the crosshairs of Tesla’s comments about a reduction in silicon carbide in their lower-tier models, and was also in the crosshairs of the failure of Silicon Valley Bank. When it seemed the stock simply couldn’t go any higher, it defied the odds, and marched higher.

Now, the market is shaking the stock loose on an excellent earnings report. Welcome to the world of small caps. The headlines are pointing toward the CFO leaving, but it’s not a real concern as he’s retiring and not moving onto a new company.

In a nutshell, the company beat on the top line and the bottom line plus reported strong margin expansion year-over-year. Compared to fiscal Q2, the margins were softer by 220 bps on gross margin, 150 bps on operating margin and 150 bps on net margin. This would be nitpicking the report, because on a YoY basis, the margins have expanded nicely (more below).

AEHR is not raising full year guidance despite beating on the top line. This implies $17.3 million to $27.3 million in revenue for next quarter. This compares to $17.2 million this quarter and $20.2 million in the year ago quarter. The high end of this guidance is not a problem given it would represent YoY and QoQ growth. However, given Aehr’s valuation, next year’s fiscal guide from management is where the market may be a touch nervous.

Bookings and backlog were very healthy this quarter (best in company history), which helps in the absence of management pulling forward the current quarter’s revenue beat. One thing to watch is that customer deposits were down, I quote the CEO on this below.

I do think it’s “all eyes” on the next fiscal year guide in July for a few reasons.

There are only two analysts covering the stock. Management’s input on what to expect is outsized, in this case. The fiscal year consensus for the 2 analysts is $102.3 million, for growth of 56.8%. This is a sizable hurdle to clear (will be up from roughly 29% growth this year), and with 1 quarter to go before management gives it’s guide, the market likely wants confirmation they can clear this expectation.
Management has referenced a strong H2 2023/2024 and this will help quantify those comments.
The valuation is quite high, and to support this, a fiscal year guide from management is very much needed come July.

Financials:

Aehr reported revenue of $17.2 million, for growth of 13% year-over-year and sequential growth of 16%. As stated above, the company did not raise full year guidance, rather reiterated “total revenue of at least $60 to $70 million, representing growth of 18% to 38% YoY, with strong profit margins similar to last year.”

EPS of $0.16 came in slightly higher than expected. This is up from $0.14 EPS from a year ago. The margins saw a turnaround in CY2021 (post-Covid) when margins were negative. This quarter was aligned with the new trend toward margin expansion for the company.

Margins:

Gross margin of 51.6% up from 48.6% in the year ago quarter. Last quarter, the GM was 53.40% softer by 180 bps
Operating margin of 22% up from 14.8% in the year ago quarter. Last quarter, the OPM was 23.50% softer by 150 bps
Net income margin of 23.8% is up from 14.7% in the year ago quarter. Last quarter, net profit margin was 25.30%.

On the margins, management pointed toward a slight increase in SG&A and R&D for the QoQ change. On net income, the GAAP includes a $1M adjustment for excess and obsolete inventory.

Cash:

Free cash flow will be available in the 10-Q that is filed over the next two weeks.

The August quarter reported cash flow margins of 50% which offset the other quarters:

In the year ago quarter ending in February, the company reported operating cash flow of (19.2%) and FCF margin of (19.7%). This was roughly ($3M)
Last quarter, the company reported operating cash flow of (1.3%) and free cash flow of (1.4%). This was roughly ($200K).

The cash has increased to $42.8 million, up from $36.6 million last quarter. This is due to the agreement for a $25 million at-the-market offering, of which $7.3 million was sold last month at a share price of $34.78. This leaves $17.7M remaining. There is dilution of 2.4%.

Key Metrics:

This earnings report stood out in terms of key metrics. Bookings were the highest in company history at $33 million, up from $10.8 million last quarter. This puts the three quarters of fiscal year to-date at $72 million, compared to $62.2 million for the entire fiscal year last year.

The backlog is at $31.6 million with an effective backlog of $41 million. The backlog in the year ago quarter was $26.9 million, and the effective backlog was “over $30 million.”

Inventories are ticking up, which can often be seen as a negative (company like Micron participating in a cyclical slowdown). For Aehr, it’s good to have inventory on-hand for any spikes in demand. Inventories were at $21.6 million, up from $3.6 million last quarter and up $6.5 million in the year ago quarter. This is only 1/5th of next year’s fiscal consensus estimate of $102 million.

In the last earnings call, the following was stated:

“This quarter, AEHR discussed ramping inventory by an additional $5 million (so far) year-over-year in Q2: “We are increasing inventory to support our expected growth in the second half of fiscal 2023, and we continue to purchase inventory to ensure adequate supply to meet current customer and future customer market demand.”

Aehr’s management is optimistic for H2, which we reported on in the last earnings write-up.

“The company mentioned “momentum into 2024” in this call: “And as we had — if you look at the amount of capacity that everybody’s talking about to hit in 2025 calendar-wise, most people are just really focused on second half 2023 and into 2024 is where just a lot of capacity is coming online and so it may be less to do with the timing of us as the timing of that silicon carbide ramp. And our goal is to get qualified before that ramp happens and have a ton of capacity and material on hand to be able to address it.”

This quarter, Aehr discussed ramping inventory by an additional $5 million (so far) year-over-year in Q2: “We are increasing inventory to support our expected growth in the second half of fiscal 2023, and we continue to purchase inventory to ensure adequate supply to meet current customer and future customer market demand.”

Earnings Call:

Current Fiscal Year Guide:

Here’s a question from one of the analysts that cover the stock on the current fiscal year guide still looking conservative and he also notes the wide range:

“Jed Dorsheimer

So I guess first question, Gayn or maybe Ken, maybe you want to take either one. But the guide and kind of reiterating the numbers suggest a pretty wide variance at this stage in the game, $17 million to $27 million […] And I know that there were two tools with the — that we weren’t — that you weren’t sure were not you get the rev rec to fall into the quarter. But I am wondering, is that the only thing that sort of kind of the difference of that $10 million or is there something else that you can probably provide a bit more color on?”

Gayn Erickson

“Aehr Test along with most, I think, all capital equipment companies have revenue recognition policies related to when you can score revenue and that is different than when you get paid by the way. Our policy, I think, is very conservative. If we have a new product, particularly to a new customer, but if we have a brand new product that has never been proven or installed and accepted by the customer, we simply don’t take revenue for it until that milestone, even though we know it’s working here, it’s been completely proven out, et cetera, but until the customer actually signs off on it, we won’t score revenue recognition. And we gave that as a pretty big heads-up going in. That’s why a lot more detail than normal, and candidly, we will probably be pulling back on detail related to things. It’s just to make sure that our shareholders understand that we have got some pretty large revenue number of things that are shipping during the quarter, but may or may not score revenue.

And you have several multimillion-dollar tool that misses by a few days and it’s pretty easy. What I want to make sure that and I will be explicit even though it’s just been implied, we are just talking about whether it comes in, in Q4 or Q1. So that’s the bulk of it.”

Jed Dorsheimer

No. The color is helpful. So thank you. I guess if you could just help me reconcile just two moving parts. Inventory, not surprisingly picked up as you talked about in terms of ramping some of these products, but customer deposits dropped off on the balance sheet. I was wondering if you could just provide a bit more color there. Is that a timing issue or how should we read those two vectors, if you will?

Gayn Erickson

Yeah. That’s a good observation and good to move in [ph]. So we actually have taken with some specific terms and conditions with customers. There are circumstances where we do not take down payments. It’s a pretty good threshold contractually for them to actually do that.

I have also at times on a brand-new product with a new customer, waived the down payment to begin with, because it’s a little odd to tell them we guarantee it’s going to work and then at the same time, we holding their money.

And candidly, people are pushing back harder and harder on some of those deposits. Ken, I think, a lot of it is that they can earn a lot more money on that too. But there’s a little bit of examples where some of the backlog is not all out of deposit and that’s what you are seeing.

New Customers, New Products and New Markets:

Aehr has four committed customers for silicon carbide. Per the CEO: “We have actually announced a total of four customers in silicon carbide so far. We expect production orders from all of them during the next fiscal year.” One of these customers has not announced it’s in the silicon carbide market yet.

Gallium Nitride is getting more air time on the earnings call. From the sound of it, this will be the next market Aehr participates in a meaningful way.

“In addition to our momentum in silicon carbide, we are now engaged with several gallium nitride semiconductor suppliers ranging from radio frequency or RF devices to power devices. Since our last call, we also received a firm commitment from a very large multinational semiconductor supplier to move forward with a full wafer level evaluation of gallium nitride devices. This evaluation includes our new high voltage option for doing the critical HTRB stress needed for gallium nitride MOSFETs and amplifiers.

We believe gallium nitride will be a significant market, driven by some of the very — some very high volume applications such as RF amplifiers, consumer, electronic power converters and chargers, solar power inverters and charger and converter applications in both standard and electric vehicles. Feedback from companies has been that several of these applications will require production burn-in to meet the application’s critical quality and reliability needs.”

On the topic of silicon photonics … the CEO said “while we believe this transition is still several years out”, yet did state they have 6 potential customers: “Aehr currently has systems installed at over half a dozen customers for 100% test and burn-in of silicon photonics devices used in 5G infrastructure, data and telecommunication transceivers and a few additional applications yet to be introduced.” They also specifically name dropped Intel, Nvidia and AMD for plans to “integrate silicon photonics transceivers into their microprocessors, graphics processors and chipsets.”

China was talked about quite a bit.

The far majority of Aehr’s business comes from outside of China, but Aehr believes over time, the company will serve this market for silicon carbide.

“We are also talking to suppliers in China, as well as OEMs in China. So we are kind of making our way up the food chain, if you will, with several conversations with Tier 1s and OEMs, which as people that are close to this realize that is a completely new thing.

Prior to COVID, none of the automotive guys talk to the semiconductor guys, right? They all worked with Tier 1s and then the Tier 1s bought from the semiconductor guys. But with all the craziness that went on supply chain, automotive guys who realize they need to go directly to and talk to the semiconductor guys. Well, we are taking a step further, they are talking to us […] Having said that, we are very confident in next year and how things are going and candidly, without trying to be in a significant portion of it, I would say that would be upside to our plans.”

Please note:

These new markets, new products and new customers are exciting, yet we have emphasized many times that the majority of Aehr’s revenue comes from one customer today — On Semi. There is customer concentration risk. We want to weigh what drives revenue at the company today alongside what can move the needle over the next year. We are comfortable with this risk, each I/O Fund Member will need to decide for themselves what their risk tolerance is around high customer concentration.

Conclusion:

Aehr is a company where technicals are going to be of utmost importance as we surf the silicon carbide wave. Per our last earnings report write-up: “We took gains in AEHR recently because we felt it was the responsible thing to do. The small cap had grown to be the top leading position in our portfolio. However, we’d like to build back at key times as the company is doing all the right things.”

Some rough numbers: The stock is up 68% since the last earnings report when I stated we took gains – that 68% includes today’s (15% pullback). We have been reducing our position since late November, not out of lack of conviction, but because we feel it’s the responsible thing to do. We then attempted a 1% breakout.

My point is that small caps are one where investors should determine how they want to play this. Going long and strong with a company that has this kind of TAM is understandable. SiC wafer market is expected to grow 35X by 2030 – that’s not a typo. “Forecast from William Blair estimate that the silicon carbide market for devices in electric vehicles alone, such as traction inverters and onboard chargers is expected to grow from 119,000 6-inch equivalent silicon carbide wafers for EVs in 2021 to more than 4.1 million 6-inch equivalent wafers in 2030, representing a compound annual growth rate of 48.4%. This equates to almost 35 times larger in 2030 than in 2021.”

Notably, Aehr’s wheels fell off last year and it dropped (70%) with no real notable change in the story. Many investors will look for a “why” but it’s the nature of small caps facing macro headwinds, which results in a risk-off appetite. Even if an investor thinks they are mentally prepared for this, it’s extremely uncomfortable when a selloff in small caps (and other larger tech stocks) actually happens.

We prefer to be in the middle with this stock – we are going to participate heavily at times (it grew to be our number one position) but also try to take gains when we can. The company is trading at a forward P/S of 13. The stock is much safer under a 10 forward P/S and safer yet under a 6 forward P/S. If we get into this range, you’ll probably see quite a few buy alerts.

The Forward PE Ratio is similar – not much history holding at this level.

The fiscal year guide is very important because it will lay the foundation for the stock’s valuation. If the guide is higher than analysts are forecasting, then these valuations get cheaper overnight. The orders that are announced throughout the quarter help, in this regard. The risk would be a lower FY2024 guide (given only two analysts cover the stock) and valuations will be forced to get cheaper. Hence, there is some buildup going into the July call.

Additional Information on Orders and Recent Headlines:

Note: we’ve spoken about this throughout the quarter, listed here for reference purposes.

For a small cap, Aehr has had to weather quite a few headlines this past quarter.

Aehr holds a credit line and checking account at Silicon Valley Bank. The official statement from the company is the following:

“Aehr Test does have a checking account at SVB with a current balance of under $2.5 million, which is less than 6% of our total of $41.8M in cash and short-term liquid assets”
“Aehr has over $39.3 million in another financial institution which includes over $9.7 million in cash and $29.6 million in short term US Government backed Treasury Bonds.”
“Aehr has no outstanding balance on its line of credit with Silicon Valley Bank and foresees no need to draw on the line in the near future. Aehr believes that there is no impact to our operations, customers, vendors, or employees. We are taking all appropriate steps to prevent any impact on our operations.”

