May Stock Pick: Perion Network – Google Anti-Trust Beneficiary Plus AI Tailwinds

Posted on May 12, 2023June 30, 2026 by io-fund

Please note, that Perion is a Hold right now and we will inform our Premium Newsletter Members if we initiate a position. The I/O Fund is unique in that we do not issue blanket buy recommendations, rather we offer an actively managed portfolio. We do not own the stock right now but we hope to enter the stock when the technicals line up. Our process is tied to a real portfolio with audited results. Our service aims to show individual investors the reality of stock investing, which is to do extensive due diligence, and then to be patient on price. In addition, tech investors must be especially keen on macro events as the tech sector is particularly sensitive to high interest rates. This is very different from other services that push out content with no adherence to actual performance and/or entries, exits.

Summary:

Last March, we covered Google’s anti-trust lawsuit here for premium newsletter members. This is an important analysis to revisit for Perion Network.Google’s anti-trust lawsuit here for premium newsletter members. This is an important analysis to revisit for 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 a previous 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 16% to 20% operating margin while maintaining 30%+ growth in the tough year of 2022. Notably, the top line is decelerating to the 10% to 15% range but a catalyst here that could lead to a reversal could be quite interesting

Perion Networks: Google Anti-Trust Beneficiary Plus AI Tailwinds

We published a piece in March on the potential outcomes from Google’s anti-trust trial slated to begin in the fall of this year. If Google is found to have engaged in anti-competitive behavior, we identified Perion Networks (PERI, $1.5b mkt cap) as a potential beneficiary.

Currently, Perion holds a unique position in the advertising technology sector that has enabled it to outperform its peers. Perion recently reported Q123 earnings. At a time when its peers are dealing with advertising budgets that are in flux, Perion revised upward its 2023 sales target. The earnings report provided a good opportunity to get an update on the business and the main business drivers.

Perion is positioned to benefit from several key investment themes.

Maximizing search monetization and integration with AI
Helping companies compete against Amazon and Walmart
Increased browser privacy awareness
Outsourcing of video advertising functions
Maximize advertising budgets

What does Perion do?

Perion is a digital advertising company that provides technology to brands, agencies and publishers to identify, reach and monetize their most valuable customers – across numerous digital channels, including retail media. Clients include world-class brands such as Mercedes-Benz, IBM, Disney, Walmart, Albertson’s and Verizon.

Perion has two main businesses, Display and Search advertising. They make up 55% and 45% of total revenue, respectively. Within these divisions, there are 3 main activities

Search ad monetization, a direct-response platform that works with a range of different publishers
Cross-channel high impact advertising through the open web, including video and CTV
Social advertising through Perion’s performance monitoring platform and content monetization system

There are 5 key business drivers

1. Search Advertising and AI

Capturing consumers at their moment of highest intent has been well-established as the highest ROI (Return on Investment) advertising channel. Advertisers are increasingly allocating funds to search advertising. According to eMarketer reports, U.S. search advertising market reached $101 billion in 2022, and is estimated to reach over $108 billion in 2023, which represents 39% of U.S. digital ad spending.

Search is a fundamental digital behavior that will continue to grow. Perion continuously innovates to provide more value to its publishers. Perion deploys advanced AI, neural networks, and machine learning to optimize yield for its publishers and transform search into revenue. As this shift continues, Perion is well positioned thanks to its longstanding relationship with Microsoft Bing. In 2022, Perion was named Microsoft Advertising’s Global Supply Partner of the Year.

Search monetization is one of Perion’s core and most profitable areas. The business is driven by 1) increasing the number of publishers 2) the aggregate number of monetized searches transferred, mainly through its partnership with Microsoft Bing and 3) integration of ChatGPT with Microsoft Bing

In Q123, these 3 factors contributed to a 29% increase in the number of publishers. As a result, average daily traffic increased by nearly 50% year-over-year and are now close to 30 million monetized searches per day on an average basis. The ability of Perion to monetize search traffic through their Microsoft Bing Partnership and its effectiveness is best reflected in the growth of Perion’s publisher network. This is particularly important given the growing shift to Direct Response, as search represents the highest intent customers.

This is how Perion described the ChatGPT impact and opportunity. Notably, Microsoft Bing has 3% market share and for every additional 1%, Microsoft will make an additional $2 billion. This may not be enough to move Microsoft stock, but can have an impact on Perion.

“We believe that the massive media attention to ChatGPT has driven a material portion of this (Q1 growth) and that will continue to see growth that exceeds our normative project. Microsoft Bing has a real competitive advantage now and that cascade[s] immediately to our business.”

“Now to other part of your question, I think that this is – it’s beyond what we able to imagine, what the ChatGPT is going to make. It’s quite a transformation. Quite a transformation and I would say that the search interaction as we’ve seen an experience in let’s say the last 20 years is not going to be the same. And we will have a chance to look at it two years from now, it would be completely different interaction, user experience, engagement between consumer and search engine. No doubt about it.”

2. Perion’s retail media solutions

Perion provides digital advertising for major retailers who have launched their own digital presence to compete with Amazon and Walmart. Perion works with companies such as Albertson’s, CVS and Target. Perion has built an AI-driven platform that enables these retailers to maximize the value of their inventory with ad units that identify consumer signals and responds with timely and personalized promotion and content. Perion can personalize at scale and can do it in an omni-channel fashion across all screens.

This allows retailers to shift away from transaction campaigns (i.e. circulars) to “always on” which generates higher returns. For Albertson’s, Perion delivered 14 times return on ad spend.

As the chart below shows. Perion develops targeted advertising at various touchpoints for different companies to target the consumer throughout the day. As the diverse client list below shows, this ranges from RiteAid to P&G to GSK.

3. SORT and Privacy

Perion’s proprietary SORT (Smart Optimization of Responsive Traits) technology will benefit from ever increasing privacy demands. SORT is a cookie less and totally anonymous solution that protects consumer privacy. Further, SORT does not collect or store any user data, the way other cookie-less solutions do. This is attracting brands who wants to be associated with the privacy-first capability while generating strong ROI.

Cookies are an essential part of the targeting infrastructure of the digital advertising market, they are under increasing pressure for the manner in which they are perceived to violate user privacy. In fact, the U.S. Congress is looking into cookies and considering further restrictions. SORT provides a competitive solution that should enable Perion to capture additional revenue as brands and advertisers move away from traditional methods such as cookies and other platforms. Google has postponed its elimination of cookies until the end of 2024 presumably because they need to do further testing to develop a satisfactory replacement solution.

In addition, consumers are made aware that a brand campaign is running through SORT, and hence the ads are safe to click, thanks to a proprietary “Privacy Shield” graphic logo that is incorporated into every ad unit running through SORT. SORT is a solution that provides consumers with visible confidence they won’t be followed around the web as their behavior is being tracked.

Currently, Perion’s clients range from Mercedes Benz to the United Nation. SORT will grow as it attracts more brands who want to be known for espousing privacy first principles.

4. Video Platform

Via their Vidazoo division, Perion’s end-to-end platform is meeting a large and growing need for publishers who are looking for fast results and lack the internal resources to build the complex time maintenance internal system. Perion is able to offer different aspects of the Vidazoo suite depending on their client’s needs.

Through Vidazoo’s proprietary video platform, Perion offers a wide range of products, through which publishers can deliver an enhanced user experience, increase video content consumption, and identify new monetization opportunities.

A simple example is how Dr. Pepper, using Perion’s Vidazoo, was able to run an ad while a sport event was playing. There was no interruption to the viewer.

5. iHUB

Perion’s proprietary Intelligent Hub (iHUB) connects the supply and demand sides of the ad marketplace. It processes billions of signals from across its network and properties. This provides five levels of value: operational savings in the form of – shared resources; reduced traffic acquisition costs and media buying optimization; increased customer value; market agility.

For Perion, iHUB helps increase its media margin (Revenue less traffic acquisition costs or TAC) by lowering TAC costs. While for Advertisers, iHUB helps them reach their ROAS (Return on Ad Spend) goals.

iHUB allows Perion’s business units to quickly balance demand and supply, providing optimum utilization of their owned & operated supply, as well as what is available on the open web. This optimization is enhanced by their ability to offer publishers and advertisers multiple ad products to support their marketing efforts which enables Perion to increase its market share with current and new clients. This helps reduce Perion’s TAC.

At the end of the day, companies seek to maximize their advertising budgets. Perion is able to help companies satisfy their ROAS though iHUB. This technology is Perion’s key competitive advantage. This is how Perion described it.

“We’re able to capture and analyze data signal from all channels and from both sides of the open web into our central hub. We’re using advanced AI to develop a bidding system that maximize our unit revenue, while reducing our video costs. By doing this, we uniquely combine efficient bind with the ability to meet our customer ROAS, Return on Ad Spend expectations. At the same time, when advertiser under extreme growth pressure, this is a true competitive advantage for us.”

“Without having all the pieces of the business connected, we would be managing a very costly, inefficient, fragmented business. On a given day, we capture into iHUB data lake billions of data requests from various media channels. One example of effectively leveraging this amount of data is creating an AI driven bidding strategy that optimizes the match between supply and demand to maximize our profit.

At the same time, it assures the highest performance to our customers. Our iHUB open architecture is a foundation that enable us to make acquisitions, which are instantly optimized because they plug in into the center of our ecosystem. As FX grows more complex and multi-dimensional, the value of our iHUB will only become way more meaningful.”

Q123 Earnings

Perion recently exceeded Q1 earnings expectations and revised their FY23 sales target of between $725-745 million which is 15% year-over-year growth at the midpoint.

One risk for Perion is that the revenue growth rate decelerated from the 30% range in prior quarters to 15.8% in the most recent quarter. Right now, analysts are showing further deceleration. We will want to see Perion resist this deceleration through one of the catalysts noted above – whether it’s product-market fit with niche advertisers, Microsoft-Bing partnership with Bing increasing in market share due to Chat-GPT and/or Google’s anti-trust lawsuit having a favorable outcome.

With increasing EBITDA and Profitability (EBITDA Margins). The GAAP operating margin was up year-over-year at 16.8% this quarter compared to 13.17% in the year ago quarter. However, this was down from the September quarter and December quarter, both in the 19% to 20% range. This is something to watch, to make sure it continues to trend up – if not on a sequential basis than at least on a year-over-year basis.

Q1 media margin increased year over year (Sales less TAC)

The balance sheet is very strong for a small cap stock with $384 in cash and no debt.

Conclusion:

Through different market environments from 2020 to 2022, Perion has continued to execute from a business and financial perspective. It demonstrates that through changing consumer and advertiser needs, Perion has been able to adapt and meet those needs.

During a time when advertising budgets are under pressure, Perion’s key competitive advantage is its technology provides a meaningful ROI on ad dollars spent by its customers.

Perion’s partnership with Microsoft Bing, while still in its early stages provides an exciting growth opportunity in its Search business. Meanwhile, Retail Media and SORT are businesses that will continue to grow. Later in the year, depending on the Google court case, Perion may also benefit.

Deep dives, trade alerts, a forum and weekly webinars on the I/O Fund portfolio are offered on our premium service, you can find out more information here.Deep dives, trade alerts, a forum and weekly webinars on the I/O Fund portfolio are offered on our premium service, you can find out more information here.more information here.

Amdocs Pre-Earnings Q223 – Expecting steady as it goes

Posted on May 10, 2023June 30, 2026 by io-fund

Amdocs is due to report their Q223 earnings on Wednesday, May 10 after the market close. Please check the forum for an updates to the earnings report.

We recently did a deep dive here and discussed how its 12-month backlog, large recurring revenue stream and multi-year engagements with large telecom clients made for a compelling investment case. We expect the quarter to be at least in line with market expectations and demonstrate a steady progression toward meeting its FY2023 targets.

These are the key points we will be looking for.

1. Has the macro environment impacted their business?

2. Growth in backlog? Contract wins?

3. Profitability improvements?

4. Free cash flow generation targets?

5. Price action since April 20th?

6. Earnings expectations?

Importantly, we will look for signs that they may reach or exceed the upper end of their 2023 guidance, which hasn’t yet been priced into earnings expectations. Since our report, the stock has presented an attractive entry point if Q2 proves to be “business as usual”.

1. Any impact from the macro?

Amdocs Q1 beat expectations and during the call management described the macro.

“As we mentioned, yes, we are not immune. I mean, we like ourselves that we are a very strong company, but we are not immune to everything that's going on around us. But I think that overall, we see a lot of demand for our services. The area of growth for Amdocs, today are highly strategic for our customers.

Everyone wants to be successful in — when they deploy 5G use cases, fixed wireless, network automation. Everyone wants to move to the cloud. So while there is some uncertainty, I can tell that we see that we continue the project with our customers. These are highly important for them and we see a very rich pipeline ahead of us.”

While addressing the uncertain macro vs solid company fundamentals, Amdocs revised their full year 2023 sales target range upward during the earnings call. A few snippets are worth pointing out.

“Strong reputation for successfully delivering mission-critical systems transformation.”

Amdocs is providing critical software to telecom companies as they upgrade their networks to 5G, migrate their legacy systems to the cloud and monetize their subscriber base. This is not opex that the telecom companies can afford to reduce, which is why there is a strong backlog.

“Highly recurring revenue streams”

Amdocs estimates that 75% of their revenue is recurring due to its managed services business. This provides earnings and cash flow stability during difficult macro environments.

“Multi-year engagements”

The majority of Amdocs clients are large telecom companies in their respective regions. In the US, ATT, T-Mobile and Verizon make up about 50% of total revenue. These multi-year arrangements provide visibility into future revenue and managing the cost base.

“We see a lot of demand for our services. The area of growth for Amdocs, today are highly strategic for our customers.”

The competition for mobile subscribers is intense. Companies like Amdocs that can help increase a telecom operator’s competitive advantage are highly valued. The multi-year engagements are a reflection of that.

2. Growth in backlog? New contract wins?

Amdocs ended q123 with a record high 12 months backlog of $4.09 billion. This increased 6% from a year ago and went up $120m sequentially, reflecting continued sales momentum. According to management, the 12-month backlog has traditionally served as a good leading indicator of their business and has consistently averaged around 80% of forward-looking 12 months revenue over the years. We will look for continued growth in the backlog.

Amdocs has long standings relationships with large incumbent providers globally such as AT&T, T-Mobile, Verizon, Comcast, Dish, and Claro Brazil in the Americas; Vodafone and Three Group in Europe, Globe in the Philippines. In the most recent quarter, they announced new contract wins with regional providers in Europe and Latam. We will listen for new business engagements within its core client base and new clients.

3. Profitability improvements?

Amdocs has shown steady and incremental improvement in its non-gaap operating margin and currently stands at 17.7%. Amdocs has guided between 17.5% to 18.1% for the year. We will look for comments as to whether they may reach or exceed the upper end of guidance.

4. On track to meet 2023 free cash flow target?

In the Q1 call, management affirmed their free cash flow target.

“We are reiterating our full year free cash flow outlook of roughly $700 million, with free cash flow in the first half of fiscal 2023, tracking in line with our expectations, taking into consideration the normal seasonal timing of annual bonus payments in the second quarter.”

At current stock levels, this implies an attractive free flow yield of almost 7%.

5. Price action since April 20th

In our April 4th Amdocs deep dive, Knox’s technical analysis indicated that he was targeting better entry levels after its strong performance post Q1 earnings. Since April 20, Amdocs has declined more than the market. With only a 0.6 beta to the market, there was no company specific news to explain the price action.

One possible explanation is that Amdocs’s decline began at the same time ATT began its 12% decline post its Q123 earnings release on April 20th. ATT is one of Amdocs’s largest clients. The market reacted negatively to ATT’s reported fcf of $1.1 bn vs $2.9b consensus. Prior to Q1, ATT had already indicated that Q123 FCF, much like Q122, would be about of 5% of their total 2023 $16b FCF target due to seasonality issues. So this should have not been a surprise to the market. Management stated:

“We remain confident in our full year outlook for free cash flow of $16 billion or better. This expectation is largely due to the timing of capital investments, device payments, incentive compensation, which all peaked in the first quarter.”

We do not believe that this should impact Amdocs. ATT recently renewed its managed services engagement until 2026. Given the mission critical services that Amdocs provides, it is not likely ATT will reduce them.

Additional comments from the ATT’s conference call reinforced this.

“The second (priority) is the repositioning of our business to focus on exclusively communication services, particularly 5G and fiber. As the last few years have demonstrated, the solutions we provide are more critical than ever before, and we only expect the demand for purpose-built, best-in-class Internet access to grow. The resiliency of the services we provide, coupled with our improved financial flexibility, provide us with the right tool set to navigate the economic environment.”

“We recognize that in order to do that, we had to increase our investments in the business to enhance our customer value proposition and make more memorable and lasting connections with our customers.”

“In mobility, our largest business unit, we're growing subscribers and taking share. We also continue to see very healthy ARPU. This translates to growth in wireless service revenues and EBITDA, while improving margins”

We will listen to the call to see if anything has changed. If it’s business as usual, the price decline has presented a good entry point.

6. Earnings expectations

Amdocs has a recent history of telling the market what they will do and then doing a little bit better when they report quarterly through a combination of better than expected revenue and incremental improvement in non-gaap operating margins. We like this type of consistency and believe the market will pay higher multiples for businesses like this if Amdocs continues to deliver and the macro continues to weaken.

During the Q123 call, Amdocs reiterated FY 2023 sales, provided Q2 sales and revised up 2023 FY earnings guidance.

“We are reiterating our guidance for full year revenue growth of between 6% to 10% on a constant currency basis in fiscal 2023, with all three operating regions contributing positively over the full year.”

“Our annual outlook includes second fiscal quarter revenue within a range of $1.2 billion to $1.24 billion. On a reported basis, we expect full year revenue growth within an improved range of 5% to 9% year-over-year as compared with 4% to 8% year-over-year previously. The new outlook anticipates an unfavorable foreign currency impact of approximately 1% and year-over-year compared with an unfavorable impact of 2% year-over-year previously.

Moving down the income statement, we anticipate quarterly non-GAAP operating margins to fluctuate around the midpoint of our annual target range of 17.5% to 18.1%. Below the operating line, we anticipate that foreign currency fluctuations and cost of hedge will continue to impact our non-GAAP net interest and other expense lines, in the range of a few million dollars on a quarterly basis. We expect that our non-GAAP effective tax rate will remain within an unchanged annual target range of 13% to 17%, for the full fiscal year 2023.

Bringing everything together, we are raising our outlook for non-GAAP diluted earnings per share growth to a new range of 9% to 13% for the full year fiscal 2023”

For Q223

Amdocs has guided sales of between $1.20 to 1.24b vs consensus of $1.22b (+6.45% y/y)
Consensus expects a normalize eps of $1.47 lower y/y (-4.59%) vs a tough Q222 comp

We will be looking to see if Amdocs meets or exceeds consensus eps forecasts and if it can meet the upper of end of its sales guidance of 10%. Currently, the market is pricing 6%.

Positions Report – 5/9/23

Posted on May 10, 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

Big Picture

I’m maintaining the count that I have been tracking for many months. In short, we are close to completing the last bear market rally before the final leg lower. It is very rare to see a complex correction play out on such a large scale. However, the pattern and character of this bear market fits the pattern quite well. In these complex corrections, one of the hallmarks is that the final legs are stretched out and take longer to complete in relation to the first few legs.

From a technical perspective, there is not much within the weekly chart of the S&P 500 that signals a linear bull market is underway. The structure off the October low, for one, is an overlapping mess. The closer you look at it, the more you see 3 wave patterns up, then down. This pattern is being repeated even to this day.

As stated, many times before, we needed to see a 5-wave pattern develop off the October low. We did not get this. So, there is only one path a new bull market can take, considering the messy overlapping 3 wave structure, which is a low-quality and less common ending diagonal pattern. I went over this scenario in great detail on the first section of this report here.)

Furthermore, as we move closer to the key 4195, volume is diminishing, as is breadth. I added a simple indicator below that measures the % of stocks in the S$P 500 that are above their 200-day moving average. Note how it is trending down as price is trying to move up. This is not the type of breadth that corresponds with a healthy uptrend.

The weekly Relative Strength Index (RSI) is the biggest tell, for me. It remains in its bear market pattern. We need to see this indicator break above the resistance above, retest and hold. This will signal that a renewed level of momentum is entering the market and would justify higher prices.

Move off the October Low

If we zoom in on the uptrend from the October low, you can see the overlapping patterns quite clearly. Trends do not just develop; they build into repeatable patterns. What I find concerning is that not a single one of the up swings could morph into a 5 wave pattern. They are all low quality diagonal, or just 3 wave moves. Even the current swing has collapsed into a diagonal, which limits the upside if we see a breakout above 4195.

The two general counts I am tracking:

Blue: we’ve topped and in a deep 2nd wave. Once we go below 4040 SPX, the red count gets taken off the board. Below 3808 and we will be entering the heart of a crash.

Red: If we breakout above 4195, the blue count will come off the board as we move towards the final targets around 4280 – 4360.

If this is the start of a new bull market, as stated, the pattern this bull market will have to take is an ending diagonal pattern, considering all the 3 wave moves. If this is in play, it will require a deep pullback once the red count completes. The current structure simply does not suggest that we will breakout in a large 3rd wave power move. So, patience and caution is our motto until the market starts providing a clearer message.