The second headline, which had a larger impact on daily price movement, was Elon Musk’s comments about reducing the need for silicon carbide. Management was quick to respond with the following:

“Tesla clarified that this will not impact the current high-performance model platforms including the Model S/X and Model 3/Y vehicles. Also, we believe that the new chips in the lower cost models will be 100 Amps per device versus 50 Amps per device today and likely 50% or more larger in surface area; therefore, the number of wafers required will be less impacted”
“This is important as Aehr’s total available market is primarily driven by the number of wafers required, not the number of devices”
“It is also important to understand that a 100A device using today’s generation of silicon carbide devices is approximately 50% larger than the devices used in the current Telsa inverters. So, while this new lower performance 800 kVa inverter only uses 12 die or 75% less than the current 48 die design, the die themselves are estimated to be about 50% larger, or require 50% more wafers for the same number of die.”
“In addition, during the Q&A session, Tesla further clarified that the new inverters would be made from a new Tesla-proprietary custom module package, and that Tesla would purchase the die from multiple manufacturers and package them in this Tesla-proprietary custom module. Again, Aehr sees this as a natural roadmap and consistent with the roadmaps stated by major manufacturers of silicon carbide where the electric vehicle inverters will migrate multi-chip modules to reduce power conversion losses, improve thermal performance, simplify design, and lower overall cost of the inverter system. As companies migrate to silicon carbide modules with multiple die in a single module package, the need for wafer level test and burn-in become critical to ensuring automotive quality and reliability as well as cost as the yield loss as a result of the stress test induced failures during burn-in become extremely expensive as a single die failure in a module results in throwing away the entire module including the other die in the module. Therefore, we believe the business use case for our solution actually increases. Wafer level test and burn in of 100% of die and extended burn in times will be required to earn Tesla’s business.

Orders Since the Last Earnings Report

In January, AEHR received a $25.1 million order for FOX-XP Test and Burn-in Systems. This will include a later order of the WaferPaks (the razor-razor blade model). The customer was ON Semi, per the CEO stating it came from their “lead silicon carbide customer”
A little more than a week ago, AEHR received a Volume Production Order from a “Major Silicon Carbide Customer” – this was not ON Semi as it was stated it came from Aehr’s “second major silicon carbide semiconductor customer.” The shipments are expected to begin March 1st.
In March, Aehr also received an additional $6.7 million order from ON Semi.
In January, Aehr announced a new customer that supplies both silicon carbide and gallium nitride semiconductors.

Cloud Earnings Review: Digging Deeper on Best-of-Breed

Posted on March 31, 2023June 30, 2026 by io-fund

This is a continuation of our article Slowdown in Cloud on Thin Ice Following Q1 Guides. Here’s a quick recap”

“Following the most recent earnings reports, our prediction is playing out that the slowdown we had predicted in Cloud would worsen. For example, best-of-breed cloud reported a 71% slowdown in QoQ/YoY growth for Q4 guides and is now guiding for an 83% slowdown in QoQ/YoY growth for Q1 guides.

This is important because the cloud category has treated investors quite well with recurring revenue, resiliency during Covid, and some of the strongest examples of product-market fit available on the public markets. However, not even this can overcome the effects of lower budgets and cloud spend, which is the top driver in terms of year-over-year comparisons.”

Digging Deeper on Best-of-Breed

Our analysis on cloud best-of-breed should not be confused for excessive bearishness. We like this category quite a bit and will continue to watch it closely to build position(s) in the future. Rather, we prefer to not stand in front of the train (which for growth stocks, can be defined as rapid deceleration on the top line) and to simply wait for a signal that growth will resume. Others will choose to remain invested for the long-term story, and that may fit another investment profile.

We took a sample of the top-ranking cloud stocks on revenue growth, free cash flow, adjusted operating margin and/or valuations. Among the best-of-breed cloud stocks, only ServiceNow’s guide shows sequential growth. The company’s QoQ growth was 7% last year and is expected to be 8% this year. In this article we want to expand the data below to see which companies are outperforming and underperforming based on the various metrics.

Source: YCharts

We did a similar analysis in December. Since then, Gitlab stands out for its revenue growth profile that increased from a 10% decel to a 16% decel expected for Q1 from the previous year. If this continues, Gitlab will see an approximate 50% decel from FY2022. HashiCorp is also turning negative in terms of QoQ/YoY, as is Bill.com and MongoDB. Two of these stocks lag cloud on YTD returns with Bill down (30.25%) and Gitlab down (27.13%).

Source: YCharts

Earnings Beats

Below we look at companies that beat revenue and adjusted EPS. HashiCorp was the leading cloud stock to have the highest revenue beat. The company’s revenue grew by 41% YoY to $135.79 million and beat estimates by 9.3%. BILL revenue grew by 66% YoY to $260 million and beat estimates by 7%. MongoDB revenue grew by 36% YoY to $361.31 million and beat estimates by 6.9%.

Source: YCharts

MongoDB’s adjusted EPS was $0.57 compared to $0.10 for the same quarter last year. It beat analyst estimates by 656.6%.

BILL adjusted EPS came at $0.42 compared to break even for the same quarter last year. It beat analyst estimates by 210.7%.

Source: YCharts

Both MongoDB and BILL, despite the top-line and bottom-line beat, dropped after the earnings due to decelerating revenue. Per Barclays analyst Raimo Lenschow, who has an overweight rating on MongoDB, the guidance only implies 16% growth and a meaningful slowdown in the company's Atlas and Enterprise Advanced segments.

We do not place much weight on earnings beats in the current macro environment. This helps to perfectly illustrate why beats can actually be a dangerous way to evaluate a stock. In all cases – HCP, MDB and BILL, the companies were beating on decelerating revenue and/or bottom lines. We had pointed this out in our January Q1 Webinar when we stated: “We won’t be buying beats on decelerating top line or beats on deceleration bottom line.”

Bottom Line and Free Cash Flow

Below we look at the best-of-breed cloud stock’s GAAP operating margin and free cash flow margin. Note that some cloud companies are reporting better free cash margins.

Snowflake reported a higher free cash flow margin of 35% when compared to 15% in the same period last year. ServiceNow has an impressive 52% free cash flow margin when compared to 46% in the year-ago period.

GAAP profitability is another important metric to closely monitor, especially with macroeconomic uncertainty. Adobe ranks the highest in the best-of-breed cloud companies with an operating margin of 34% and ServiceNow ranks second with an operating margin of 8%.

Source: YCharts

Cloud investors should remain cautious as cutting back on expenses may weigh on growth long-term. We do not have all of the information yet on how these companies will perform a year out when they’ve decreased head count, gone remote, cut back on sales and marketing and/or cut back on R&D. During the bull market, cloud was spending for growth and this had a direct relation to helping the top line. The effects of pulling back on this spending will not be immediately seen. We are very new to cloud deceleration, which I estimate began to occur in Q3 2022. We’ve stated various reasons for this being the quarter where earnings were a bit unusual, including the Q2 beats weren’t being carried through to a full year raise on guidance.

As stated on Real Vision, this was a flag to us and we began to decrease our exposure to cloud around this time. I think we will need at least a year to 18 months to see the full effects of reduced spending in relation to the top line. Our December cloud report had said – do not be surprised if we see best-of-breed dip below 20% — and we are already quicker than I thought was possible with MDB reporting 16% growth. Perhaps I should update this and say – do not be surprised if best-of-breed reports below 10% growth. With the information we have today, we are headed in this direction.

More on Margins:

The below chart shows the GAAP operating margins of the best-of-breed cloud companies. Apart from ServiceNow and Adobe, other cloud names have negative GAAP operating margins.

Datadog was GAAP profitable but recently lost their positive margin from +3% to (7%). CrowdStrike is low negative single digits at (5%). Datadog’s management had stated in the earnings call that the previous year’s operating margin benefitted from less in-person office costs and travel costs due to Covid policies.

Source: YCharts

Stock-Based Compensation

Most of the names listed below that are unprofitable on a GAAP basis are paying high stock-based compensation. BILL has the highest percentage of stock-based compensation at 45.9%, followed by Snowflake at 42.6%, and 36.6% for SentinelOne.

The high stock-based compensation is something to be on watch for, because when companies report, they will overemphasize non-GAAP earnings. For example, BILL has a GAAP operating margin of (43%) and an adjusted operating margin of 12%, with the primary difference being stock-based compensation.

Stock-based compensation is a non-cash expense added back to adjusted earnings. However, in practice this is an expense as per GAAP rules. Warren Buffet said the following, which relates to the importance of GAAP earnings over adjusted earnings when stock-based compensation is involved. “If options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And if expenses should not go into the calculation of earnings, where in the world should they go?”

Source: YCharts

Valuations

In the below chart, we ranked companies based on the forward P/S ratio. Snowflake and Cloudflare have the highest forward P/S ratio. These have come down considerably over the past few months. Eventually, cloud will hit a bottom on valuations and be cheap enough for risk-adverse investors to consider.

Source: YCharts

Ranking based on revenue estimates change for current quarter.

Zscaler’s revenue estimates have been revised up 2.4% and CrowdStrike’s revenue estimates have been revised up 1.6% in the past 30 days. On the other hand, GitLab’s revenue estimates have been revised down (6.6%), Datadog’s revenue estimates have been revised down (2.6%), and MongoDB’s revenue has been revised down (1.7%). This is another reason that earnings beats are not the best way to determine the outcome of an earnings report. Because the market is forward-looking, you’ll see a company beat current estimates while being revised down on forward estimates. This is a trap that retail should try to avoid at all costs.

Source: YCharts

Ranking based on adjusted EPS estimates change for the current quarter.

MongoDB’s adjusted EPS has been revised up 47.4% in the past 30 days. We also noted earlier in our analysis that the company had a very strong adjusted EPS beat in the recent quarter. Similarly, Zscaler’s estimates have been revised up 27%, and CrowdStrike’s by 16.8%. On the other hand, Snowflake’s estimates have been revised down (26.4%) and Gitlab’s by (10.1%).

Source: YCharts

A Few Best-of-Breed highlights and lowlights in Q4.

According to the data above, Adobe and ServiceNow are best positioned to weather the new macro. This is due to favorable bottom lines, which includes the elusive GAAP profitability for this category. Their stock-based compensation ranks margin lowest on our list and their respective GAAP operating margins reflects this.

ServiceNow and Adobe also have two of the strongest free cash flow margins in the category and are essentially flat QoQ/YoY on the top line while many cloud stocks are deeply decelerating.

Crowdstrike is guiding for QoQ growth from Q4 to Q1 on both the top line and bottom line.

CrowdStrike revenue grew by 48% YoY to $637.4 million (beat estimates by 1.7%) and adjusted EPS was $0.47 (beat estimates by 10.4%). The free cash flow was also strong as it grew by 65% YoY to $209.5 million with a free cash flow margin of 33%.

Crowdstrike guided for $676M, at the midpoint and EPS of $0.50 to $0.51.

Wedbush analyst Taz Koujalgi said, "We calculate that the [annual recurring revenue] guide appears conservative, and if macro conditions do not deteriorate, net new [annual recurring revenue] growth if high single digits are doable."

The management also highlighted that the company had been ranked No.1 for the third consecutive year in IDC’s annual Worldwide Modern Endpoint Security Market. The company was able to increase its market share by 3.8% to 17.7%.

Cloudflare Grows Free Cash Flow Margin

Cloudflare revenue grew by 42% YoY to $274.7 million (beat estimates by 0.23%) and adjusted EPS was $0.06 (beat estimates by 31.6%).

The company had a free cash flow of $33.66 million with a free cash flow margin of 12% compared to a free cash flow of $8.64 million with a free cash flow margin of 4% in the year-ago quarter.

The management highlighted some of the key deals in the quarter, particularly a leading generative AI company signing a one year $1 million deal. The AI company has been a user of free tier since 2017. Cloudflare was also awarded a five-year deal of $7.2 million to operate the .gov registry. The company also got the moderate status of the FedRAMP authorization in December.

Zscaler Grows Free Cash Flow but Billings Slow

Zscaler revenue grew by 52% YoY to $387.6 million (beat estimates by 6.3%) and adjusted EPS was $0.37 (beat estimates by 26.1%). The free cash flow grew by 113% YoY to $62.8 million with a free cash flow margin of 16%. However, the weak point in the company’s report was the calculated billings that grew by 34% in the quarter from 37% growth reported in Q3 and 59% growth reported in the year-ago quarter.

The management mentioned in the earnings call, “Billings were impacted by new customers being more deliberate about their large purchasing decisions at the start of the calendar year. These deals have not gone away, and we have closed a few already in February.” The billings guide for the next quarter was also low. “For Q3 (Q1), we are assuming billings to decline by approximately 9% sequentially, compared to the mid-single digit percentage declines we have seen in the last few years.”

Conclusion

The cloud sector has many moving parts as it mixes strong product stories with weak bottom lines. In addition to this, eventually the valuations will become attractive especially for those that can weather the new macro by cutting costs and maintaining category-leading growth. Across the board, cloud investors should be prepared for a sustained slowdown on the top line. This could worsen over the next year, as typically there’s a direct relationship between spending/investing in growth and top line results 12-18 months later. The opposite will also be true, cutting back on spending/investing in growth will lead to a lower top line.