Timing Analysis

One of the primary tools I use is cycle analysis to better time entries/exits. Markets move in cycles, as strange as it may seem. Regardless of why, for those that have been following the time factors I provide, you can see how accurate they have been at signaling local tops/bottoms, to even major ones.

The most important part of this type of analysis from a broad market perspective is when these cycles cluster together. Below is a chart of the S&P 500 that shows each time we see a cycle cluster (blue arrows). Note how they tend to show up at major inflection points. The market recently topped just underneath one of these clusters, which is why I’m very cautious.

No technique is perfect, so if we see the market ignore this cluster and instead move above 4195, the next big cycle clusters are in August and October (really big one here).

Supporting Markets

Financials

Regional banks look horrible. The chart below shows some of the bigger ones in the S&P 600 as well as the Regional Banks ETF (KRE). If a bank breaks below the panic low following the Silicon Valley default, it’s a bad sign. In the banks I track, one as broken down and another is testing this key support. No bids can be found, which is also concerning.

However, it’s not just regional banks. The big banks are in a very concerning posture as well. Take a look at Bank of America. It’s testing a crucial trendline after completing a clean 5-wave pattern from the 2022 top. It needs to break above $30.15 and stay above here to negate this downside development.

The big insurance companies look really bad, as well. I’ve talked about Metlife and Allstate, which still look unhealthy. Now, look at Liberty. This stock has retraced over 50% of its bull market off the 2009 low. This is a very unhealthy chart, all while money is piling into big tech.

So, the only market that I really care about is the major financial sector. If you are a bull, then you believe that Big Tech is leading and financials are following. I believe the opposite is playing out and it’s just a matter of time before the rest of the market follows along. The chart below tracks not the regional banks, but the largest financial institutions in the US (XLF).

So far, XLF has given us a clean 5 waves down, followed by a 3-wave bounce, which is likely over. For those that are new to this analysis, note the triangle pattern. This is the second leg of a correction, which we call a B wave. The final leg of the correction is a C wave and it is always in the form of a 5-wave pattern. The fact that we are seeing this clear 5-wave pattern unfold is concerning. If XLF goes below $30.40, then this market could get really nasty.

On the other hand, if XLF can break above $36, then I will likely pivot into the bull camp, deploy our cash reserves and enjoy a safe bull market uptrend. Short of this, I remain cautious.

One last point on XLF, the weekly Gann chart is quite telling. Notice how the current price drop is riding the 1×1 line (45 degrees) from the COVID low. If this level breaks, it will be a big signal for more downside to come. Also, the square of 19 is coming up around May 26 for XLF. This cycle started on the 2016 low, and will complete one full rotation with the square of 19 date. It is the biggest time factor in Gann’s world. I would expect a 3rd wave breakdown, or some type of big bottom.

On the other hand, if XLF can break above $36, then I will likely pivot into the bull camp, deploy our cash reserves and enjoy a safe bull market uptrend. Short of this, I remain cautious.

Equal Weight S&P 500 vs. the S&P 500

For those that are unfamiliar, the S&P 500 is weighted according to market capitalization (market cap), and it is simply price x float. Since the number of shares outstanding stay mostly static, price is the determining factor in the weighting of the S&P 500. So, it’s really a momentum index that gives a large amount of weighting towards the mega caps in the index that are performing well. This is why MSFT and AAPL currently account for a whopping 14% of the entire portfolio, while Home Depot, Chevron and Coke account for less than 1% each.

The Equal Weighted S&P 500 rebalances the portfolio frequently and provides an equal weighting to all 500 stocks. So, AAPL has the same weighting as Home Depot, Chevron and Coke. In a healthy market, we tend to see mid-caps outperform large caps, as well as most sectors and stocks participating. For this reason, comparing the two indexes can help determine the health of the market/economy.

When we divide the equal weighted S&P 500 by the market cap weighted S&P 500, here is what we have.

When the price in the chart above is going up, it means that the equal weighted index is outperforming. It’s also a sign of a broad and healthy expansion in the markets, which coincides with an expanding economy.

This pattern was moving in the right direction, until February of 2023. Note the breakdown in a clear 5-wave pattern. If the coming bounce is weak, it will be another warning for the bulls. No bull market is carried by a handful of stocks, while the economically sensitive ones keep trending down. This needs to reverse if we are starting a new bull market.

Macro

The yield curve is the most inverted since the early 1980s. What followed was a double dip recession, coupled with frustrating price action until the late 1980s. The bond market is screaming recession on the horizon, which even the FED is acknowledging a “mild recession.”

However, this recession is not here today, and this is why the market is not crashing. Take a look at the 3 month annualized impulse of some key economic metrics.

Nothing about the chart says a recession is here. The consumer is stronger than most expect, and even housing is rebounding. The resilience of the US economy is remarkable and emboldens the bulls into positioning for a soft landing, or even no landing at all.

What these investors fail to recognize is that with strong growth comes strong inflation. Below is the same 3 month annualized impulse of key inflation metrics. Note how far away core metrics are from the FED’s 2% targets.

The conclusion here is that short of a systemic banking crisis, this FOMC will continue to raise rates. Inflation is far from their targets, and they know this. I said last month the FED will raise their terminal rate and talk more hawkish than the market is pricing in. This is exactly what happened. Now, I’m saying that as long the banks hold up, this FED will keep raising rates into year-end.

The reason this matter is simple – without the FED’s participation, there can be no new liquidity cycle to lift equities. The FED is still raising rates and plans to hold rates this elevated into 2024, which is also a kind of tightening. Assuming that the banks do not force them to drop rates sooner, we would need equities to push higher without the support of an FOMC liquidity cycle.

The current macro, from this perspective, should at the very least, explain why the bulls, as well as the bears, cannot take control of this market.

Regarding the looming credit cycle, the Q2 Senior Loan Officer Survey was released yesterday. Though it was not as bad as expected, it was not good, especially as it relates to the soft-landing thesis:

Commercial and industrial loans and leases (23% of total) – we saw banks modestly increase lending standards while meaningfully increasing the cost of capital. They also saw demand for loans show a sizable decrease from large to small businesses.
Consumer Loans (15%) – banks meaningfully reduced a willingness for consumer instalment loans, while seeing a modest increase in demand for consumer loans.
Commercial Real Estate (24%) – banks reported a meaningful tightening for construction and land development loans, office financing, and apartment financing. Banks reported a moderate decline in the demand for these loans at the same time.
Residential Real Estate (21%) – Banks held their lending standards here, while seeing a large increase in demand for various real estate loans.

This is a continuation of the trend where banks are slowly shutting the credit window. We still hold that the looming credit cycle is unavoidable, considering how aggressive this rate campaign continues to be. The consensus states that there is a 9-12 month lag between a rate hike and experiencing its effects in the economy. This means that we are just now about to experience the 1st of four 75 bp hikes starting in late July of 2022. With inflation preventing the FOMC from starting a new liquidity cycle, as well as the full brunt of the rate hike campaign yet to be felt, we continue to act cautiously.

I/O Portfolio

Cash remains our biggest position. We have a target list of current positions we want to build, and some new ones within the AI space once we get the prices we are looking for. Our portfolio remains concentrated in AI and crypto, for now.

Hedge Signal

Our signal remains in sell mode. We are currently in line with it and maintaining a 100% hedged position. We remain in bear market mode, so expect whipsaws.

Nvidia (NVDA)NVDA)

No change in NVDA’s state. We are in a wait and see mode until the next large pullback gets underway. If it is a 3 wave pullback, it will build the case for red below. If it is 5 waves down, it will build the case for blue.

Netflix (NFLX)NFLX)

Both counts have the low in for NFLX. If blue plays out, we’ll sell into that. If it’s red, we’ll look to build our position at the general targets listed.

Advanced Micro Devices (AMD)AMD)

The path to a new bull market will be a break above $103.50, followed by a 3 wave pullback that holds the low. Like NVDA (and most stocks), if the next large pullback is a 5 wave move, prepare for fire sale prices.

Bitcoin (BTCUSD)

We are looking to add ~2% between $26K – $24K. This setup remains intact, which I discussed on the last webinar.

Microsoft (MSFT)MSFT)

I know it is not popular, but I still see this as a large B wave with new lows on the horizon.

Ethereum (ETHUSD)

This is the big picture for ETHUSD. The bullish setup is in place, and we’re looking to buy the next dip.

Aehr Test Systems (AEHR)AEHR)

AEHR has provided us a clean 5 wave drop from the recent high. This bounce is running on fumes and a clear 3 wave move higher. If AEHR can get above $34, that supports blue. If we break that trendline around $23, then red is in control.

Enphase (ENPH)ENPH)

ENPH is getting pretty comfortable at the recent low. We love the company and are targeting lower prices.

Tesla (TSLA)TSLA)

TSLA is setting up for another push lower soon. I still maintain it has a target of $92 before the bigger correction completes. I just can’t see a 3rd wave break out on that last ER.

Chainlink (LINKUSD)

Just horrible price action. If we break down towards $3.5, we’ll buy heavily.

Taiwan Semiconductor (TSM)TSM)

AMD Q1 Earnings: Yes, I’m Still Feeling Zen

Posted on May 10, 2023June 30, 2026 by io-fund

Please note, this was originally published for Premium Members on May 2nd when the stock was down (9%) and prior to the Microsoft announcement. This helps to illustrate our conviction in the face of a fickle market reaction, as two days later, AMD’s AI strategy became clearer with the Microsoft announcement and the stock was up quite a bit. Also, due to a tight earnings schedule for our portfolio and pipeline, you can expect to receive the May stock tip before the end of this week or Monday at the latest.Microsoft announcement. This helps to illustrate our conviction in the face of a fickle market reaction, as two days later, AMD’s AI strategy became clearer with the Microsoft announcement and the stock was up quite a bit. Also, due to a tight earnings schedule for our portfolio and pipeline, you can expect to receive the May stock tip before the end of this week or Monday at the latest.

Back in the Fall, when Nvidia was badly beaten up, I wrote two editorials about Nvidia’s gaming bottom and how the company was “ready to rumble” with H100 GPUs. I could repeat these editorials and simply replace the headlines by saying AMD is bottoming on PCs and that AMD is “ready to rumble” with Genoa, Bergamo — and most especially, the highly anticipated MI300 GPUs. Considering Nvidia was down roughly 60% when I wrote those articles, AMD being up roughly 50% YTD doesn’t feel so contrarian – but it is a bit contrarian because the company is on the precipice of proving it’s up for the task of AI acceleration.

The product road map for AMD is particularly exciting right now and also a bit complex because AMD’s AI ambitions are also found outside the data center. We’ve focused on AMD taking market share from Intel for three years with EPYC processors, but now we need to switch our focus and prepare for the next three years. You can expect a fresh deep dive on AMD come this June that drills into this particular company’s AI opportunity. It’ll be the end of a chapter on our site to place our focus beyond Intel for AMD’s growth, but now is the right time so we can prepare for AMD’s moment in AI.

Q1 Highlights/Lowlights:

Data center growth declined 23% sequentially and was flat year-over-year. Per the conversations on the call, data center growth is expected to be up year-over-year and this implies a 50% growth rate in H2 (see below). The sequential decline this quarter is a reflection of enterprise sales and not from EPYC CPUs, which remained strong.

The Client segment was down (65%) due to PCs. The strategy has been to undership for a quicker rebound, which was Nvidia’s strategy for gaming. This makes it more painful in the short term but sets up a better recovery in the long term. According to management, this is the bottom for PCs with a meaningful rebound in H2.

For comparison, we covered this strategy to undership gaming units for Nvidia in the Q2 August earnings report when we wrote:

The CFO Collette Kress stated: “Across those two quarters, the Q2 of ‘23, the Q3 of ‘23, we have likely undershipped gaming to our end demand significantly. We expect that sell-through or essentially our end demand for those combined two quarters of Q2 and Q3 to be approximately $5 billion […].”We expect that sell-through or essentially our end demand for those combined two quarters of Q2 and Q3 to be approximately $5 billion […].”

She is referring to about $1 billion being under shipped (or reduced sell-in) if we assume flat growth for gaming next quarter as the company attempts to rebalance inventory. It would be even more of an under shipment if gaming does decline sequentially.

Gaming was down (6%) but is expected to benefit from the Radeon 7000 Series release. However, gaming is expected to modestly decline again next quarter.

Embedded remains strong with 60% growth and this is part of what our deep dive will discuss as AMD’s product road map on AI is broader than the data center. Notably, coming off strong growth for 4-5 quarters, next quarter Embedded is expected to report a modest decline.

Margins are weaker than usual and this is due to the Client segment/PCs. When product mix returns to normal, margins will stabilize again. Notably, the data center segment had a lower margin of 11% compared to 33% last year. This was due to the Pensando acquisition and AI investments in GPUs.

Reference our Pre-Earnings Writeup here for more information.

Financials:

AMD beat on revenue and EPS in the current March quarter yet revenue missed consensus for Q2 ending in June.

Revenue for Q1 was $5.4 billion compared to $5.3 billion expected. Guidance of $5.3B missed consensus of $5.52B.

EPS beat at $0.60 versus $0.56 consensus.

Margins are lower than usual but came in as expected. Per the note above and the earnings call discussion below, margins will stabilize when PCs return to growth. This is expected to be the bottom for the PC slump.

GAAP Gross Margin is soft at 44% compared to 48% in the year ago quarter. Adjusted gross margin has been steady at 50% and is expected to be 50% again next quarter.

It’s better to focus on adjusted operating margin for now as GAAP operating margin includes expenses from Xilinx and Pensando acquisitions. Adjusted operating margin of 21% was weaker than 31% in the year ago quarter.

Cash flow margins are down with FCF margin of 6% compared to 16% a year ago. Cash and debt has not changed at $5.9 billion and $2.5 billion, respectively.

The company returned $241 million to shareholders through share repurchases. There is $6.3 billion in remaining authorization for share repurchases.

Earnings Call:

Data Center Growth in H2:

There were two important discussions around what data center growth will be in the second half of the year. The first analyst believed the growth would be in the 30% range but it was later confirmed it’ll be in the 50% year-over-year range. AMD investors need the data center to participate in a big way in the second half, therefore both discussions are important, and are highlighted below.

Vivek Arya:

For my first one, Lisa, when I look at your full year Data Center outlook for some growth, that implicitly suggest Data Center, right, could be up 30% in the second half versus the first half, right? And I'm curious, what is your confidence and visibility and some of the assumptions that go into that view?

Is it — do you think there is a much bigger ramp in the new products? Is it enterprise recovery? Is it pricing? So just give us a sense for how we should think about the confidence and visibility of the strong ramp that is implied in your second half Data Center outlook?

Lisa Su

Right. So Vivek, thanks for the question. Maybe let me give you some context on what's going on in the Data Center right now. First of all, we have said that it's a mixed environment in the Data Center. So the first half of the year, there are some of the larger cloud customers that are working through some inventory and optimization as well as a weaker enterprise.

As we go into the second half of the year, we see a couple of things. First, our road map is very strong. So the feedback that we're getting working with our customers on, it's ramping well. It is very differentiated in terms of TCO and overall performance. So we think it's very well positioned. Much of the work that we've done in the first half of the year — in the first quarter and here in the second quarter is to ensure that we complete all of that work such that we can ramp across a broader set of workloads as we go into the second half of the year.

And then I would say, from an overall market standpoint, I think enterprise will still be mixed with the notion that we expect some improvement. It depends a little bit on the macro situation. And then as we go into the second half of the year, in addition to Genoa, we're also ramping Bergamo. So that's on track to launch here in the second quarter and will ramp in the second half of the year. And then as we get towards the end of the year, we also have our GPU ramp of MI300. So with that, we start the ramp in the fourth quarter of our supercomputing wins as well as our early cloud AI wins. So those are all the factors. Of course, we'll have to see how the the year play about how we're positioned from an overall product and road map standpoint for Data Center.”

Below, is where the year-over-year growth rate was confirmed:

“Stacy Rasgon

For my first one, Lisa, can you just like clarify this explicitly for me. So you said double-digit Data Center. Was that a full year statement? Or was that a second half year-over-year statement? Or was that a half-over-half statement for Data Center?

Lisa Su

Yes. Let me be clear. That was a year-over-year statement. So double-digit Data Center growth for the full year of 2023 versus 2022.

Stacy Rasgon

Got it. Which just given what you did in Q1 and sort of are implying for Q2 needs something like 50% year-over-year growth in the second half to get there. So you're endorsing those — you're endorsing that now?

Lisa Su

I am…

Jean Hu

Yes, your math is right.”

Comments on the Client Segment Stabilizing in H2:

Arguably, how the Client segment performs is equally important to how data center performs simply because this segment has been a bit awful for a wide range of companies.

Per the opening remarks:

“Now turning to our client segment. Revenue declined 65% year-over-year to $739 million as we shipped significantly below consumption to reduce downstream inventory. As we stated on our last earnings call, we believe the first quarter was the bottom for our client processor business. We expanded our leadership desktop and notebook processor portfolio significantly in the quarter. In desktops, we launched the industry's fastest gaming processors with our Ryzen 7000 X3D series CPUs that combine our Zen 4 core with industry-leading 3D chiplet packaging technology.”

There were questions in the Q&A with the CEO, Lisa Su, saying the following:

“Lisa Su

Yes. So we've been undershipping sort of consumption in the Client business for about 3 quarters now. And certainly, our goal has been to normalize the inventory in the supply chain so that shipments would be closer to consumption. We expect that, that will happen in the second half of the year, and that's what the comment meant that we believe that there will be improvements in the overall inventory positioning.

And then we also believe that the Client market is stabilizing. So Q1 was the bottom for our business as well as for the overall market. From what we see although it will be a gradual set of improvements, we do see that the overall market should be better in the second half of the year. We like our product portfolio a lot. I'm excited about having AI-enabled on our Ryzen 7000 series. And we have leadership notebook platforms with Dragon Range. Our desktop road map is also quite strong with our new launch of the Verizon 7000 X3D products.

And so I think here in the second quarter, we'll still undership consumption a bit. And by the second half of the year, we should be more normalized between shipments and consumption, and we expect some seasonal improvement into the second half.”

Comments on the MI300 Release:

The MI300 will be released in Q4 and is expected to contribute to revenue by early 2024. I will expand on this in the upcoming deep dive. Here is what was said in the opening remarks:

“Customer interest has increased significantly for our next-generation instinct MI300 GPUs for both AI training and inference of large language models. We made excellent progress achieving key MI300 silicon and software readiness milestones in the quarter, and we're on track to launch MI300 later this year to support the El Capitan exascale supercomputer win at Lawrence Livermore National Laboratory and large cloud AI customers.”

There were many questions about the MI300, one of the more important one being from Ross Seymore who hints toward Nvidia being hard to compete against. Lisa Su’s answer points toward potentially undercutting Nvidia on price and also having strong relationships from EPYC CPUs:

Ross Seymore

And pivoting for my follow-up on the AI side and MI300. I just wanted to know what you would describe as your competitive advantages? Everybody knows that's a market that's exploding right now. There's tons of demand. You guys have all the IP to be able to attack it. But there's a very large incumbent in that space as well.

So when you think about what AMD can bring to the market, whether it's hardware, software, heterogeneity of the products you can bring, et cetera, what do you think is the core competitive advantage that can allow you to penetrate that market successfully?

Lisa Su

Yes. There's a couple of aspects, Ross. And — yes, since we haven't yet announced MI300, all of the specifications will — some of those will come over the coming quarters. MI300 is the first solution that has both the CPU and GPU together, and that has been very positive for the supercomputing market.

I think as it relates to generative AI, and we think we have a very strong value proposition from both a hardware and again, it's a performance per dollar conversation, I think there's a lot of demand in the market. And there's also — I think given our deep customer relationships on the EPYC side, there's actually a lot of synergy between the customer set between the EPYC CPUs and the sort of 300 GPU customers.

Conclusion:

This is the kind of earnings report where you’d have to listen to the call to piece it together. Journalists and others who cover dozens of stocks will rush the conclusion (beat this quarter, lower guidance quarter) but there a lot of depth to AMD right now – perhaps more depth than any other stock we own right now since the product road map is loaded for the second half.

I’m still feeling Zen after this earnings report and also feeling like it’s time to dedicate a new deep dive to the company. It’ll be a bit nostalgic to come back to Xilinx again as I called the company “a heavy hitter AI stock” four years ago. The MI300 GPUs are exciting but Xilinx is also a large piece to AMD’s AI opportunity. Keep an eye out for this deep dive in the next couple weeks as we carefully, patiently, and with an exceptional level of due diligence, build out the world’s very best AI portfolio.

Deep dives, trade alerts, a forum and weekly webinars on the I/O Fund portfolio are offered on our premium service, you can find out more information here.here.

Apple’s Stock In Focus: More Profitable Than Banks

Posted on May 4, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on May 1, 2023,10:07pm EDTForbes Forbes on May 1, 2023,10:07pm EDT

Investors looking for the “next big thing” will point toward companies like Stripe, Sofi or Square as the leading fintech stocks. Meanwhile, the next big thing to disrupt the financial sector may be sitting in plain sight. Apple grew its cash trove through legendary design and hardware, yet how Apple chooses to leverage its enormous reserve of cash may be what writes the next chapter for the world’s most valuable company.