Our preference is to remain on the side lines for now while identifying the strongest one or two cloud stocks fundamentally for when the technicals show give us a clear signal that it’s time to hold exposure here again. This could happen quickly so we prefer to be prepared in advance with what companies’ charts should take priority.

Of these names, we plan to do a deep dive in April for our premium members on the front runner(s). Stay tuned.

Cloud Earnings Review: Digging Deeper on Best-of-Breed

Posted on March 31, 2023June 30, 2026 by io-fund

This is a continuation of our article Slowdown in Cloud on Thin Ice Following Q1 Guides. Here’s a quick recap”

Digging Deeper on Best-of-Breed

Source: YCharts

Earnings Beats

Source: YCharts

MongoDB’s adjusted EPS was $0.57 compared to $0.10 for the same quarter last year. It beat analyst estimates by 656.6%.

BILL adjusted EPS came at $0.42 compared to break even for the same quarter last year. It beat analyst estimates by 210.7%.

Source: YCharts

Bottom Line and Free Cash Flow

Below we look at the best-of-breed cloud stock’s GAAP operating margin and free cash flow margin. Note that some cloud companies are reporting better free cash margins.

Source: YCharts

More on Margins:

The below chart shows the GAAP operating margins of the best-of-breed cloud companies. Apart from ServiceNow and Adobe, other cloud names have negative GAAP operating margins.

Source: YCharts

Stock-Based Compensation

Source: YCharts

Valuations

Source: YCharts

Ranking based on revenue estimates change for current quarter.

Source: YCharts

Ranking based on adjusted EPS estimates change for the current quarter.

Source: YCharts

A Few Best-of-Breed highlights and lowlights in Q4.

ServiceNow and Adobe also have two of the strongest free cash flow margins in the category and are essentially flat QoQ/YoY on the top line while many cloud stocks are deeply decelerating.

Crowdstrike is guiding for QoQ growth from Q4 to Q1 on both the top line and bottom line.

Crowdstrike guided for $676M, at the midpoint and EPS of $0.50 to $0.51.

Cloudflare Grows Free Cash Flow Margin

Cloudflare revenue grew by 42% YoY to $274.7 million (beat estimates by 0.23%) and adjusted EPS was $0.06 (beat estimates by 31.6%).

The company had a free cash flow of $33.66 million with a free cash flow margin of 12% compared to a free cash flow of $8.64 million with a free cash flow margin of 4% in the year-ago quarter.

Zscaler Grows Free Cash Flow but Billings Slow

Conclusion

Deep dives plus trade alerts and weekly webinars are offered on our premium service, you can find out more information here.

Official Press Release: I/O Fund’s Cumulative Returns Double the Nasdaq Following a Tough 2022

Posted on March 30, 2023June 30, 2026 by io-fund

Actively managed portfolio and research site announces its largest cumulative lead over institutional all-tech portfolios. The I/O Fund defies a challenging market, outperforming peers and providing innovative tools to level the playing field for retail investors.

I/O Fund, a tech research site that actively manages a real time portfolio, announces a cumulative return of 46.92% since inception versus the Nasdaq-100’s 18.65% return during the same time period.

Impressive Performance in a Challenging Year for Tech (and the Market as a Whole)

A few important highlights of the I/O Fund’s performance include:

Cumulative return of 46.92% since inception, compared to the Nasdaq-100’s 18.65% return during the same time period
More than doubled the Nasdaq since 2020 with an outperformance of 28.27%
2022 performance of (-38.8%), rivaling the Nasdaq-100 performance of (-32.9%)
Relative outperformance in 2022 surpassing institutional all-tech portfolios by as much as 85%
Since inception, the I/O Fund has a lead over institutional technology portfolios by as much as 174% including those who manage billions of assets under management (AuM)

Typically, in a risk-off environment, the indexes are known to protect investors to the downside. It also helps to gauge the overall cost of owning tech in a historic year for losses in the stock market. Meaning, even the most conservative tech investors lost (32.9%) in 2022, defined by those that hold their exposure to NDX through QQQ.

Notably, losses are geometric in nature, so a portfolio that is down (67%) has to go up 85% to catch up with our 2022 performance of (38.8%). Since inception, to catch up with the I/O Fund compared to other all-tech portfolios, you’d have to make up 174%.

Our 2022 relative outperformance followed an outperformance in 2021, with gains of 11.4% compared to many tech funds that were down (23%) or more. On a cumulative basis, we currently have the largest lead over Ark that we’ve ever had since inception.

Ark is not the only all-tech portfolio peer that we are outperforming on a cumulative basis. The portfolios listed below are managed by highly regarded portfolio managers, are reserved for high-wealth individuals only, and have billions of assets under management (AuM).

Pictured above: If you had invested $10,000 with the I/O Fund's picks versus other all-tech portfolios at inception, the difference would be a portfolio value of $14,692 with IOF versus $5,358 with institutional tech-focused portfolios. The difference in value is 174%.

You can read the official Business Wire press release here. A copy of the auditor’s engagement letter including verified procedures and the verified performance percentage is shared with I/O Fund customers in the paywall article “2022 Audited Returns.” To become a customer of the I/O Fund, learn more here.here. A copy of the auditor’s engagement letter including verified procedures and the verified performance percentage is shared with I/O Fund customers in the paywall article “2022 Audited Returns.” To become a customer of the I/O Fund, learn more here.

How the I/O Fund was Able to Rival the Nasdaq During a Historic Bear Market for Tech

Our firm is well-known for carefully choosing allocations as an important risk management tool. Lead Tech Analyst, Beth Kindig, has over a decade of experience analyzing tech. Her deep dive research helped the firm build its highest allocations in the complex semiconductor industry, which was the best performing sector in tech in 2021 and 2022.

Kindig has made contrarian, bullish calls on Nvidia in her free newsletter. Her analysis led to the I/O Fund buying at the October low for a 35% gain by year end, which has turned into more than 140% gains. Year-to-date, Nvidia is the best performing S&P 500 stock on the market, and remains the I/O Fund’s top position. Notably, the firm takes gains throughout the year on their positions and issues real-time trade alerts to this effect.

“We stayed focused and pivoted to hedging in April which helped us stage a strong comeback. In addition to hedging, we built a defensive tech portfolio that included two of the tech industry’s leading stocks. We held these winners at some of our highest allocations in Q3 2022 with gains of 33% and 43% on our initial entries.” -Business Wire press release, Lead Tech Analyst, Beth Kindig

I/O Fund also owes its lead over other all-tech portfolios to technical analysis. Portfolio Manager, Knox Ridley, actively manages the portfolio in real-time, providing readers with weekly webinars and charts to show where the I/O Fund plans to buy and sell key positions.

Ridley is known for managing high-risk assets in 2022, such as Bitcoin, Nvidia, and Netflix, with a near-perfect track record. This led to outperformance during a historic selloff across tech stocks. Ridley issues real-time trade alerts to research subscribers for every stock entry and exit plus offers a pie chart of the portfolio’s allocations.

“Given that 2022 destroyed more wealth on record than any other time in modern history, beating the Nasdaq on a cumulative basis cannot be overstated. The far majority of our competitors cannot say the same. Our performance reflects our ability to outperform in any market condition,” said Portfolio Manager Knox Ridley.

Note: Knox Ridley holds weekly webinars that discusses the broad market and I/O Fund’s positions, including the positions the I/O Fund plans to trim, add, sell or buy. He also goes through details on the automated hedge weekly. Learn more here.Learn more here.

In April, the I/O Fund partnered with Vincent Duchaine of WealthUmbrella to develop an automated hedging signal. Duchaine is an A.I. and Machine Learning University Professor who worked with Ridley to create an automated risk-on/risk-off signal for retail investors. This marked an important turnaround for the I/O Fund as the team expanded their risk management tools during a critical year to stave off losses.

Sign up for I/O Fund's free newsletter with gains of up to 221% -Click hereSign up for I/O Fund's free newsletter with gains of up to 221% -Click hereClick here

Strategic Approach and Focus on Top-performing Stocks & Sectors

In 2022, we made a strategic shift by leveraging hedging strategies with exposure to top-performing sectors within the tech industry plus top performing stocks.

The I/O Fund held a 30%+ allocation to semiconductors in 2022, which despite all odds, has been one of the top performing sectors in tech in 2021, 2022 and YTD 2023. Beth Kindig’s expertise in the tech industry helped the I/O Fund feel confident allocating 10% and even 15% positions in this complex sector over the past few years.
As early as June last year, Beth shared bullish commentary on one of our most significant current portfolio holdings in the article “Netflix Stock Could Rally with Ad-Supported Content.” Since I/O Fund’s original entry, the stock was up 33% in 2022. The firm held up to a 9% allocation. We offered our free newsletter subscribers an in-depth analysis and investment rationale, enabling them to take advantage of this top performer in the second half of the year.
As stated above, Kindig made contrarian, bullish calls on Nvidia in her free newsletter. Her analysis led to the I/O Fund buying at the October low for a 35% gain by year end, which turned into more than 140% gains total. This position and the others noted above helped the I/O Fund rival the Nasdaq’s performance in 2022.

Cutting-edge Analysis and Innovative Partnership Tools with a Focus on Hedging

The year 2022 marked an important turnaround for our firm as we gave up what I would call “retail idealism” which centers around the idea that holding a stock for a long period of time is retail’s only defense. This works during times of economic expansion, but this can go (horribly) wrong when a new, more challenging macro can change the outlook for any given company.

This year, we partnered with Vincent Duchaine of WealthUmbrella to develop an automated hedging strategy, which helped us successfully bridge the gap between human-driven actions and objective, emotionless machines. Ray Dalio calls this the “man and machine approach.”

With the automated hedging strategies, the I/O Fund was able to hedge up to 100% of our portfolio at times, focusing on playing defense rather than offense during last year’s market extremes. This hedge not only mitigated some of the most significant market drops after April but also set the stage for our relative outperformance towards the end of 2022.

As the market experienced a steep downtrend all year even into year's close, our portfolio manager Knox Ridley provided two long-term bullish scenarios, along with a detailed analysis of global market trends, divergences, and new market leadership. Knox also accurately predicted the August to September pullback and the October market bottom, helping investors make timely decisions in a demanding market environment. As the articles illustrate, Knox publicly navigated the broad market for free newsletter subscribers while reserving his real-time trade alerts for premium members.

A few of the biggest moves from the hedge in 2022 are detailed in the article “The Best of I/O Fund’s Newsletter in 2022” with more information including daily real-time trade alerts provided behind the paywall. The Best of I/O Fund’s Newsletter in 2022” with more information including daily real-time trade alerts provided behind the paywall.

Commitment to Transparency and Accountability

At the heart of I/O Fund, we believe that transparency is key to our success. We keep our members in the loop with real-time trade alerts and audited performance reviews. This raises the bar on accountability as no other retail site goes to these lengths by offering an actively managed and transparent portfolio.

Over the past three years, the I/O Fund has invested over $130,000 into accountability and transparency for our Members. When we launched in July of 2019, for the first year or so, we used a forum hosted by Tribe for our trade alerts, but by January of 2021, we had migrated to SMS and email tools that are least likely to experience an outage for our real-time trade alerts. This costs us $40,000 per year.

In addition to this, we use an auditor from a large firm in San Francisco to mathematically review and verify the performance of our I/O Fund portfolio trading account and crypto account. The process is quite extensive and it takes up to four months to complete. This costs $4,500 per audit and we’ve completed four audits for a total of $18,000 spent on this process. Premium members can access the verified procedures, verified performance and engagement letter here.

I/O Fund Analyst, Beth Kindig, recently wrote “The Importance of Verified Returns and Risk Management for Retail” which identifies three key reasons retail tends to underperform professional investors. The I/O Fund has worked diligently and made sizable investments to empower retail by addressing these issues which include automation, risk management tools and being the only retail firm to offer a verified performance.

The I/O Fund Experiment: Empowering Retail Investors

The I/O Fund's mission is to help retail investors beat Wall Street in the competitive tech sector. Our experiment in providing institutional-level research and tools to retail investors has been successful since we launched in 2019. This includes beating our other all-tech portfolios in the tough years of 2021 and 2022.

Previous press releases:

I/O Fund Announces Impressive 1-Year and 2021 YTD Returns

I/O Fund Outperforms Leading Active Tech Funds in 2021

I/O Fund Cumulative Returns Double the Nasdaq Following a Tough 2022

Join the I/O Fund Community Today!

If you are ready to optimize your investment strategies, join the I/O Fund Community and experience the advantages of accountability, innovation, and exceptional performance. Subscribe to our premium analysis service to access real-time trade alerts, weekly webinars that review our positions plus the broad market, a forum to connect with other skillful investors, and deep dive research from a Silicon Valley trained analyst who is frequently in Tier 1 media. Learn about our Premium Services here or Explore Pricing Options here.

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.

Slowdown In Cloud Stocks On Thin Ice Following Q1 Guides

Posted on March 29, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Mar 23, 2023,09:56pm EDTForbes Forbes on Mar 23, 2023,09:56pm EDT

Following last quarter’s earnings, we published an analysis on cloud that showed hyperscalers were slowing (5%) sequentially and best-of-breed was slowing (12%) sequentially, based on Q4 guides.