The markets have clearly shifted from favoring top line growth to emphasizing bottom line strength. This reminder is echoed across every industry, but none more so than the finance industry where regional banks are defaulting due to high bond rates and depositor withdrawals.

It’s easy to dismiss the financial sector in today’s tech focused market. After all, financials only account for 11% of the total market cap of the S&P 500, with 3 sectors ahead of it. However, all companies depend on loans, and when banks get scared, the credit window shuts, which tends to lead to outsized bankruptcies. Simply put, banks cause the worst kinds of recessions. We detailed this more here.

Today, the tech industry has disrupted nearly every industry in its path from energy, to commerce, to automotive, to entertainment. Perhaps now is the time that tech will finally disrupt the banking sector.

Apple Is More Profitable Than Banks

JP Morgan has over $1.4 trillion on its balance sheet compared to Apple’s $165 billion. However, Apple is more profitable with $99 billion in profit last year, which is higher than JP Morgan and Citi combined. What Apple has to boot is access to 1.2 billion iPhone users. Therefore Apple may not have as much cash as a bank, but it’s fundamentally a more investable business model.

For stock investors, Apple’s large cash reserves are certainly not news as the company has more cash than any other tech stock. What’s news is that the FED is aggressively draining liquidity from the system as a means to fight inflation, as shown in the chart below, that compares the trends in liquidity to the S&P 500.

Source: I/O FUND

There has been a long-standing relationship to liquidity and asset prices, and until we can see a new liquidity cycle start, companies with cash will have better leverage over those that don’t. You can also expect volatility in the markets to remain high until there’s a new liquidity cycle, which we covered when we discussed where we hold cash.

The longer this plays out, the more ways Apple can leverage its $165 billion in cash as consumers will seek better financing terms, higher yields and credit lines will also increase.

For example, Apple recently launched a new high-yield savings account that offers a 4.15% interest rate, which is 10 times higher than the United States national average and 415 times higher than what Chase or Bank of America offers at 0.01%. Apple is also lending from its balance sheet for the first time ever through Apple Pay’s Buy Now and Pay Later product.

To illustrate how effective Apple’s move into finance tech has become, the cornerstone product, Apple Pay, currently has 75 percent adoption among iPhone users. This is up from 10% in 2016. In addition to taking on banks, Apple is also competing with Mastercard and Visa with features that allow merchants to use iPhones and iPads to send and receive payments. The long-term goal is to replace wallets with iPhones.

Apple has the best operating margin among the FAANG stocks at 30.7%. Net profit last quarter was $30 billion with free cash flow of also $30 billion.

Source: I/O FUND

Apple is not immune to the effects felt across corporate bonds and mortgage securities. According to CNBC, the company has $13 billion in unrealized losses. These losses are not reported as long as Apple plans to hold to maturity, and as long as the bond issuers are solvent enough to repay the debt. Also, a loss of $13 billion is not detrimental to Apple, as the company generates $100 billion in free cash flow per year. Notably, the company used to have $250 billion in cash reserves before increasing buybacks in 2017.

Apple has debt of $111 billion for a net cash balance of $54 billion. The company paid $3.8 billion in dividends and equivalents and repurchased shares worth $19.5 billion.

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What to Watch for in Q1 Earnings

Apple is not a growth stock. The company is known for strong margins, outsized cash flows, and stable balance sheet. The company’s revenue has been partly negatively impacted from the adverse FX movements. Analysts expect revenue to decline by (4.6%) YoY to $92.81 billion yet the company’s revenue is expected to grow after the June quarter.

Source: SEEKING ALPHA

On a fiscal year basis, Apple is expected to report a rebound next fiscal year:

Source: SEEKING ALPHA

Apple has the highest operating margins among the FAANG stocks. For EPS, Apple is expected to report the following:

Source: YCHARTS

Apple’s main segments are iPhones, Macs, iPads, Wearables and Services. Of these, the Mac segment is dragging on Apple’s results. Last quarter, Mac sales declined by (29%) YoY to $7.7 billion. Management expects revenue to decline double digits due to challenging comparable with the M1 Mac Books from last year and a weaker consumer.

According to IDC, there was a YoY decline of (29%) in the shipments of traditional PCs in Q1 2023 due to weaker demand and excess inventory. The report from IDC suggests that Macs declined by (40%) in Q1 2023.

iPhone sales in the December quarter declined by (8%) YoY to $65.8 billion yet were flat excluding foreign exchange rates. Management expects revenue to accelerate in the March quarter when compared to the Dec quarter, per the earnings call: “For iPhone, we expect our March quarter year-over-year revenue performance to accelerate relative to the December quarter year-over-year revenue performance.”

According to the research firm Canalys, the global smartphone market declined by (13%) YoY in Q1 2023. The report from Canalys states that Apple gained 3% in global market share from 18% to 21% driven by the demand for iPhone 14 Pro series. Samsung was the only leading vendor to report QoQ growth and also regained the #1 position at 22% market share.

The Services segment is the second largest segment after iPhone. This is where payment services and loan products will show up. Many investors see this as the long-term opportunity as Apple is monetizing it’s installed base of over 2 billion active devices. The installed base grew by 8% YoY. Services revenue grew 6% YoY to $20.8 billion and grew double digits excluding foreign exchange rates.

The company has more than 935 million paid subscriptions, up 19% YoY. Per CFO, Luca Maestri, The growth is coming from every major product category and geographic segment, with strong double-digit increases in emerging markets such as Brazil, Mexico, India, Indonesia, Thailand and Vietnam.”strong double-digit increases in emerging markets such as Brazil, Mexico, India, Indonesia, Thailand and Vietnam.”

Big Tech is Propping up the Nasdaq

In the early phase of a bull market, we tend to see expansive buying amongst most sectors and markets, with a relative focus in your economically sensitive sectors like small caps and high beta names. This is simply not the case right now. In fact, what we are seeing is a handful of big tech names propping up the markets. Meanwhile, underneath this, economically sensitive stocks are getting aggressively sold while Big Tech props up the market.

Source: I/O FUND

Furthermore, the percentage of Microsoft and Apple’s combined weighting in the S&P 500 has never been higher. The S&P 500 weighting is according to market cap, which is price times float. The longer buying happens in these two names, accompanied with selling in other areas of the index, the percentage weighting becomes stretched to unhealthy extremes. This is not characteristic of a burgeoning bull market; instead, it is the type of behavior we see at market tops.

Regarding Apple’s price chart, we believe that the bounce off the October 13th low in 2022 is starting to top out.

I/O FUND

We have been talking about the $169-$170 price target for many months in our premium service. Now that we are here, you can see how the market is trying to push higher on weaker volume and weaker momentum. We could see a push to the $175 region in this final push higher, but soon, AAPL will have to correct. If the structure of this correction is a 5 wave decline, then we will be targeting new lows. On the other hand, if this pullback is a 3 wave move, we could see a move back to the $145 region only, before a fresh attempt higher is made.

Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock entries and exits. We offer trade alerts plus an automated hedging signal. The I/O Fund team is one of the only audited portfolios available to individual investors. Learn more here.Learn more here.

Note on Valuation:

Apple is trading at a premium with a current PE ratio of 28. The stock does not tend to hold well at a PE ratio of 30.

Source: I/O FUND

The forward PE Ratio of 28 is also stretched and does not hold well at this level historically.

Source: I/O FUND

Conclusion:

Apple is the most likely candidate to disrupt the financial sector. The company’s reach of 2 billion devices has assisted its slow roll-out of payment services with 75% of iPhone users opting into Apple Pay. One can only imagine the potential success Apple may have in leveraging its cash for higher yields during a time when banks are weak in reputation and balance sheets.

In the upcoming earnings report, expect weakness in Macs to overshadow the other segments. iPhones are expected to be flat yet the Services segment is where fintech growth will show up. Overall, this is unlikely to be a standout quarter for Apple on the top line, so look for surprises on the bottom line to drive the stock.

We have Buy levels we are targeting for Apple, which we share with our premium research members each week as the stock progresses. We believe our target buy level will set us up for gains in Apple’s stock when the next bull cycle begins. We provide in depth macro and individual stock analysis so that readers can better understand why we buy/sell. In this market, we frequently take gains.

We also issue real-time trade alerts when we enter and exit stocks. YTD, our firm has held the two top performing assets in the tech industry – Nvidia and Bitcoin — at high allocations. We also issued a buy alert with NVDA last year at $108 and with Bitcoin in the $16,000 region, based on the type of analysis we provide. You can learn more here including information on our next webinar, this Thursday at 4:30 pm Eastern, where we review our positions live.

Portfolio Manager Knox Ridley and Equity Analyst Royston Roche contributed to this article.

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.

Recommended Reading:

This Stock Price For Netflix Is A “Buy” For 2023

Posted on May 3, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Apr 28, 2023,07:15am EDTForbes Forbes on Apr 28, 2023,07:15am EDT

In April of 2022, Netflix surprised the markets by reporting its first subscriber loss in nearly 10 years. The stock tumbled 35% the following day, as investors panicked. Famed hedge fund manager, Bill Ackman, immediately sold his entire stake in Netflix for a $400 million loss, only after holding it for just over three months.

Last April was a tough month for Netflix stock, yet fast forward — and in one brief year, Netflix is up 41% from where Ackman sold the stock and is up 84% since the low on May 12.

In our free newsletter published on Forbes, we argued that “the day that Netflix’s stock price dropped 35% was consequently one of the most important days in the company’s history in terms of its chances for a boost in revenue and a renewed uptrend. Patience, though, will be required, as Netflix has work to do.”

On the very day that Netflix lost one-third of its value last year, management announced its intention to cutoff password sharing and rollout a new ad tier. We deemed the stock a buy and executed in August and again in early September.

Source: I/O FUND

What will make or break Netflix’s price action will be next quarter’s earnings report as there will be one full quarter of the results from cutting off password sharing. The bottom line is surprisingly stable for this company and what the market will want to see is top line impact from the two pivots announced a year ago.

Currently, our technical analysis points toward May 12th being the bottom for the stock. In other words, we do not believe the stock will dip below $200 before the macro environment clears up. This is rare, as our analysis points toward a few FAANGs retracing their lows in the coming quarters.

Although our firm is long-term bullish on the stock, we don’t believe now is the time to build a long-term position. Instead, we plan to further trim our position and build at lower levels. More details are below.

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The Pivot of a Quarter-Century

At the same time that Netflix lost its growth status, the company made the biggest announcement in its history – which was to cutoff password sharing for 100 million users and to roll-out an ad tier that will monetize higher than the Basic and Standard subscription plans.

One could argue that moving from DVDs to over-the-top (OTT) was the biggest announcement in the company’s history, yet at the time Netflix had nothing to lose. Today, the company is the top streaming service in the world and has held this top position despite media titan Disney’s attempt to reclaim the media throne. In other words, Netflix’s two pivots are high stakes. The good news is, investors won’t have to wait too much longer to find out if the pivots are successful.

Password Sharing:

In the most recent quarter, global paid adds of 1.75M came in slightly shy of analyst estimates of 1.8M.

For password sharing, the Latin America region was a test region and the Q1 results provided some clues as to how a broader rollout will perform. According to management there was a cancel reaction which later eased. The region reported a loss of net adds of (0.4M) compared to net adds of 1.76M in Latin American last quarter, yet the revenue was up 7% YoY (+13% on constant currency basis).

The company stated that other regions, such as Canada, were “directionally consistent with what we saw in Latin America.”

There was a similar pattern in the United States Canada (UCAN) region where there was low net adds yet higher revenue growth. The region reported 0.1 net additions with revenue up 8% YoY.

In the year ago quarter, these regions were flat or reported a decline. Notably, churn can be higher coming out of Q4 for Netflix since that quarter has high net adds.

Another observation is that LatAm and UCAN both had expanding ARM, or average revenue per membership, whereas the other two regions saw a lower ARM. This could be encouraging in terms of a broader rollout on password sharing driving more top line growth in the second half of the year.

UCAN up +9% from $14.91 to $16.18
LatAm up +3% from $8.37 to $8.60
EMEA down (6%) at $10.89 this quarter compared to $11.56 in the year ago quarter
APAC down (13%) at $8.03 this quarter compared to $9.21 a year ago

Notably, average paid membership increased in APAC, and was up 17%. This is clearly a large region but there’s been some attention on India specifically where Netflix has lowered prices. This would make sense to where net adds increased but ARM decreased.

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.

Advertising Tier

Upfront season is coming for Netflix, which means Netflix will likely have to state the company’s expected scale for the ad tier come Q3/Q4. Right now, the company is not guiding for this but analysts believe it will be in the 13M range.

Per Forbes and Bloomberg: “After a slow start Netflix ad tier has been gaining traction with U.S. subscribers. After analyzing their internal data, BloombergBloomberg reported in its first two months, Netflix had one million active users. Before its launch, Netflix had projected 1.1 million by year end 2022 increasing to 13.3 million by the third quarter 2023. Industry analysts project Netflix could eventually wind up with 30 million U.S. subscribers on its ad supported tier. The U.S. is one of the 12 markets where Netflix is now selling ads. At its most recent earnings report Netflix had 74 million total U.S. subscribers with 231 million worldwide.”

For our purposes as investors, the most important aspect of the ad tier is that it will be accretive to the bottom line as the ad tier will monetize at a higher rate than Netflix’s basic and standard plans. The ad tier will be $6.99 per month plus ad dollars. With that, management believes there will be “50% or more incremental profit contribution to the business.”

Strong Free Cash Flow

Netflix’s bottom line has stabilized. In the recent report, free cash flow came in at an impressive $2.17 Billion, with management raising full year guidance to $3.5 Billion. This is an improvement of ~$6.5 billion in free cash flow from 5 years ago when the company was losing $3 billion per year in 2019.

The free cash flow margin has more than doubled from last year at 25.9% compared to 10.19% in the year ago quarter.

Source: YCHARTS

Gross debt is still high at $14.5 billion, which is inherent to the business model. However, net debt is improving at 1.1X compared to 1.3X last quarter with net debt of $6.7 billion compared to $8.37 billion last quarter.

Netflix still trails other FAANGs on its investment rating, yet it’s notable the company has seen an upgrade from Moody’s from junk to investment grade. Netflix has been the black sheep of the FAANGs in this regard, however, a large part of our thesis is based on the company’s change in profile in terms of bottom-line strength.

On another positive note, Moody’s stated the following regarding Netflix’s ad tier: “Moody’s anticipates that growth in subscribers from the recently launched ad supported service will be gradual but steady and provide a strong long-term opportunity for revenue growth.”

How to Position Now and Throughout 2023

As a leading all-tech portfolio, our firm is cautious when it comes to timing as tech can be volatile. We find the most success in matching quality stock ideas with technical analysis. This provides some insurance should a speculative bet not work out, for example, should Netflix’s management team not be able to execute. It also helps to increase gains as buying in April of 2022 would have produced 40% gains versus in May of 2022 at 80% gains. This is a substantial reward for only waiting one additional month.

Regarding the bigger technical picture, Netflix remains range bound between $304 and $347.

Source: I/O FUND

We’ll start with the red count below. If we see a breach of the below trend channel, that will be the first warning. A break below $304 will open the door to our 1st target zone between $257 – $235.

On the other hand, if we see a breakout above $347, we would not consider this breakout a buy. The reason is because the bullish pattern that started on May 12th of 2022 is a 5 wave pattern. Any break above $378 would be considered a big warning, as it would be completing the 5 wave pattern and setting up for a rather deep retrace.

We do not believe a buy above $257 is worth the risk, considering both the macro environment and technical pattern in Netflix, right now. If we see favorable results regarding Netflix’s pivot, and yet pricing comes under pressure from the macro environment, we will be looking to aggressively accumulate at much lower levels. The exact levels we buy are shared the moment we execute with premium members.

Conclusion:

Look for password sharing to contribute to results next quarter due to a broader roll-out including in the United States. This will be a line in the sand moment for Netflix’s new narrative.

If this hurdle is cleared, then look for the ad tier to contribute to earnings results by Q3 and Q4 of 2023 as the company will need time to grow the audience to a meaningful size for ads to have an initial impact. The target is in the range of 10 million to 15 million, if we assume 13 million is the midpoint.

Although some investors will become aggressive around these targets being hit early, it’s better to let management successfully pivot than to force exact timing. As long the top line bottoms in the June quarter, with evidence of an acceleration for the September guide on the top line, then that’s good enough for our position.

As stated, we have buy levels that we target, which we share with our premium research members each week as the stocks progresses. We believe our target buy level will set us up for gains in Netflix stock when the next bull cycle begins. We provide in depth macro and individual stock analysis so that readers can better understand why we buy/sell. In this market, we frequently take gains.

AMD Q1 Earnings: Yes, I’m Still Feeling Zen

Posted on May 3, 2023June 30, 2026 by io-fund

Q1 Highlights/Lowlights:

Data center growth declined 23% sequentially and was flat year-over-year. Per the conversations on the call, data center growth is expected to be up year-over-year and this implies a 50% growth rate in H2 (see below). The sequential decline this quarter is a reflection of enterprise sales and not from EPYC CPUs, which remained strong.
The Client segment was down (65%) due to PCs. The strategy has been to undership for a quicker rebound, which was Nvidia’s strategy for gaming. This makes it more painful in the short term but sets up a better recovery in the long term. According to management, this is the bottom for PCs with a meaningful rebound in H2. For comparison, we covered this strategy to undership gaming units for Nvidia here.
Gaming was down (6%) but is expected to benefit from the Radeon 7000 Series release. However, gaming is expected to modestly decline again next quarter.
Embedded remains strong with 60% growth and this is part of what our deep dive will discuss as AMD’s product road map on AI is broader than the data center. Notably, coming off strong growth for 4-5 quarters, next quarter Embedded is expected to report a modest decline.
Margins are weaker than usual and this is due to the Client segment/PCs. When product mix returns to normal, margins will stabilize again. Notably, the data center segment had a lower margin of 11% compared to 33% last year. This was due to the Pensando acquisition and AI investments in GPUs.
Reference our Pre-Earnings Writeup here for more information

Financials:

AMD beat on revenue and EPS in the current March quarter yet revenue missed consensus for Q2 ending in June.

Revenue for Q1 was $5.4 billion compared to $5.3 billion expected. Guidance of $5.3B missed consensus of $5.52B.

EPS beat at $0.60 versus $0.56 consensus.

GAAP Gross Margin is soft at 44% compared to 48% in the year ago quarter. Adjusted gross margin has been steady at 50% and is expected to be 50% again next quarter.

Cash flow margins are down with FCF margin of 6% compared to 16% a year ago. Cash and debt has not changed at $5.9 billion and $2.5 billion, respectively.

The company returned $241 million to shareholders through share repurchases. There is $6.3 billion in remaining authorization for share repurchases.

Earnings Call:

Data Center Growth in H2:

Vivek Arya:

Lisa Su

Below, is where the year-over-year growth rate was confirmed:

“Stacy Rasgon

Lisa Su

Yes. Let me be clear. That was a year-over-year statement. So double-digit Data Center growth for the full year of 2023 versus 2022.

Stacy Rasgon

Lisa Su

I am…

Jean Hu

Yes, your math is right.”

Comments on the Client Segment Stabilizing in H2:

Arguably, how the Client segment performs is equally important to how data center performs simply because this segment has been a bit awful for a wide range of companies.

Per the opening remarks:

There were questions in the Q&A with the CEO, Lisa Su, saying the following:

“Lisa Su

Comments on the MI300 Release:

The MI300 will be released in Q4 and is expected to contribute to revenue by early 2024. I will expand on this in the upcoming deep dive. Here is what was said in the opening remarks:

Ross Seymore

Lisa Su

Conclusion:

First Solar Q1 Earnings: IRATC Timing, Strong Backlog, Higher ASP Per Watt

Posted on May 3, 2023June 30, 2026 by io-fund

In our First Solar deep dive and Q123 earnings preview, we pointed out that post Q1 may provide a better entry point mainly due to the timing of the IRATC recognition. In Q4, management had guided that the IRATC will only begin to make a meaningful impact after Q1.

Despite First Solar’s timing guidance, consensus expectations were elevated going into the first quarter and was disappointed by the amount of the Q1 IRATC recognition. Taking the high end of $710 million in IRATC 2023 guidance, First Solar recognized $70m or about 10%. They expect to recognize 25% in 1H and the rest in the 2nd half of the year. This equates to $108m in Q2 and $532m in Q3/Q4, respectively.

Importantly, First Solar did not change their 2023 guidance. However, it does indicate that earnings will be heavily weighed toward the 2nd half.

Key earnings highlights

Q123 sales were $583 million, up 49% y/y and down 45% sequentially. Sales missed consensus expectations of $713
Q123 eps was $0.47, vs a loss of $0.41 in 2022. EPS missed consensus expectations of $0.86

The lower than expected sales was mainly due to the timing of module sales and higher logistics costs that were partly offset by higher ASPs. Gross margins were 20% vs 25% in Q1 2022.

Reviewing the key points we were looking for going into Q1.

1. Any revisions to the treatment, timing or total amount of the 2023 IRATC?

First Solar reiterated full year sales of $3.5b and IRATC amount of $660-710 and $0.17 IRATC per watt. For the first time, they shared the IRATC timing recognition – 25% in the first half and 75% in the second half.