What was most important for tech investors to realize, is that this is out of character for cloud, as Q4 is typically the strongest quarter. We concluded that this foreshadows a weaker-than-expected Q1 and also a weaker FY2023 than was currently baked into estimates.

Following the most recent earnings reports, our prediction is playing out that the slowdown we had predicted would worsen after the current quarter results.

Below, we discuss the fundamental weakness apparent in the most recent earnings reports. For our Premium Research Members, we are extending the analysis next week to include a few outliers that seem more resilient than others in the category, and those that are definitively the weakest.

Often times, identifying one or two strong companies in a category and patiently waiting can pay off, as the cloud category will put downward pressure on the stock price, including the outliers. Our goal is to buy the outlier(s) after they’ve been unduly penalized.

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Big Tech: Bellwethers for Cloud Spend

Big Tech competes with best-of-breed cloud companies in nearly every capacity. For example, although most think of Azure when looking at Microsoft’s earnings reports, the company has a formidable presence in cybersecurity worth over $20 billion in revenue. Google’s BigQuery is one of Snowflake’s largest competitors, as is Amazon’s RedShift. I covered the differences between the three for Forbes here.

We also made the following point about why the Big 3 is an important proxy in our analysis: “Slowing Growth in Cloud Stocks: When Will We Hit a Bottom”

“The Big 3 are the best proxy because their reports represent the layer in the tech stack that tends to be the most resilient in terms of churn. The switching costs are quite high for cloud IaaS services. The Big 3 also afford a more concentrated view by owning 66% of market share across three companies whereas SaaS is spread across thousands of companies.”

The slowdown over the past four quarters is quite visible:

The Cloud slowdown over the past four quarters is quite visible – I/O FUND

The Cloud slowdown over the past four quarters – COMPANY RESULTS

Key Highlights from the Cloud Hyperscalers:

AWS:

AWS sales grew by 20% YoY to $21.4 billion in Q4, down from 27% YoY growth reported in Q3 and down from 33% YoY reported in Q2
Q4 2022 growth rate of 20% was halved as AWS sales grew by 40% YoY in Q4 2021
AWS revenue also missed the management guidance of 25% growth
Guidance for Q1 was not provided, however, it was stated the YoY growth rates in January were “in the mid-teens”

Azure:

Microsoft Azure revenue grew by 31% YoY and was down from 35% in Q3. In constant currency, it grew 38% and beat the management guidance by 1%.
Microsoft Azure revenue grew by 46% YoY and also in CC basis in Q4 2021.
The management provided guidance of 30% to 31% growth rate for the March quarter, down from 38% this quarter and down from 49% on a CC basis in the year ago March quarter.
You may recall the 5-point deceleration announced in the October report caused concern in the market. This is technically a steeper deceleration.

GCP:

Google Cloud revenue grew by 32% YoY to $7.3 billion and was down from 38% growth in Q3. Revenue missed the analyst consensus estimates by 1.5%.
The growth rate was also significantly lower than last year’s growth (down about 1/3rd) when Google Cloud revenue grew by 45% YoY in Q4 2021.

What Big 3 Management Teams are Saying

When there’s evidence of a deceleration, analysts will typically ask the management teams to elaborate on the call with the idea of identifying how much more deceleration may be reported in the future and for how long.

Here’s a question regarding AWS’s slowdown:

Mark Mahaney

[…] Brian, just any color on why mid-teens is kind of a holdable growth rate for AWS over the next couple of quarters, given what looks like pretty clearly, continuing deterioration in enterprise demand?

Brian Olsavsky (CFO)

So on the AWS growth rate, I'm not sure I can forecast for you with any level of certainty what is going to happen beyond this quarter. You kind of — this is a bit uncharted territories economically. And as we mentioned, there's some unique things going on with the customer base that I think many in this industry are all seeing the same thing.

[..] And whether there's short term, perhaps short-term belt tightening in the infrastructure expense by a lot of companies, I think the long-term trends are still there. And I think the quickest way to save money is to get to the cloud, quite frankly.”

Amazon’s management also volunteered the following in their opening remarks:

“Starting back in the middle of the third quarter of 2022, we saw our year-over-year growth rates slow as enterprises of all sizes evaluated ways to optimize their cloud spending in response to the tough macroeconomic conditions. As expected, these optimization efforts continued into the fourth quarter.”

They expect the optimization efforts to continue at least for the next couple of quarters and, in the absence of proper guidance for Q1, said that the YoY growth rates in January were in the mid-teens.”

Per management: “As we look ahead, we expect these optimization efforts will continue to be a headwind to AWS growth in at least the next couple of quarters. So far in the first month of the year, AWS year-over-year revenue growth is in the mid-teens.”

Here’s what Microsoft’s CEO, Satya Nadella, said in the first part of his opening comments:

“As I meet with customers and partners, a few things are increasingly clear. Just as we saw customers accelerate their digital spend during the pandemic, we are now seeing them optimize that spend. Also, organizations are exercising caution given the macroeconomic uncertainty.”

Later in the call the CFO mentions, “As noted earlier, growth continued to moderate, particularly in December, and we exited the quarter with Azure constant currency growth in the mid-30s.”

The I/O Fund has launched a new $99/year Premium Newsletter called "Essentials" — this newsletter delivers premium samples for our readers who want more actionable analysis for their tech portfolios. This month, we released a stock pick that we believe will be a leader in 2023 plus a video with the buy plan.$99/year Premium Newsletter$99/year Premium Newsletter called "Essentials" — this newsletter delivers premium samples for our readers who want more actionable analysis for their tech portfolios. This month, we released a stock pick that we believe will be a leader in 2023 plus a video with the buy planbuy plan.

My Translation:

Cloud will see belt tightening in 2023 and investors will have to gamble on the timing for when this turns around. It could be in the next few quarters or it could take years. Most of this will depend on the economy, as the common denominator for cloud stocks is budgets.

To be clear, the category has the potential to be quite resilient, which we covered in 2019 when we said, “My prediction is this may be one of the last cycles when tech is considered less safe than value stocks. As the market will find out (the hard way), cloud software is actually very safe. It is insulated from trade wars and overseas manufacturing issues. It reduces costs for enterprises, which is ideal for a recession. Lastly, cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech — such as mobile, e-commerce and advertising — which are reaching saturation, are finding themselves in the cross hairs of anti-trust and are susceptible to consumer spending changes.”

There are a lot of cloud software bulls and for good reason, this category has treated investors well with predictable revenue growth. Cloud software is resilient because it drives down costs and increases productivity. We know this scenario well as we wrote about it many times in the past few years to defend cloud. Often, cloud selloffs were welcomed to position for a 6-month bounce back after the category sold off (40%) or more. I pointed this out in the past on the free side and here on MarketWatch (behind paywall) in 2019 (i.e., when we weren’t facing a brick wall on growth).

The issue with this assumption is that Cloud growth is actually slowing downCloud growth is actually slowing down —- that is the reality of things —- and this wasn’t true in 2019 and hasn’t been true in the last decade. Couple this with weak bottom lines that require cash injections, and what get is a sector that is largely out of favor.

What Analysts are Saying about the Big 3

Institutional analysts are able to do channel checks. It doesn’t hurt to see if there is more information available directly from large cloud customers.

Here are some recent analyst notes:

BMO Capital analyst Keith Bachman said until Azure growth stabilizes, the shares are likely to be range bound. The firm believes there is too much remaining uncertainty on Azure, which represents about 31% of BMO's revenue estimates.

Piper Sandler analyst Thomas Champion said that the Alphabet’s Q4 revenue and EBITDA missed across the board with advertising trends slightly weaker than expected, driven especially by Network. Search growth also slowed and Cloud growth decelerated 550 basis points. He further said Alphabet is transitioning the cost base for slower growth.

Piper Sandler analyst said that the Amazon’s Q4 results were mostly positive with revenues topping the high end of the guidance range. However, Amazon's guidance was slightly weak as Consumers sound cautious and the Cloud deceleration cadence appears to be landing in the mid-teens for Q1. The analyst believes management comments suggest the company is still navigating a difficult stretch.

Interesting enough, Dan Ives lowered his price target on Microsoft following earnings, yet has raised the price target again recently stating:

[…] [Wedbush is] "seeing steady cloud enterprise spending for Microsoft that has stabilized from the softness we saw in the month of December." Wedbush added that Microsoft, along with cloud competitors such as Amazon (AMZN), Google (GOOG), Oracle (ORCL), and IBM (IBM), are "seeing a surge of Beltway cloud deal activity in 2023 with a major shift to cloud underway from the Pentagon to civil agencies in the 202 area code."

More on Best-of-Breed

To help illustrate how the deceleration is quite steep for some best-of-breed names, we took a sample of the top-ranking cloud stocks on revenue growth, free cash flow, adjusted operating margin and/or valuations.

Among the best-of-breed cloud stocks, only ServiceNow’s guide shows sequential growth. The company’s QoQ growth was 7% last year and is expected to be 8% this year. The largest deceleration was in GitLab, with revenue that grew 12% QoQ last year, is expected to decline (4%) sequentially this year.

Overall, the category is slowing down sequentially (a rather drastic) 83% for Q1 guides compared to the previous year — from an average of 12% QoQ last year to 2% QoQ growth this year.

As stated in our previous analysis, it’s assumed that H1 2022 was strong so YoY is less important than QoQ/YoY. This is because the cloud slowdown happened later in the market cycle with first management comments appearing in Q3.

For example, best-of-breed cloud reported a 71% slowdown in QoQ/YoY growth for Q4 guides and is now guiding for a 83% slowdown in QoQ/YoY growth for Q1 guides.

Best-of-breed cloud reported a 71% slowdown in QoQ/YoY growth for Q4 guides and is now guiding for a 83% slowdown in QoQ/YoY growth for Q1 guides. – YCHARTS

Here is how this compares to last quarter when we were seeing a 2/3 slowdown from 17% to 5% when I stated:

“Yet, the Q4 guidance is out of character as we see a 2/3 decline in average sequential growth rate from 17% to 5%. This is the more severe drop off because Q4 2021 was much better than Q2 2022 in terms of the economy. However, my contention is that Q4 could be reflecting what is to come in 2023 rather a reflection of budgets from 2022 as the slowdown is more pronounced in Q4 than it has been in previous quarters from 2022.”

Source: YCHARTS

Conclusion

Below is cloud’s price action since we last covered the weakness in this sector. This is despite a surprisingly strong January and February for tech.

Above is cloud’s price action since we last covered the weakness in this sector. This is despite a surprisingly strong January and February for tech. – YCHARTS

Both Bill.com and GitLab saw weak price action compared to the others, and coincidentally, both saw sequential growth turn negative. Prior to the current earnings reports, I spoke about Bill.com and GitLab specifically with Samuel Burke of Real Vision when I forecast there would be further weakness in this category.

Many cloud stocks are on thin ice in this regard, and I imagine that if/when more cloud stocks turn negative on a QoQ/YoY basis compared to last year, weak price action will follow.

Source: Beth Kindig speaks with Real Vision about the cloud slowdown – REAL VISIONBeth Kindig speaks with Real Vision about the cloud slowdown – REAL VISION

Every investor must determine their personal risk tolerance. The I/O Fund noticed unusually weak fundamentals in cloud in Q3 and re-allocated our positions to other sectors within tech at that time. However, we are hard at work in determining the one or two cloud positions we’d like to buy when this category reaches a bottom. We share our stock picks plus entries and exits with our premium members. You can learn more here.

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

POSITIONS REPORT – 3/28/23

Posted on March 29, 2023June 30, 2026 by io-fund

For reference to terminology used, please look at technical analysis under our resources section here. Regarding the charts below, the vertical tan shades represent time factors. These are inflection points where we have high odds of something significant happening. More times than not, (3/4 of the time), they mark a turning point in the trend. So, what matters is the direction we are trending into these periods. Regarding the vertical lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.here. Regarding the charts below, the vertical tan shades represent time factors. These are inflection points where we have high odds of something significant happening. More times than not, (3/4 of the time), they mark a turning point in the trend. So, what matters is the direction we are trending into these periods. Regarding the vertical lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.

Elliott Wave count are meant to provide context. There is a pattern unfolding in real-time, one of which will play out. By monitoring price levels that are held/broken, it will help us figure out which one is in play

Broad Market

Nothing has changed from last week. My primary case is that we have topped, and are attempting one more push higher before the bear market continues lower. My alternative case is that this push higher can morph into a multi-month uptrend that takes us to at least 4275. However, both scenarios categorize the move higher from the October 13th low as a corrective rally in a larger bear market.

The internals of this bounce are quite week. Note the weakly RSI above. It can’t even break above the black resistance zone that has suppressed all attempts at a larger thrust higher. If the below red dashed line breaks to the downside, this will be an early warning that the downtrend is about to continue.

If we zoom in on the chart below, first off, the structure off the February high is a clear 5 wave pattern. This leaves us with two alternatives on what is unfolding in the current bounce:

Blue – This is a 2nd wave bounce. The probabilities support this. More times than not, an overlapping, messy bounce is a correction in a larger downtrend.

Red – We are starting a new uptrend to at least 4275. However, the only pattern that this first wave could be is a rare pattern called a leading diagonal pattern. This is a 5 wave pattern that is overlapping and messy.

In order for a leading diagonal to be trusted, we need to see: (1) a 5th wave higher, preferably to our 4067 target, (2) a 3 wave retrace that holds the 3900 low; (3) a breakout above where the 5thwave tops. This is a lot to ask, and one should be cautious on getting too overly bullish until the above criteria is met.

Critical supports: 3900, 3835, 3808. For each level that breaks, risk increases substantially. Below 3808, and the bear market resumes.

Do not underestimate the importance of price action here. The bulls must thread a thin needle by completing this rare leading diagonal pattern in order to push us higher. If they do this, we will be monitoring and may add to our longs. Short of this, pay close attention to the key support levels previously outlined for clues.

Commentary on Contrarian Investing

Support for the Red can be found in the excessive positioning into defensive assets as well as various sentiment gauges. This would be the contrarian bet, and more times than not, the market does not reward the herd at inflection points.

Sentiment is currently hovering at bearish extremes. There are many ways to gauge this, one that I like is the AAII survey that asks investors if their perspective is bullish or bearish over the next few months. The 8-day moving average of the bullish % is hovering at a historically low extreme, which is unusual.

Not only do most investors feel terrible about the markets right now, but they are positioned accordingly. There is currently $5.1 Trillion in money market funds, which is more than we saw at the COVID extremes.

BofA Global Research takes this one step further to show money managers are positioned. As you can see, equities are the most hated asset, while cash is the most liked.

However, if we look in the options market what you are seeing is not what the above contrarian information should suggests. With excessive worry should come excessive negative bets in the form of implied volatility. On a nominal basis, there is a heightened implied volatility, but this only matters in relation to the actual volatility in the markets (realized volatility). Now, when we compare the implied volatility to the realized volatility, we are not seeing the type of contrarian signal you would expect.

The reason for this is due to realized volatility being uncomfortably high. This implies that there is not a healthy level of liquidity in the markets, which makes us more susceptible to see large intraday swings. The rule is that where realized volatility is today, go back in time and find periods when it was at similar levels, and you can get an idea of the type of move it can lead to.

One more point about contrarian investing. Anyone that looks back in time, can find periods where defensive positioning/extreme sentiment readings were actually right. In early-to-mid 2008, we saw excessive defensive bets and sentiment in the basement, much like now. Then October of 2008 happened. We saw similar readings in early 2022, I being one of the contrarians that was leaning into this data at the time. However, much like 2008, the contrarians in early 2022 also got steamrolled.

Macro

The popular narrative in the Financial Media is that the current banking issues in the US are localized to regional banks, it is largely under control, and mega banks should be the beneficiaries to the exodus of deposits from regional banks. The charts are telling a much different story.

XLF is an ETF that tracks The Financial Sector Index. This is an index that is comprised of the largest banks and insurance companies, not regional banks. It appears to be in a precarious position. After completing a large degree bear pennant (B wave), we have gotten an extended and obvious 5 wave drop from the point of breakdown.

We are now coming to the end of the 1st wave down, so a multi-week bounce may have already started. If we see this bounce retrace into the above targets, and the structure is a 3 wave bounce, I would be cautious of ANY financial holdings. What this implies is that the panic-drop we recently saw was the 3rd wave of a larger 1st wave. That means the larger 3rd wave will be more intense.

Keep in mind the above chart tracks the US financial sector, so the largest banks and insurance companies in the US are in it. We are being told this is localized in regional banks, while the above chart suggests otherwise. Now, let’s look globally.

Deutsche Bank announced that they will redeem $1.5 Billion of notes due in 2028. As a result, the cost of their credit default swaps increased sharply, much like what we saw with Credit Suisse prior to their collapse. European banks were down across the board on this news, as Deutsche Bank saw a 14% drop last Friday.
The French CAC has been one of the stronger indexes in Europe; however, under the hood, the banking sector is the weakest sector, much like in the US. BPN Paribas, France's largest bank, for example, is down 26% from its February high.
Now UBS is being probed and possibly sanctioned due to their support of Russian Oligarchs.
Two of Japan’s largest banks, Mitsubishi UFC Sumitomo and Mitsui Financial, are down between 15% – 17% from March 9th.
The largest bank in Australia, the Commonwealth Bank of Australia, is down 14% since March 14th, while England’s largest bank, HSBC, is down 15% since late February.
Itaú Unibanco, Brasil’s top bank, is down 15% since late February and over 25% since last November.

I could go on, but my point is that this is not a US centric, regional bank problem. It is a global problem regarding the banking sector. They are not catching substantial bids at major support regions, while most bank charts look like XLF, to a large degree sharp drop, that traces a 5 wave pattern down. If this is what’s unfolding, it warrants caution on this next bounce higher.

Furthermore, the US markets are quite unhealthy. Only a handful of stocks are holding up the rest of the indexes.

Note how the S&P 500 continues to push higher while at the same time we have seen net new 52 week lows day after day. This is possible because of the weighting of the S&P 500. Apple and Microsoft, for example, account for over 12% of the total weighing of the S&P 500, and they have been quite strong while most stocks are continuing in downtrends.

APRIL 11-28

I’ve been talking about the excessive amount of cycles stacking up in mid-late April. Every FAANG, semi, bond, commodity and global market that I track is pointing to this period on time. Take a look the SPX chart below.

That’s five cycles in a 4-day period, with two more on each side of that period in April. When you see cycles stacked like this, it is a period that we should pay specific attention to. As always, what will matter the most is how we are trending into this region.

Hedge

Our hedge is inching closer to triggering. It would likely trigger long before we even test 3900, if we take that path. If this happens, we will go back to being hedged.

I/O Fund Portfolio

Our cash has been reduced down to about 22% and added to our longs in case the red count is about to unfold. Our move into crypto and ENPH is an attempt to position into specialized uptrends, regardless of what happens to equities. We are looking to add another 2% to Bitcoin and another 2% to ENPH, if it breaks out.

NFLX

If NFLX can break above $379, we will take heavy gains. This will complete a very large leading diagonal off the low.

NVDA

The strength in NVDA is quite incredible. It has blown past the $241 region, and inching higher above more and more resistance zones. Though we love NVDA, we are not looking to buy up here. Instead, we have taken consistent gains. No matter how you slice it, we only have 3 waves up, while being incredibly stretched fundamentally and technically.

AMD

That’s 5 waves up off the low. Risk is high up here until we see the structure of the pullback – 3 waves down is good, 5 waves down is bad.

ENPH

ENPH continues to track energy commodities. As a whole, they continue to be setting up for what looks like a breakout. Regarding ENPH, a break out above this trendline will signal our next buy.

Oil and Gas

These are two charts I’m tracking that have had a strong correlation to the general direction of ENPH. Gas is looking ready to breakout; however, it is probably waiting for crude to bottom, which should be soon. If the next dip is shallow, then followed by a noticeably bullish push higher, the low is in for crude.

AEHR

Bitcoin

We are leaning into Bitcoin right now, considering the banks. It is separating from equities, which is very interesting. We have a stop on some of our Bitcoin holdings, in case this is a head fake, and the red count unfolds instead.

MSFT

Looks like one more high is possible in MSFT. A deeper pullback is needed if we are going to push higher. If that pullback is 5 waves down, the market is setting up for a fresh low.

Ethereum

TSLA

TSM

Chainlink

MGNI

NVIDIA Showcases AI Breakthroughs, Omniverse Platform, and New Partnerships at GTC 2023

Posted on March 28, 2023June 30, 2026 by io-fund

The tech giant reveals cutting-edge AI advancements, a powerful cloud based Omniverse platform, and strategic collaborations in the automotive industry.

This year at the GPU Technology Conference (GTC) 2023, NVIDIA unveiled a series of groundbreaking AI innovations, talked about upgrades to their Omniverse platform, and highlighted new partnerships that promise to revolutionize the world of computing and automotive manufacturing.

AI Breakthroughs and Applications

NVIDIA showcased its first PCIe dual-GPU in years with applications to train the latest generative AI models, GPT4. NVIDIA has been involved with the training function of these models which have the potential to transform many industries, from language processing to visual content creation and even biology. The company also demonstrated AI Foundations, a new set of cloud services that enables the creation of custom language models and generative AI. Partnerships with Getty Images, Shutterstock, and Adobe highlight the potential of these new AI tools in creative fields.

Our first coverage of Nvidia’s AI thesis began nearly five years ago in the analysis “Holding Nvidia Stock Will Pay Off Due to Two Impenetrable Moats” Since then, the stock has returned 436%. More recently, in January, I discussed why Nvidia powering OpenAI and Microsoft is a great way to play this trend in my interview with Real Vision. Watch the Video here.

NVIDIA Omniverse: Unifying Global Industries

The conference spotlighted NVIDIA's Omniverse, a digital twin platform that allows industries to simulate, optimize, and plan their operations in a virtual environment. The platform has already been adopted by major automotive manufacturers like BMW, Toyota, and Mercedes-Benz to optimize their assembly lines, plan operations across multiple factories, and accelerate digitalization.

Collaborations with companies such as Rimac and Lucid Motors further demonstrate the versatility of the Omniverse platform in creating digital stores and facilitating virtual planning sessions for the automotive industry.

I spoke with VP of Omniverse and Development Platform, Richard Kerris, in a candid one-on-one interview last year. You can view the full-length interview here: “How to Value the Metaverse.”

In our conversation, I asked Kerris about CEO Huang’s well-publicized comment that the “Omniverse or Metaverse is going to be a new economy that is larger than our current economy.” – essentially, what I wanted to know is how can the Metaverse grow to this size considering the dominant influence the internet has on the global population?

Here is what Kerris said:

“[The Metaverse] is going to be many times bigger than the web because of what a virtual world can do for business, for education, for medical, for all sorts of things including entertainment; we’ve just begun to scratch the surface of these possibilities […] You’ve probably heard the term digital twin. One example is what it’s going to do to revolutionize the industrial market, design and manufacturing. Well, a digital twin is a true-to-reality twin in synthetic worlds of what happens in the physical world. We are seeing this transform these things because when you can make decisions in that synthetic world before you commit to it in the physical world, you have a lot of cost savings.” –Richard Kerris

New Hardware, Systems, and Cloud Services

NVIDIA unveiled its latest hardware, including the Ada RTX GPUs and the OVX servers, designed to run the Omniverse platform efficiently. The company also introduced new chips, Grace, Grace-Hopper, and BlueField-3, engineered specifically for energy-efficient focused data centers.

The tech giant announced the NVIDIA Omniverse Cloud, a fully managed cloud service in partnership with Microsoft Azure. The Omniverse Cloud will be integrated with Microsoft 365 and Azure IoT Digital Twins services, connecting hundreds of millions of Microsoft 365 and Azure users. This is a key partnership and a remarkable highlight from the event for public investors.

Since our first coverage of Microsoft, the stock has returned 148% compared to Amazon’s 15%. Read my previous coverage on Microsoft here where I discussed in 2018 “How Microsoft Could Overtake Amazon on Cloud Infrastructure” and also “FAANG-Leader Microsoft is Banking on 4 Key Trends.” How Microsoft Could Overtake Amazon on Cloud Infrastructure” and also “FAANG-Leader Microsoft is Banking on 4 Key Trends.”

NVIDIA DGX AI Supercomputer: A Modern AI Factory

Spearheading the AI revolution, NVIDIA's DGX H100 AI supercomputer provides the processing power needed for mass-scale AI applications. The company expanded its business model with NVIDIA DGX Cloud, partnering with Microsoft Azure, Google GCP, and Oracle OCI to bring AI supercomputing to companies via a browser.

A few months back, I encouraged investors to stay long Nvidia through the crypto mining selloff with an editorial in September “Nvidia is Ready to Rumble with RTX 40 Series and H100 GPUs” – the stock has returned 113% in roughly 6 months and is the number one performing stock in the S&P 500.

Nvidia is Ready to Rumble with RTX 40 Series and H100 GPUs” – the stock has returned 113% in roughly 6 months and is the number one performing stock in the S&P 500.

The Future of Accelerated Computing

With a focus on energy efficiency, strategic collaborations, and wide-ranging applications, NVIDIA's accelerated computing ecosystem is poised to play a significant role in shaping the future of industries globally. By combining the power of AI, digital twin technology, and strategic partnerships, NVIDIA continues to show that it will push boundaries of what's possible in technology and industry.

This year's GTC demonstrated NVIDIA's commitment to moving industries forward, improving energy efficiency, and driving innovation through AI and advanced computing technologies. As the entire world races toward digitalization, NVIDIA stands at the cutting edge, helping businesses tackle the challenges and opportunities that lie ahead.

The AI thesis is important for the long-term thesis. In the near-term, Nvidia needs to recover the $2.5 billion decline that occurred following Ethereum’s merge to Proof-of-Stake (PoS) last August. I wrote about this in an editorial “Nvidia Stock: Evidence Gaming Has Bottomed and Why It’s Important” with the conclusion “The company’s swift and concise answer to the crypto mining selloff helps illustrate why Nvidia stands apart from its peers – primarily, that its products are superior, end-market demand remains strong, and management has many levers it can pull to quickly reverse a bottom. Since this article was written, the stock has returned 67%

What’s Next for Nvidia

The I/O Fund is an actively managed portfolio. We sent a trim alert last week on Nvidia and took gains. This is a position we have managed for 5 years, building up to 15% allocation and taking gains near the top, while layering in at the bottom. You can learn more about our Research Services here and our Verified Returns here.