From a timing perspective, First Solar is still mainly selling inventory that was made in 2022 and not eligible for the full IRATC in 1H23. As the year progresses, they will start to sell more inventory made in 2023 and the amount of the IRATC recognized will increase accordingly.

From a legislative perspective, there is still a tug-of-war to finalize the details of the IRA bill between the Treasury and Congress. It comes down to Assembled vs Made in the USA. The former relates to companies that apply for waivers to procure certain components overseas, assemble the final product domestically and then attempt to qualify for the IRATC.

This is how First Solar characterized it:

“I would like to take a moment to discuss the policy environment in our key markets. In the United States, with respect to the Inflation Reduction Act, we continue to await guidance related to the domestic content bonus provision.

We believe it is imperative that the United States Treasury Department issued guidance consistent with the Congressional intent of the IRA, which is to nurture true domestic solar manufacturing, ensuring a robust domestic supply chain for American made solar modules. It is critical to guidance recognized that to qualify for the bonus. At a minimum, the manufacturing of solar cells must occur in the United States. This is not only consistent with clear objective of the IRA, but is also supported by the legal framework under the Buy America Act Regulations expressly referenced by Congress in the enactment.

While the intent of the IRA and regulations governed and are clear, it is unfortunate that sections of the industry are advocating that treasury grant some form of waiver that would allow bonus credits for solar panels assembled using 4 subcomponents, such as solar cells. We believe that any such waiver runs contrary to the letter of the law and Congressional intent. The purpose of the bonus credit is to incentivize domestic manufacturing and the creation of a domestic solar supply chain and not to create an entitlement simply to support foreign manufacturers.”

An outcome closer to the Congressional intent rather than the Treasury will enhance First Solar’s competitive position due to its vertically integrated US operations.

2. On track to meet production targets and update on contracted backlog?

First Solar’s contract backlog grew from 61.4GW in Q4 to 71.6 GW in Q1. The current backlog is about 6x 2023 production capacity. They’re sold out through 2026, ex-India. Volume sold targets remained unchanged at about 12 GW. US capacity expansion plans in Ohio and Alabama are on track.

3. Update on capex plans and related financing

First Solar finished Q1 with cash and equivalents of $2.3 billion vs $320m in debt. First Solar expects the year to end at about 1.35 billion after capex. Q123 capex was $371m and fcf was negative $336m.

Typically, First Solar requires 20% of the contract upfront to secure it. Given their sold out orderbook through 2026, First solar is requesting that a greater portion of 20% deposit in in cash, which is reflected as deferred revenue on the balance sheet. Currently, this stands at $1.2 billion. This provides a significant portion of the financing required for expansion.

First solar confirmed it does not rely on super regional banks for banking services nor financing. They did not indicate that any of their clients, mainly large utilities, are experiencing difficulties either.

4. ASP per watt?

Since the beginning of 2023, pricing dynamics are trending higher. First Solar ended 2022 with a contracted backlog of 61.4GW at an average ASP of $0.288 per watt.

In Q1, it ended with a contracted backlog of 69.4 GW, at an avg ASP of $0.295 per watt. New bookings since the Q4 earnings call, totaled 4.4GW at an average price of $0.318 per watt. Management was constructive on overall ASP in the future. One driver is that large utility clients are looking to secure multiple year agreements and it appears First Solar has greater pricing power in those situations.

“And generally, we see much higher volumes and larger agree purchasing power and a multiple-year agreement. You may see ASPs more aggressively into that situation. So I wouldn't attribute the increase to any one lever. But what I would say is that we're still very happy with the market and the opportunity and the ASP that we're receiving”

Meanwhile, adjusters are a potential source of earnings upside starting in Q2.

“So we are currently processing additional amendments associated with providing U.S. manufactured product, which will be reflected in our Q2 contracted revenue backlog when reported. As we previously addressed, a substantial portion of our overall backlog includes the opportunity to increase the base ASP through our application of adjusters, we're able to realize achievements within our technology road map as of the required timing for delivery of the product.”

5. Any improvement in logistics costs that was a significant drag on 2022 earnings?

Logistics continue to be a drag on gross margins. Management stated the following:

“Although logistics costs decreased during the quarter, they continue to remain elevated relative to pre-pandemic levels. During the first quarter, they reduced gross margin by 15 percentage points. As we look to the second half of the year, we expect to see a reduction in logistics costs.”

First Solar’s Q1 gross margins ended at 20%, which demonstrates how much logistic costs detracted from profitability. To provide a recent historical context, logistics costs reduced gross margins by 19 percentage points in 2022, 11 percentage points in 2021 and 6 percentage points in 2020. So they are off the peak but still have not returned to pre-pandemic levels. A return of somewhere between 2020 and 2021 levels will be a source of positive upside to gross margins.

6. 2023 earnings expectations

It’s helpful to take a step back and examine reported 1Q23 eps vs management guidance and consensus expectations. At the end of q422, First Solar guided for a 2023 eps of between $7-8. They provided no 1Q23 guidance except that the IRATC benefit will be seen after Q1. Consensus forecasted $0.86 Q1 eps or 11% of the midpoint of First Solar’s 2023 eps guidance.

First Solar reported an actual Q1 eps of $0.41, less than consensus, and 5% of their 2023 guidance. First Solar maintained their FY 2023 guidance of $7-8. Put another way, whether they met or missed, Q1 was not expected to be significant quarter in 2023 by management nor consensus.

Rather Q1 was more of a transition quarter in a post-IRATC world. Consensus likely overestimated the impact of the IRATC and underestimated logistic costs still being a drag on gross margins.

Conclusion

In the Q1 call, management stated the following:

“I would like to reiterate that from an earnings payment perspective, as previously noted on our February earnings guidance call, we anticipate our earnings profile will be higher in the second half of the year due to contractual delivery schedules, timing of first sales of our Series 7 products and the timing of recognition of Section 45X benefits, driven by both the timing of volumes sold as well as the inventory lag where our product sold in the early part of 2023 may have been manufactured in 2022.

We are maintaining our 2023 guidance in full, including full year earnings diluted share of $7 to $8.”

Objectively speaking, First Solar was straightforward in the q4 call on its 2023 earnings cadence and how short-term inventory timing and continued normalization of logistic costs through 2023 meant earnings would be 2nd half weighted.

Meanwhile, First Solar’s 2023 IRATC and EPS guidance before Q1 also painted a compelling earnings picture in 2024 and 2025 which led to positive earnings revisions. However, the market’s expectations got a bit ahead of itself in Q123. It is why we felt post Q1 could offer a better entry point.

The fundamental story in terms of order book growth, contracted backlog, and increasing ASPs supported by important legislation are still in place. The team believes that First Solar is one of the “national champions” of the IRA bill, so for now we are willing to look through Q1 and give credibility to their 2023 guidance.

However, First Solar will have to show in Q2 that Q1 was in fact just a transition period into a post IRATC world. If they do, this will give more support to their 2nd half forecasts which indicate significant earnings power not just in 2023 but possibly through 2025.

Post Q1, consensus is forecasting $1.17, $2.49 and $3.18 for Q2, Q3, and Q4 respectively. Which would equate to $1.64 in H1 and $5.67 in H2 for a total of $7.31.

Based on consensus eps 2024 $13.44 and 2025 $20.14 estimates, the valuation is not demanding.

Positions Report – 5/2/23

Posted on May 3, 2023June 30, 2026 by io-fund

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.

Long Term Broad Market

From a long time horizon, our outlook remains the same. We will likely continue to see the market trade within a range for the next several weeks/months until the inevitable credit cycle causes risk assets to crash.

In the above weekly S&P 500 chart, the weekly RSI continues to trade within a bear market range. If we can see a breakout above the upper trendline, followed by a retest and hold, it will likely coincide with a new bull market building. Until then, this market continues to exhibit the characteristics of a prolonged bear market.

Another feature of the current market that is not supporting the bull thesis is how weak breadth is. Usually, in bull markets, we see expansive buying amongst all sectors and markets. This is simply not the case right now.

The above chart shows that as money continues to move into Big Tech, specifically Apple and Microsoft, it is leaving the more economically sensitive and higher-risk markets. This isn’t a case of leaders leading. It is a continuation of the downtrend in many stocks and sectors while being masked by a handful of names moving higher. Furthermore, the percentage of Microsoft and Apple’s combined weighting in the S&P 500 has never been higher.

What we are seeing is a handful of big tech names, which hold a growing weighting in the S&P 500, are propping up the markets, while aggressive selling is taking place underneath. This is not the characteristic of a burgeoning bull market; instead, it is the type of behavior we see towards tops.

Intermediate Term Broad Market

My perspective on the long-term path of the broad market remains a high probability from my analysis. However, where we go over the short to intermediate term is quite variable. Here are the two general paths I’m tracking over the following months:

Blue – This remains my primary count. The only reason that I am maintaining it as my primary count is because of the major cycle cluster I’ve been talking about for months. We tend to see big inflection points around these clusters, and rarely do we see them not result in even a minor inflection point. However, this count is relying on a double top that fails below 4195 SPX. Above this region, and this count is off the board.

Red– This count has us breaking above 4195 and moving to the 4280 – 4360 regions. Based on excessive short positioning, earnings coming in slightly better than expected, and the high-frequency economic data not giving into an imminent recession, markets simply do not have a reason a crash right now. If we keep seeing more and more banks fail, we will likely see a pull forward of this thesis, which would show up with a break below 4050. This alternative count is pretty close to a coin toss compared to the blue.

Above 4195 will put 4300 back on the table.
Below 4050 will shift the odds towards the red count.
Below 3808 and we will be entering the heart of the crash.

Supporting Markets

We are seeing mixed results from various markets. Many of the stocks and sectors that I track do look incomplete. This suggests some variation of the red count would play out. However, other sectors have clearly topped or simply cannot catch a bid while on critical support.

Energy (XLE)XLE)

XLE appears to be in a fourth wave and needs one more move higher to complete the 5th wave top. This lines up with the red count on SPX. If for some reason, we see a breakdown below $69 first, this would also line up with SPX giving us a double top below 4195 SPX.

The Dow Jones (DJI)DJI)

I’ve been talking about this index a lot since the October lows. Considering the ongoing destruction we are seeing in high beta risk assets, it makes sense that any push higher would be with safer value names along with Big Tech (minus financials)

Note below that we now have what looks like a 5-wave move higher. We now need a 3-wave retrace (2nd wave) that holds the March low, followed by a breakout higher. If this happens, the Dow is going to new highs while the rest of the market rallies.

If the coming minor correction we are expecting in the Dow breaks below 31985 DJI, then this setup will fail, and it will support the double top scenario where SPX fails below 4195 and continues lower.

The Russell 2000 (RUT)

Small caps have been very weak, which is not a normal characteristic of newly developing bull markets. The regional banks reside here, as well as companies that cannot diversify their revenue globally. So, this index is very much an economically sensitive one.