2022 Full Year Audited Returns

Posted on March 24, 2023June 30, 2026 by io-fund

We’ve issued a press release today in BusinessWire on our full year 2022 returns, which you can find here.

Due to a 180-degree pivot in May, the I/O Fund ended the year at (38.8%). This places us within roughly 6% of the Nasdaq-100 (NDX) which helps illustrate the comeback that occurred starting in May. Typically, in a risk-off environment, the indexes are known to protect investors to the downside. It also helps to gauge the overall cost of owning tech in a historic year for losses in the stock market. Meaning, even the most conservative tech investors lost (32.9%) in 2022, defined by those that hold their exposure to NDX through QQQ.

Notably, losses are geometric in nature, so a portfolio that is down (67%) has to go up 85% to catch up with our 2022 performance of (38.8%). To catch up with the I/O Fund compared to other all-tech portfolios since inception, you’d have to make up 174%.

“If you had invested $10,000 with the I/O Fund's picks versus other all-tech portfolios at inception, the difference would be a portfolio value of $14,692 with IOF versus $5,358 with institutional tech-focused portfolios. The difference in value is 174%”

Our mission statement is to help Retail beat Wall Street in the challenging sector of technology.

When we set out on this mission, it was purely an experiment. The statistics show that Retail often fails to such a high degree that we felt any improvement here would be worth the attempt.

Past performance is not a guarantee of future performance. The I/O Fund is a publishing company. The analysts are not money managers and we are not financial advisors. Please consult with your financial advisor for every trade you do.

A few important stats on our Performance:

The I/O Fund announces a cumulative return of 46.92% since inception versus the Nasdaq-100’s 18.65% return during the same time period.
The I/O Fund’s cumulative returns of 46.92% have more than doubled the Nasdaq since 2020 with an outperformance of 28.27%
I/O Fund’s 2022 performance of (38.8%) rivaled the Nasdaq-100 performance of (32.9%)
The I/O Fund’s relative outperformance in 2022 surpassed institutional all-tech portfolios by as much as 85%
Since inception, the I/O Fund has a lead over institutional technology portfolios by as much as 174%

The transition began in May with the analysis “Compartmentalizing Cloud Stocks” and was complete by August.

In a nutshell, this is what that looks like:

Please note, anything stated outside of our performance review are estimates. The only official, verified number we provide is from the Engagement Letter listed below of (38.8%).

AEHR: 6% Allocation in October-December

NFLX: 9% Allocation in October-December

NVDA: 10% Allocation throughout 2022 with active management

Hedge: mitigated some of the largest drops after April. The biggest moves from our hedge in 2022 are below. The green indicates periods where we mitigated the drawdowns, while red indicates periods where we had to close our hedge for a loss.

Hedging

In an environment where the odds can be stacked against Retail, the I/O Fund is committed to leveraging tools that institutional-level money managers are unable to leverage.

The primary tool we leveraged for Retail in 2022 was hedging. In 2021, the tool we leveraged for Retail was to actively manage crypto. A few of the all-tech portfolios listed in our comparison chart are not able to leverage these tools. For example, ETFs such as QQQ (tracks the NASDAQ-100) and ARKK do not hedge and do not hold crypto.

In 2022 we partnered with Vincent Duchaine of WealthUmbrella. The automated hedge that Duchaine built helped the I/O Fund close the gap between human-driven actions and emotionless machines. This marked an important turnaround for our firm as we gave up what I would call “retail idealism” which centers around the idea that holding a stock for a long period of time is retail’s only defense. This works during times of economic expansion, but this can go (horribly) wrong when a new, more challenging macro can change the outlook for any given company.

I’ll be the first to point out that success is a team effort, and these Knox and Vincent repeatedly ran the ball into the end zone in the third and fourth quarter. If half the battle is just showing up, then most of you noticed Knox and Vincent did not let our Members down in this regard.

April of 2022 marks the end of the I/O Fund relying on stock picks as the primary, offensive measure. It marks the beginning of what I would call IOF 2.0, more officially known as “man and machine” and “woman and machine.” After partnering with WealthUmbrella on an automated hedge, the I/O Fund hedged successfully up to 100% of our portfolio, at times.

We pivoted to playing defense rather than offense. Those who watch team sports will understand this transition well, as the strategy changes from attempting to make money (or make a goal) to a strategy that prevents losses (or prevents a goal).

With Vincent’s help, the I/O Fund has reduced whipsaws. The automation tool has also freed up Knox’s time to work on broad market and identify circuit breakers, which are the broad market levels that must hold. Together, these two launched an incredible tool for retail.

Performance Review

Below is the engagement letter from the firm that reviews and verifies our performance. Our terms and conditions with the accounting firm state that this engagement letter is to only be shared with paying customers. For that reason, our performance letter resides behind our paywall.

With that said, any paying customer can access the engagement letter which is posted on io-fund.com/premium and io-fund.com/essentials for this purpose.

The I/O Fund owns the performance review and we do not authorize our customers or any person on our site to share a confidential engagement letter or performance review outside of our paywall. As the owner of the report, we will at times market our performance number outside of the paywall. The terms and conditions can be found here.

The I/O Fund Experiment

Our site and services remain an experiment to see if Retail can beat Wall Street. There is no guarantee the experiment will work out in the future. Humility is the one adjective that best describes the market and we had a heavy dose of this last May.

I believe our site’s edge is the accountability and transparency we offer. By tracking every trade in real-time, we were forced into instant accountability on every action we were taking. What resulted was rapid self-improvement, similar to athletes who track every mile they run, or every swing of the bat. By measuring every single daily action, our accountability went through the roof as did our drive to improve.

Real-time trade alerts and an audited performance are extremely uncomfortable when you’re not performing well. However, it was this very thing that forced us to become better during a landslide in tech.

We made the case that this is partly why retail performs so poorly. There are simply too few resources available that mirror what real money managers do. With that said, most professional money managers resemble what Knox does on the I/O Fund site, which is actively managing positions, with lots of activity, pivots and course corrections. This is the reality even if Retail is sold on utopian idea that you can buy one stock and hold into eternity. In some cases, this is the correct thing to do, but it’s rare.

2022 Was Still Negative = The I/O Fund Has More Work to Do

In our webinar, we pointed out the Lessons Learned from 2022. The methodologies and processes from pre-2022 simply weren’t working, and perhaps due to our high level of accountability, we felt this more than most. For a live presentation on this important pivot plus the Lessons We Learned from 2022, please reference our premium webinar here.

Here is a brief summary, the full list can be found/heard on the webinar.

Lack of flexibility was our number one mistake last year. We need to be more willing to change.
Cold, Hard Facts Vs Hopium. We were ignoring obvious facts and relying on hopium instead (hopium most dangerous around earnings)
100% Offensive instead of a mix of Defensive = put making money above protecting money
Complacent that tech (FAANGs) will always lead
Retiring the term LTBH and simply referring to it as “I/O Fund Portfolio”

How the I/O Fund Sets a High Bar for Accountability

In addition to a lack of risk management tools, we believe a lack of verified returns in the retail space contributes to the losses this investor type experiences. Smart money is careful about who they consider a good investor — they do not take someone’s word they are a good investor; they make the investors or firms they follow prove it. Every single hedge fund has to report their returns, which reduces the chances of posturing.

Retail is not offered these checks and balances, and instead, this investor type follows many influencers and research sites who verbally state their performance without proper verification. Across the board, retail is offered a very low amount of accountability – this includes unverified month-end reviews, a list of stock tickers, unchecked screenshots, or other methods that are easy to manipulate. This widespread acceptance of loosely stating a stock performance is odd, to say the least, considering the finance industry is more inclined than any other industry toward deceptive practices.

Over the past three years, the I/O Fund has invested over $130,000 into accountability and transparency for our Members. When we launched in July of 2019, for the first year or so, we used a forum hosted by Tribe for our trade alerts, but by January of 2021, we had migrated to SMS and email tools that were the least likely to experience an outage for our real-time trade alerts. This costs us $40,000 per year.

We want to thank our members for believing in a small team that is focused on beating Wall Street. The sense of community we all have created together and the support we received during a tough 2022 was extraordinary. When we launched our retail-focused fund, we aspired to bring institutional level research to investors by forming a small, focused team that cares very much about their chosen specialty. We continue to improve upon our processes and look to strengthen our returns going forward.

2022 Full Year Audited Returns

Posted on March 24, 2023June 30, 2026 by io-fund

We’ve issued a press release today in BusinessWire on our full year 2022 returns, which you can find here.

Our mission statement is to help Retail beat Wall Street in the challenging sector of technology.

When we set out on this mission, it was purely an experiment. The statistics show that Retail often fails to such a high degree that we felt any improvement here would be worth the attempt.

A few important stats on our Performance:

The I/O Fund announces a cumulative return of 46.92% since inception versus the Nasdaq-100’s 18.65% return during the same time period.
The I/O Fund’s cumulative returns of 46.92% have more than doubled the Nasdaq since 2020 with an outperformance of 28.27%
I/O Fund’s 2022 performance of (38.8%) rivaled the Nasdaq-100 performance of (32.9%)
The I/O Fund’s relative outperformance in 2022 surpassed institutional all-tech portfolios by as much as 85%
Since inception, the I/O Fund has a lead over institutional technology portfolios by as much as 174%

The transition began in May with the analysis “Compartmentalizing Cloud Stocks” and was complete by August.

In a nutshell, this is what that looks like:

Please note, anything stated outside of our performance review are estimates. The only official, verified number we provide is from the Engagement Letter listed below of (38.8%).

AEHR: 6% Allocation in October-December

NFLX: 9% Allocation in October-December

NVDA: 10% Allocation throughout 2022 with active management

Hedging

In an environment where the odds can be stacked against Retail, the I/O Fund is committed to leveraging tools that institutional-level money managers are unable to leverage.

Performance Review

With that said, any paying customer can access the engagement letter which is posted on io-fund.com/premium and io-fund.com/essentials for this purpose.

The I/O Fund Experiment

2022 Was Still Negative = The I/O Fund Has More Work to Do

Here is a brief summary, the full list can be found/heard on the webinar.

Lack of flexibility was our number one mistake last year. We need to be more willing to change.
Cold, Hard Facts Vs Hopium. We were ignoring obvious facts and relying on hopium instead (hopium most dangerous around earnings)
100% Offensive instead of a mix of Defensive = put making money above protecting money

How the I/O Fund Sets a High Bar for Accountability

Over the past three years, the I/O Fund has invested over $130,000 into accountability and transparency for our Members. When we launched in July of 2019, for the first year or so, we used a forum hosted by Tribe for our trade alerts, but by January of 2021, we had migrated to SMS and email tools that were the least likely to experience an outage for our real-time trade alerts. This costs us $40,000 per year.

Google Faces Biggest Lawsuit in Company History — What Companies Could Benefit

Posted on March 22, 2023June 30, 2026 by io-fund

We’d like to set our sights on a few ad-tech names that may benefit from the Google antitrust lawsuit. It may feel like the words “Google” and “lawsuit” are commonplace, but the trial in September carries enormous weight and is unlike the lawsuits of the past. Not only do we want to identify what ad-tech names could benefit should Google’s monopoly be broken up and the juggernaut come out weaker, but we also want to be prepared if the tech giant is able to hold off regulators.

Considering that Google is sitting on the world’s very best consumer data, which is not an exaggeration in the least bit, its ability to lead on artificial intelligence and large language models should not be underestimated. For our purposes, the company is far from sitting on its laurels and there’s a predictable path where the company competes in a duopoly with Microsoft.

Therein lies the issue. Google undisputedly has the world’s best consumer data, but did this grow to become part and parcel with operating a monopoly? The Department of Justice has asserted anti-trust violations against Google with the trial beginning in September 2023. The trial is expected to last ten to 12 weeks, although a lawyer for the DOJ told CNBC it could be as brief as five weeks.

Why it matters:

With Google and other ad-tech companies trading this low, one of two outcomes will happen. The antitrust outcome will be mild, and Google will be empowered to continue to dominate. Or, the outcome will require the ad properties to be broken up, leading to a weaker stance for Google. This could benefit smaller ad-tech players.

The Goal — Looking back:

A few years back, I analyzed the potential outcome of a government decision when the Pentagon was evaluating cloud providers. Clearly, this decision is far outside of anyone’s control and requires some speculation. At the time, I speculated Azure would be a winner. For a year or so, Microsoft did secure the Pentagon contract over the more-favored Amazon. This decision was ultimately reversed, and the contract was split between four tech companies.

The exact outcome of the Pentagon contract was not particularly important because the analysis led to my conclusion that Microsoft’s hybrid computing was a material advantage and this would be the path Nadella would most likely use to take market share from AWS’s heavily-slanted public cloud strategy.

I’m hoping for something similar, which is to acknowledge something very important is going on with ad-tech, which is Google’s antitrust case. This is not a headline to simply dismiss. It’s the first time the DOJ has brought a case of this kind against a technology company since Microsoft. If there are even minor cracks in Google’s monopoly, there could stand to be a stock or two that starts a new trajectory.

On similar note, Cambridge Analytica is what sparked my coverage on Facebook. Similar to Google’s antitrust case, it became apparent to me that Facebook was peaking in terms of its ability to monetize through third party data. I covered this extensively, for example here and here.

Brief Overview of Antitrust Case:

According to Lanier Law Firm, which is the litigation team for the State of Texas in the state coalition case, a primary argument against Google is that the company went above and beyond to become the default search engine on iOS devices by paying Apple $12 billion per year.

The lawsuit includes other deals that Google struck with Apple’s Safari browser, the Mozilla browser and Android device manufacturers where Google either paid up or imposed restrictions on Android device makers to strongarm having their suite of apps pre-installed on the home screen.

The company has already lost an antitrust case in Europe in 2018 with a $4.4 billion Euro fine for forcing Android manufacturers to pre-install Google’s bundle of apps on the device, including Chrome, Maps and the Play Store.

Google’s market share of Search is at 91% and the argument is being made this was accomplished through anti-competitive practices, especially since Google owns Android and had leverage over the many device makers that used this operating system.

In addition to being pre-installed and the default browser/search engine, Google also attempts to keep people on its search engine by using a website’s data on its page. For example, if you look up “Best Dog Breed” Google scrapes Wikipedia and puts the results onto the search page instead of sending you to Wikipedia. This is seen as anti-competitive as it takes a website’s data to profit from it, rather than directing the traffic to the rightful copyright owner, which is the function of a search engine.

Part of Microsoft’s antitrust case was based on Microsoft using its dominance on Windows to force a Microsoft Explorer to be the default browser. At the time, the decision was that default settings are anticompetitive.

The secondary argument filed by a 10-state group led by Texas, is that Google leverages its properties to be the buyer and the seller via its ad exchange. Per Lanier Law Firm, the Texas case states Google and Facebook “unreasonably restrained trade and harmed competition through an unlawful agreement to allocate auction wins and to fix prices in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1”

This is where it gets very messy, and so I’ve dedicated a specific section below to break down these details. The purpose of understanding the minutiae is not to only determine if we should buy Google and when, but also what companies could stand to benefit if Google’s products are shutdown or broken up.

My long-ago analysis on Facebook pointed toward a conflict of interest in the company owning a third-party ad network called Audience Network while also being publisher. At the very least, the conflict of interest created a risk since Facebook was essentially siphoning oil from real estate the company didn’t own (iOS users). This was a serious, material risk for investors that played out over time (note: it certainly wasn’t immediate, it took four years from the first time I covered the topic).

If you’re a Meta investor, you’ll want to watch the CPMs on the company and make sure the erosion below is not permanent. Despite Apple only impacting third-party data, it’s unclear how much of that third-party data was informing its first party data. The unusually high CPMs that Meta charged points towards enhanced targeting – that in my opinion – was likely due to mixing both first-party data with third-party data. This means there will be an eventual erosion, over time, of the CPMs Facebook can charge even on its own applications.

Pictured above: Although subtle, there is an erosion to Facebook’s otherwise high CPMs. You can see that Nov 2022 made a lower high over Black Friday compared to the two previous years. Many factors could be at play, such as lower ad budgets, but it’s something investors should keep a close eye on.

Google currently does the same thing that Facebook used to do, which is to run an ad exchange that is undeniably a conflict of interest. The difference is that rather than renting real estate, like Facebook did with iOS, Google is a real estate tycoon. There isn’t a tech company that can kick Google off their turf because Google owns all of the turf – primarily Chrome, Android, Google Search, and YouTube.cBy conflict of interest, I’m referring to AdX, DoubleClick and DV360, collectively known as the Google Network.

Below, you can see Google Network is a $32 billion annual revenue stream. Not exactly peanuts.

To further the lawsuit, a 30-state coalition has issued a third claim that Google uses its monopoly to rip off smaller companies, such as Yelp, DoorDash, and Kayak. You can see evidence of this when Google Search returns flight searches powered by Google at the top, with a large embedded format, rather than producing a fair search result that includes competitors. Yelp has been in a battle with Google over this for over a decade. After Google Reviews were launched, Google pushed Yelp down the page in terms of search results.

The two search engine allegations are fairly straight forward. Most of us who use Google Search can reasonably understand those arguments.

The Messy, Blackbox that is AdExchange (AdX):

DoubleClick was acquired in 2007 for $3.1 billion. As author Tony Yiu points out on Toward Data Science, this was twice the amount paid for YouTube a year earlier. Google Network is a by-product of many acquisitions including AdMob for $750 million and AdMeld for $400 million, among others, yet DoubleClick truly set the supply side dominance in motion as the company owned 60% of the desktop publisher market at the time of acquisition.

DoubleClick allows Google to set a cookie on a website so that online publishers can better target visitors with ads. The DoubleClick cookie provides the time and date a user saw an advertisement, as well as a unique ID that identifies a user by their browser. Publishers are then able to auction inventory to advertisers.

DoubleClick was a major move by Google to expand beyond search advertising. This was the first time Google entered the market on display ads. As stated, DoubleClick owned 60% of the publisher market when it was acquired, which means Google would eventually profit from monetizing millions of websites.

This led to a concentration of power for Google, because with this advantage, it was able to grow quickly as a predominant ad server for publishers. Naturally, Google wanted to maximize this advantage, and so the company made the appropriate acquisitions to operate on the demand side (advertiser side) in addition to the publisher side.

Through a series of acquisitions, Google built DV360, which allows advertisers to use their own data to target customers across publisher inventory. Google always has strong ties to data, in this case powering DV360 with Google Analytics 360. In addition to this, Google’s AdX allows advertisers to create campaigns across Google-owned properties in addition to millions of websites from third-party publishers on the DoubleClick publisher side, as mentioned above.

An easy analogy here would be to compare it to a real estate transaction, since ads are transactional between a buyer and seller. In this case, Google was representing both the buyer and the seller, and in some cases brokered its own real estate to the buyers. You can imagine due to Google’s scale of doing millions of transactions a day, things might get unethical real quick.

Here’s how a Google executive put it:

“[I]s there a deeper issue with us owning the platform, the exchange, and a huge network?” the executive allegedly asked. “The analogy would be if Goldman or Citibank owned the NYSE.”

With that in mind, let’s continue because the depth of Google’s black box is quite deep.

The product AdSense further pools the data provided by publishers. When millions of websites join AdSense to pool data, Google can record more information on a person’s browsing history. It provides a complete view of the consumer for more enhanced targeting. Another area that Google allegedly monopolizes the market is that the company mixes its first party data with this third party data, but only in instances where Google will benefit.

The AdMob acquisition in 2009 provided a similar strategy as DoubleClick but on mobile. It deepened Google’s reach on the supply side for the mobile market. This, of course, was especially advantageous considering Google bought Android in 2005.

You can imagine, that the depth of Google’s data on desktop users and mobile users is deep (and likely quite dark). Meaning, Google knows more about you than you know about yourself. Now, take that depth of data and add the serious conflict of interest that can occur when Google bids against competitors.

Where Google (Allegedly) Went Wrong with AdX

Despite the allegations below that Google was unethical, I want to point out that antitrust could be harder to prove for AdX. This is because many corporations combine first-party publisher data with a third-party ad exchange, such as Amazon, Facebook, Disney and Comcast. Microsoft is building its ad exchange, as well right now, after acquiring Xandr from AT&T. However, Xandr/Microsoft’s strategy is to support the “free and open web” by adopting the Unified ID.

Point being, if the product AdX is found to be anticompetitive, it could have far-reaching implications for other companies. This wasn’t the case with Microsoft, as the company was rather isolated on its throne in the late 90s. With that said, Google is the worst offender in terms of the sheer advantages it has compared to other corporations with large media properties.

Here are some of the more unethical things Google is being accused of:

According to the lawsuit, there was a 65% drop in revenue if publishers chose to not use Google on the demand side. Advertisers are also stating this was a conflict of interest as Google restricted inventory in this case. This would be like a real estate agent refusing to show a house if they did not have both the buyer and the seller to double-end the transaction.

Google also allegedly circumvented waterfall auctions to prioritize their own bids on AdX. Waterfalls were prevalent throughout the ecosystem because they allow exchanges to be ranked by bids. Based on historical bids, if the ad exchange in the number one position doesn’t buy the inventory, it goes to the next ad exchange in the waterfall (the number two position).

Where Google may have manipulated the bidding is by allowing their exchange to meet only floor prices to win the bid, even when another exchange would have bidded higher in a waterfall-like auction. This would be like a real estate agent only presenting their Buyer’s offer to a Seller even if they knew they could get higher offers from another agent.

Due to DoubleClick and AdX waterfalls having the issues described above, programmatic header bidding was introduced to offer true, real-time bidding to increase publisher yield. It essentially increased competition by holding an open auction rather than a closed, blackbox auction that pushes inventory back and forth in an attempt to sell the inventory.

Per Digiday written in 2015: “One notable side effect of header bidding adoption is that it puts pressure on Google’s DoubleClick for Publishers ad server, which, through its dynamic allocation feature, lets AdX — but no other exchange — see and bid on every impression.”

That sentence and general understandingand general understanding of what AdX did to manipulate the waterfall process nicely sums up where Google could face trouble in a courtroom. According to the lawsuit, publishers saw 30% to 40% more revenue through header bidding by simply removing Google’s ability to manipulate the waterfall auction. I bolded “general understanding” because Google is so powerful that the ad ecosystem knew full and well that it was using its monopoly in anticompetitive ways but there was nothing any publisher or advertiser could do about it.

Google has tens of thousands of engineers and is a very advanced company, which is why the allegations are quite complex. The lawsuit points out that Google then later manipulated header bidding by allowing AdX to bid last. As long as AdX beat the previous bids, then it would win the bid. Going back to the real estate agent scenario, this would be like having multiple offers on a house, and the listing agent going to their exclusive buyers to reveal what the prices are to help the buyers win the bidding war.

Google is also accused of using more acquisitions for ad technology that would later be leveraged to subsidize bids. This means Google paid the difference on an advertiser’s bid in order to be the winning bid. In this case, Google simply increased its margin or cut in order to make up for the amount that was subsidized.

Google’s DSP called DV360 was also allegedly engineered to decrease bids from competing ad exchanges, including those who were using header bidding for a more fair auction process. This was done by setting the highest competing bid at the floor price while AdX was able to bid higher.

Google is accused of suppressing header bidding through covert mechanisms by reducing header bids by up to 90%. Meanwhile, Google’s own DV360 bid was not decreased. This was done even when Publishers attempted to set a lower floor for competing ad exchanges, meaning, Publishers were without recourse even if they agreed to a lower bid.

Possible Outcomes

The outcome that many competing supply-side platforms (SSPs) and demand-side platforms (DSPs) are hoping for is the adoption of the Unified Ad ID 2.0 (UID2). There are many investors in The Trade Desk on our site, so this term is likely very familiar to our IOF Members.

The Unified Ad ID is essentially a replacement for cookies that uses email-based identifiers. There are a few hurdles here, such as users would have to opt-in and it brings up privacy issues to have ad exchanges passing a more persistent signal, such as anonymized IDs based on emails. What UID does solve for is any anticompetitive practices as there are many companies in the ecosystem that have signed on to support the open web initiative.

There are more companies than just The Trade Desk that would benefit if this happens – companies like Magnite, PubMatic, Microsoft/Xandr, to name a few.

To be clear, I’m not sure UID2 is realistic because of the privacy hurdles. The ad ecosystem may be “all-in”, but consumers are not likely to opt-in to having a persistent signal.

Another possible outcome is that Google Network is not broken up because what the company did was perhaps unethical but not anticompetitive since many corporations do something similar – which is mix first-party data with third-party data, and otherwise wield their large, corporate publisher dominance.

Instead, there could be regulations that force more transparency in the pricing structure. Or, perhaps Google has to choose a side in the transaction (publisher or advertiser) but cannot serve both.

It’s also possible that Google is not allowed to compete as a Search Engine across other verticals, such as flights, reviews, or dining reservations and must direct the traffic to web pages.

Companies that Challenge the Walled Garden

The ad ecosystem is quite large, although there are only a handful of public companies for us to discuss. Below is a view of the 2023 ecosystem per Publisher Management company Playwire. Most of these companies stand to benefit in some manner should Google be broken up or otherwise made weaker.

As stated, Google Network generated $32.8 billion in 2022. The DOJ is asking for divestiture ‘at minimum’ to divest the Google Ad Manager, including its publisher ad server (DFP) and the ad exchange (AdX).

In addition, the search engine is in the crosshairs for anti-competitive behavior, such as requiring mobile OEMs to make Google the default search engine. When Microsoft did this by requiring Microsoft Explorer to be the default browser across PCs, the behavior was found to be anti-competitive.

We believe the following companies stand to benefit:

Perion Network is partnered with Microsoft Bing. For this reason, the company is considered a beneficiary of Chat-GPT. If Google Search is forced to play fair, it’s likely Bing would see an incremental increase in its market share. In addition to this, Perion does not rely on cookies. As cookies are phased out, ETA around Jan 2024 (assuming no further delays), Perion will stand out in this regard, as well. Perion uses search intent insights to create audiences or “SmartGroups” for targeting purposes. Perion can help any search function, so imagine the search you might perform on Pinterest or Expedia. This is unique because search intent is often a superior signal compared to other forms of behavioral targeting.

The Trade Desk sits on the demand side and is in direct competition with Google’s DSP. If Google has been strongarming publishers into using its exchange for ads, per the allegations noted above, then breaking this up would be an immediate tailwind to The Trade Desk. Essentially, Google is penalizing publishers in various ways if they use another DSP.

If it becomes a more equitable ecosystem, to where publishers are rewarded equally no matter which DSP they use, then The Trade Desk will be able to fairly compete with Google on their publisher inventory. This assumes that Google will be able to keep the supply side ad machine it acquired from DoubleClick for Publishers. Clearly, The Trade Desk has done well in a walled garden environment despite all odds. It’s reasonable to assume The Trade Desk will do better if those walled gardens become weaker.

Notably, as stated above, The Trade Desk has two hurdles – the second one being the elimination of cookies and IDs. This is a separate issue entirely and does not relate to the antitrust case, it just happens to be timed to where the antitrust case is in 2023 and cookies will be phased out in 2024.

The goal is for Unified ID to be accepted as part of the open web, but there are privacy hurdles here that don’t relate to anticompetitive practices. In 2021, 96% of iOS users opted-out of tracking. The same can happen to UID 2.0. In other words, Google could be broken up but this may not do much for allowing the demand-side to access third-party IDs for attribution and measurement.

Magnite and PubMatic compete with Google on the supply side. Publishers have an outsized advantage when they use Google on the publisher side as the company mixes its first party data with third party data to drive the industry’s best targeting. Similar to Meta’s Audience Network covered here, it’s nearly impossible to compete as a SSP when a publisher of Google’s magnitude combines its data and brokers for a pool of publishers.

If this is broken up, then those who specialize on the publisher side — while also not directly competing with publishers — stand to benefit. Because Google is the largest publisher in the world while also competing with smaller publishers for ad inventory, it seems a likely outcome will be the breakup of the SSP side, at the very least.

The hurdle the SSP side must clear is that many corporations do this – with that said, Google is by far the largest offender due to its commanding properties of Android, Chrome, Search and YouTube. It’s also not clear if the other corporations (Comcast, Disney, etc.) have leveraged their position to penalize publishers who use other SSPs.

Ad-Tech Fundamentals

Below, we go into brief overviews of each company’s financials. The goal of combing over these companies during a lull in earnings is to accomplish a few things. First, to acknowledge that this antitrust lawsuit should not be overlooked. The ramifications could be quite advantageous to a few small cap companies. Secondly, to cautiously watch the charts ahead of the trial. We don’t want to front run but we also don’t want to be complacent. Third, is to understand Google a bit more. In the avalanche of Chat-GPT coverage, we want to be realistic about a potential position in Google, and look at the brass tacks of this important lawsuit.

Ultimately, I believe the outcome of the antitrust lawsuit is more important than the hype of the chatbots in the near term – that goes for both Google Search and Bing. AI chatbots are great for early adopters but search engines serve the masses. In addition to this, considering Google Network is worth $32 billion, and we have some small caps that could stand to benefit, we want to be prepared if there is a favorable outcome for the smaller players.

Perion Network

Perion Network is a digital advertising company headquartered in Holon, Israel. The company offers digital solutions in three primary channels of digital advertising: ad search, social media, and display/video/CTV advertising.

Perion helps brands and publishers to identify and reach customers through the company’s proprietary Intelligent HUB (iHub), which processes billions of signals, and powers the cookieless solution SORT. By mixing contextual data with user insights, Perion is able to forego cookies by using this data with AI-based clustering techniques. SORT stands for Smart Optimization of Responsive Traits, which translates to categorizing customers into 1 of 30 Smart Groups through shared traits.

The primary sources of data are contextual – so what a customer is reading at the moment, why they’re reading it, how long they’re reading it and/or what search words brought them to the content. This is combined with signals such as time of day, weather, browser, device, etc. Ultimately, what Perion’s technology does is calculates the similarities between groups, and then to target the group that performs the highest in terms of converting. The model is deemed effective when one group has a significantly higher click-through-rate (CTR).

Second, SORT then optimizes the bids so that it’s a cost-effective solution. SORT analyzes the bid of each publisher and selects the price that is likely to win. If the price is too high, SORT finds another publisher with a similar audience as the SmartGroup. The entire process happens in real-time.

Doron Gerstel, CEO of the company, said in the Q2 2022 earnings call, “iHub sits in the center of the supply and the demand side of the market. This is an innovative model that no one else in the industry has, aggregate data signals from all channels and from both sides of the open web to create the model that eliminates waste and rewards clients. The data goes into Perion’s privacy first cookieless solution known as SORT.”

This is important because cookies are expected to be phased out from Chrome in 2024. Cookies have already been phased out by Mozilla Firefox and Apple Safari.

In addition to this, Perion has partnered with Microsoft Bing. CodeFuel is the Perion product that powers intent-based monetization. When you go to search for something on a search engine, Perion’s CodeFuel can power the search results in an optimal way for conversion. This has led to a strategic partnership between Microsoft and Perion that was renewed in 2020 for four years.

Per the recent earnings call, “If the new Bing search with ChatGPT sparks even modest share gains, Microsoft can do very well in the business. As their CFO, Amy Hood said yesterday, every percentage point of share it gains in search equals roughly $2 billion in additional advertising revenue, and as a strategic partner of Microsoft Bing, I’m sure we will be benefiting from this increase.”I’m sure we will be benefiting from this increase.”

Notably, there is a risk that Microsoft does not renew its partnership next year. However, this risk is muted a bit since Perion was named “Global Supply Partner of the Year” by Microsoft in 2022.

What’s interesting about Perion is that the company is fundamentally one of the strongest ad-tech companies on the public markets due to a strong bottom line and a top line that was more resilient than its peers. Any windfall here could very interesting for a company that already proven operational efficiency with a 20% operating margin while maintaining 30%+ growth in the tough year of 2022. Notably, the top line is decelerating but a catalyst that could lead to a reversal here could be quite interesting

Some of our Members already own this stock so keep an eye out for their posts on the forum, also.

Financials:

The company’s revenue in the recent quarter grew by 33% YoY to $209.7 million. Display advertising revenue grew 24% YoY to $123.8 million and search advertising revenue grew 49% YoY to $85.9 million. The company had an operating margin of 20% compared to 13% in the same period last year.

The company is GAAP profitable, and margins are improving. The net profit margin improved to 18% from 11% in the same period last year. The adjusted EBITDA margin was 23% compared to 18% in the same period last year.

Source: Company IR

The company has free cash flow of $37.90 million representing a free cash flow margin of 18%. Perion had cash and bank deposits of $429.6 million and no debt at the end of December 2022.

Revenue growth is expected to slow, as seen below. The company’s revenue grew above 30% in all four quarters in 2022, and it grew 34% YoY to $640.3 million for the full year of 2022. This is expected to level off quite a bit, presumably due to industry-wide headwinds.

Source: Seeking Alpha

Magnite

Magnite is another ad-tech company that is a potential beneficiary. Magnite is a sell-side platform (SSP) that offers exposure to a higher mix of CTV ads from an independent SSP than what is currently on the market.

We previously discussed Magnite is both an ad server and a Supply Side Platform. Strategically, this allows Magnite to compete with FreeWheel and Google and helps them maintain their position “as the largest independent programmatic CTV marketplace.” The SSP allows for programmatic and private market place bidding while the ad server stores the creatives and serves the ads. The SSP facilitates the selling/bidding (auction) while the ad server actually manages, stores and serves the ads. SpringServe is ad server that Magnite acquired for $31 million. The acquisition came from SpotX’s option to buy.

In their recent earnings call, the management highlighted that Disney has renewed their agreement to use Magnite as Disney’s global programmatic SSP partner. “As you may recall, our relationship with them started with Hulu. We have since grown the relationship to include the full portfolio of Disney properties.”

The company’s Q4 2022 revenue ex-TAC grew by 10% YoY to $156.6 million. The operating margin was (16%) compared to +2% in the same period last year.

Net losses are increasing to ($36.4) million with a net margin of (21%). This compares to $453,000 in net profit for a flat net margin in the year-ago quarter.

The company reported GAAP EPS of ($0.27) compared to GAAP EPS estimates of $0.02. The adjusted EPS also missed at $0.24 versus $0.32 expected.

Our recent analysis discussed that the company missed on the bottom line due to the new CTV ad platform that was launched in February. The newly launched Magnite Streaming is a single supply-side platform that merges the technology from Magnite CTV and SpotX platform. Magnite Streaming led to a $35 million accelerated amortization.

Cash flow was the strongest line item in Magnite’s report. Free cash flow margin was 28% compared to 34% in the year-ago quarter. The company has $326.3 million in cash on the balance sheet with $726.4 million in debt for net debt of $400.1 million.

Below are the analyst’s ex-TAC revenue estimates. Magnite’s revenue is also decelerating.

Source: Seeking Alpha

PubMatic

PubMatic is another sell-side platform that is a potential beneficiary. The company works with over 1,600 publishers. In the recent earnings call, the management highlighted new partnerships with Roku, TiVo, and Kroger.

Rajeev Goel, CEO and co-founder, pointed out that the company has increased its market share from 2-3% at time of IPO in Dec 2020, “We ended 2022 with an estimated market share of 4% to 4.5%, significantly up from when we went public just over two years ago. We are well on our way to our stated goal from the time of our IPO of 20% market share, and we intend to use the downturn to further accelerate our gains.”

The CEO pointed out that Google’s antitrust case could help them achieve the (lofty) 20% goal: “Advertisers and publishers continue to seek alternatives to the walled gardens. This tailwind, along with structural changes, including ongoing antitrust activities, will only expand our total addressable market as an independent technology provider.”

The company’s revenue in the recent quarter declined by (1.7)% YoY to $74.3 million. The operating margin was 22% compared to 37% in the same period last year. The drop in revenue led to lower margins when we compare it to the year-ago quarter. However, the Q4 operating margin was the highest for the year 2022. Net margin was 17% compared to 37% in the same period last year.

The free cash flow in the recent quarter was $7.02 million, with a free cash flow margin of 9% compared to a free cash flow of $18.72 with a free cash flow margin of 25% in the year-ago quarter. The company has cash and marketable securities of $174.4 million with no debt. The analysts expect revenue to decline in the next two quarters. In the earnings call, management was cautious about the macro environment.

Source: Seeking Alpha

The Trade Desk

The Trade Desk is an independent demand side ad platform. We discussed the Universal ID in August 2019. “Strong drivers for The Trade Desk include omnichannel capabilities, which is the ability to buy ads across many channels, such as mobile, video, audio, display, social and native. The universal ad ID is another important differentiation as it offers an anonymized ID that helps track users, target audiences and provide attribution.”

The Trade Desk has benefitted from its omnichannel approach that also focuses on CTV. Jeff Green, CEO and founder of the company, said in the recent earnings call. “CTV continued to be our strongest growth driver as more content owners from around the world are moving beyond ad-free subscription models and offering ad-supported options for viewers.”

Jeff Green mentioned in fourth quarter last year, about 15% of the Trade Desk’s third-party data had UID2 associated with it and expects it to be in the 75% range in the first half of this year. “In fact, I would say again that it becomes about 10x more valuable than with cookies, simply because UID2 solves the needle in the haystack problem that came with cookies, because advertisers can now match their customer data with accuracy across the open Internet more effectively than ever before.”

Jeff Green also sounded confident in the earnings call that the outcome of the DoJ will benefit the company. “I know there is some at Google who tried to suggest that we have been through this three or four times before. I do believe that this is fundamentally different. And part of that is just because of how detailed I think the case is outlined.”

The Trade Desk has illustrated a strong bottom line despite a tough 2022. The company’s Q4 revenue grew by 24% YoY to $491 million. The operating margin was 20% compared to (6%) in the same period last year. The net margin was 15% compared to 2% in the same period last year. The adjusted EBITDA margin was 50% compared to 48% in the same period last year.

The company has free cash flow of $123 million with a free cash flow margin of 25% compared to $151 million compared to a free cash flow margin of 38% in the year-ago quarter. The company had cash and short-term investments of $1.4 billion with no debt.

Below are analyst revenue estimates for the next few quarters. Analysts expect the revenue of the company to grow faster when compared to the other ad-tech companies we covered, and the company also has a premium valuation.

Source: Seeking Alpha

The Trade Desk has a forward P/S ratio of 15.14 compared to 2.53 for PubMatic, 2.47 for Magnite, and 2.22 for Perion Network.

Source: YCharts

The Trade Desk has a forward P/E ratio of 51.12 compared to 38.1 for PubMatic, 17.17 for Magnite, and 13.89 for Perion Network.

Source: YCharts

Conclusion:

Given the sheer impact a weaker Google could have on the ad-tech ecosystem, we wanted to do a deep dive and get in front of this. Most of the names listed are familiar to our Members, yet these names may be seeing the biggest catalyst in their respective company’s history. This will depend on outcome of the antitrust lawsuit and the severity of the DOJ’s actions.

Perhaps the opposite will happen. Perhaps Google’s deep pocketbooks will provide top tier lawyers who can defend the case accordingly. As investors, it’s not our job to take sides but to find where ad dollars may be flowing next.

Ultimately, I believe this is the number one catalyst across ad-tech this year and we want our readers to benefit no matter the outcome. As the market can often do, there may be some price movements ahead of the trial, and if so, we will be watching for entries closely.