The below chart looks to be tracing a triangle pattern. This has us making one more push higher, which lines up SPX above 4195, as well as XLE and DJI making another push higher. RUT has the room to make one more low and still hold this setup; however, if it breaks below that yellow band on the chart, it will coincide with the SPX double top scenario.

Financials (XLF)XLF)

Financials, for the most part, have likely topped, just like many high-beta risk assets. This choppy move higher is doing so on less volume and less momentum, which is characteristic of 2nd wave bounces. We are also only in the lower band of the most probable range that this 2nd wave would top. No matter how much higher we move, in the coming weeks/months, financials continue to signal a warning for those claiming a new bull market is developing.

In Conclusion, markets have been frustrating both bulls and bears since November of 2022. We have gone nowhere, as the market continues to trade within the 3800 – 4200 range. This directionless action has been especially pronounced in 2023, as markets violently thrash within a range.

I expect similar price action to unfold, as any continuation up from here will likely be given back, with a floor under any further drops until the imminent credit cycle is unavoidable. In an environment like this, patience, and adherence to a long-term plan is crucial. The market is both squeezing shorts, then forcing bulls to the sidelines, which lines up with the macro forces in play right now. Less is more until a sustainable bullish trend unfolds, or a breakdown below our pivots happens. We believe, ultimately, the market will give way to the damage caused by the FED's rate hikes. This being said, surviving until the next bull market is our game plan. We want to hold plenty of cash to buy beaten-down shares, as well as adhere to our hedge for protection.

Macro

Our thesis remains that we are in the interim part of a prolonged bear market with one more crash low to complete the cycle. A 40-year high Inflation pulse forced the FOMC to aggressively raise rates in an attempt to quell demand in the economy, and thus halt inflation. Rates went up higher and faster than at any point since the 70s, and we are just now starting to see the effects of higher rates in the economy. We think it is cavalier to assume that this rate campaign will not cause a recession, especially with the level of debt in the system, as well as how inverted the yield curve currently is.

We are now seeing evidence of the credit cycle starting to manifest. For one, deposits in all commercial banks are declining at a historic pace.

FRED

This is especially true with regional banks, which is becoming apparent in this earning season. First Republic was the most recent bank to fail, following an earnings report that showed a loss of $102 Billion in customer deposits in 3 months. This is a 40% decline in deposits. Today, we are seeing a similar trend with PacWest and Western Alliance. PacWest has lost 17% of its deposits, while Western Alliance has lost 11%. Both stocks are down more than 30% on this news, as the regional banking sector makes a fresh low.

Federal Reserve

Considering the nature of fractional banking, if too many deposits leave a bank their loan-to-deposit ratios becomes too fragile. It is causing regional banks to reduce the amount of new loans, which is having an effect on the economy. In fact, the unanticipated changes in banks tightening their loan requirements have moved much higher in Q1 of 2023.

BofA Global Research

According to the Wall Street Journal, “in most US districts, small and average banks account for 90% of loans to small businesses.” Most small business loans, auto loans, and personal loans come from this struggling sector. So, with regional banks under duress, expect needed loans to continue to become harder to come by. This is exactly what we are seeing from the companies that would typically get business loans from regional banks.

UBS Group

Even large companies are struggling in 2023. In fact, 2023 has been the third worst year for large bankruptcies since 2000 with 70 on record. For reference, 2020 saw 71 bankruptcies while 2009 holds the record at 118.

Bloomberg

So, as I’ve stated before and will say again, a credit cycle tends to feed on itself. The credit window shuts as banks protect their books, causing more bankruptcies, which causes more fear within the banking sector based on loan exposure. This causes unemployment to move higher, which affects discretionary spending in the economy. This puts more strain on companies as well as banks until the cycle runs its course. For those that believe this is a liquidity-driven market, I encourage you to go back in time after an aggressive rate hike campaign and see how long it takes for a liquidity pivot to filter into the market. Once the damage is done, it takes time for both liquidity and the credit cycle to run its course.

One would think that the FED would pause their rate hikes, considering the turmoil. This is simply not the case. Even after more regional banks have come under fire, the FOMC futures have a probability of 87% chance of a 25 bps hike this week.

CME Group

The reason for this is because growth still remains stubbornly strong, as evidenced by housing starts as well as the recent PCE data. What investors need to understand, which makes this cycle so unique, is that with strong economic growth comes strong inflation. Short of a systemic shock to the system, the FED will continue to react to inflation data, raising rates and keeping them elevated until both growth and inflation drop into a recession.

A good example of this can be found in the recent Personal Consumption Expenditures report (PCE). Core PCE (stripped of food and energy), is up 4.6% YoY, and only 1% off its peak. Services are up 5.5% YoY vs 5.1% in June! Super Core, which the FED is closely monitoring, and excludes food, energy and housing, is up 0.2% QoQ and up 4.4% YoY, showing little change. It's remarkable the interest rate risk we are seeing in banks and earnings reports, yet they have had little effect on services.

Keep in mind the FED’s mandate is to get back to the 2% threshold. So, while we have seen peak inflation, we are at least double, and in some instances nearly triple that target in various core segments. So, what this data means is that the FED has more work to do, which is running contrary to what the market is pricing in.

Interestingly, the farther out we go into 2023, the higher we see the odds of a rate cut.

CME Group

This matters because this narrative runs counter to the FED’s stated plan, which is to keep rates at the (growing) terminal rate until 2024. So, for the futures market to be pricing in rate cuts in 2023 means one of two things: 1) that the services segment of the inflation data that refuses to drop will hit the 2% target soon, and stay there. I find this very unlikely, short of a black swan event; 2) the futures market is pricing in that we will be in the bigger credit cycle that we have been warning about for a long time, as the FED drops rates to fight it.

So, the unique equation that we are in…Stubborn Growth = Stubborn Inflation. It appears that the only way to quell an elevated core PCE, which has been the case in all instances throughout history, is through a recession. The FED knows this, and the market is still expecting a pivot long before we are seeing evidence of inflation reaching their mandated target. Do not be surprised if rates keep going up beyond this week, or until a bigger issue in the economy forces their hand. The S&P 500 north of 4100, Bitcoin north of $25,000, and an unemployment rate near record lows does not scream pivot early.

Banks

While regional banks remain in focus, many of the larger banks, as well as insurance companies, remain unhealthy under the hood. We have been warning our readers about this, and it remains true today. Here are a few charts with incomplete corrections.

Metlife

Allstate

Capital One

Bank of America

What these charts are picking up on is unclear. What is clear is that this issue is not isolated to regional banks, even though this is where all the focus is right now.

I/O Fund Portfolio

Cash remains our biggest position as we are now holding north of 30% in cash. Our thesis on ENPH fell apart after their report, so we pulled it back in our portfolio. We also closed our META short. Though we think that call will be correct, our timing was off, which is crucial when attempting to short a stock. Our primary themes remain AI, and crypto.

Hedge Signal

Our signal has, once again, picked up on volatility close to the top of the recent swing. We do not believe that the hedge will be such of a major focus once we get into a bull market; however, while we remain in bear market mode, it will trigger more frequently, which we will continue to lean into.

Nvidia (NVDA)NVDA)

NVDA topped right into a very important time factor that has been in play with the stock since 2018. Any break below $261 will trigger the much needed pullback. Expect heavy buying from the I/O Fund on the way down.

Netflix (NFLX)NFLX)

It’s do-or-die time for NFLX. We will see in the fundamentals if their pivot is working in the US very soon. Regarding price, we can’t go too much lower and still hold the blue count.

Advanced Micro Devices (AMD)AMD)

This is another one we will buy heavily on the way down. If AMD can get us one more high before the bigger breakdown, then we will have a potential first wave in the form of a leading diagonal in place. Short of this, we only have 3 waves up.

Bitcoin (BTCUSD)

Bitcoin is up again on banking concerns. We will maintain this thesis for as long as the structure remains in a bullish posture. For now, that will be above $22,325 and/or as long as the WealthUmbrella signal remains in the green.

Microsoft (MSFT)MSFT)

MSFT is propping up the markets, along with Big Tech. It blew through my prior targets, which means that my original analysis was off. I’ve updated the current targets in the chart below, and expect one of them to mark a top. Expect us to buy a lot of MSFT on the way down.

Ethereum (ETHUSD)

ETHUSD was unable to break through the resistance zone we identified. Like Bitcoin, we remain in a bullish posture; however, we must hold $1630.

Aehr Test Systems (AEHR)AEHR)

We had a good run with AEHR, and we expect to have an even better one in the next cycle. For now, AEHR’s Gann analysis was not encouraging. The cycle cluster on the chart included some strong cycles. The inflection point we got was a breakdown below the 1×1 line that has held up the uptrend since the major low in June of 2022. This is a big deal, which would not be known outside of Gann. For this reason, we are stepping back, hedging the rest of our position and looking lower for better entries.

Enphase (ENPH)ENPH)

This remains a great company, with some of the best management in tech. Their catalyst is intact; however, the thesis that they would remain correlated with energy was put into doubt by that last report. They proved to be too correlated to a weak consumer, much like many tech names. For this reason, they have continued lower, in what appears to be a leading stock for the rest of the tech market. We expect to get shares around $100, if not lower.

Regarding Energy futures, the gasoline chart says it all. We have broken the pattern and will look to a lower level for a larger 4th wave low. The same is true with oil. These charts suggest a fresh inflation pulse, but it is unlikely to happen soon.

Tesla (TSLA)TSLA)

That report was really bad. Management acted in a questionable way, shifting the conversation from margins to automated driving. They then hid the very metric they were touting on prior calls. We believe TSLA is destined to make new highs; however, first, it likely has more downside than most are expecting.

Chainlink (LINKUSD)

It’s been a while since I got trapped in a false breakout. We are sitting on a loss with the most recent attempt at a breakout. Below $6.20 and we will likely stop out of a lot of our LINKUSD. There will be a day when we accumulate a lot of this coin, but not now.

Taiwan Semiconductor (TSM)TSM)

I’m not a fan of this breakdown move. We will look lower for better entries.

AMD’s Q1 Pre-Earnings Notes: The Soon-to-Materialize AI Market

Posted on May 2, 2023June 30, 2026 by io-fund

What we are watching for in the upcoming earnings results …

Mr. Market can be very fickle. Microsoft has been a leader in AI for years, but now suddenly everyone is hot on the story. Same with Nvidia. But what about AMD – when will AMD be called the next big AI stock? On management’s end, that’s likely what this earnings call will be pointed toward.

AMD is releasing a chip that combines a CPU, GPU and memory into a single integrated design called the MI300. The company plans to launch the MI300 in the second half of this year although it’s not expected to contribute to revenue until 2024. The MI250 currently powers the world’s highest performing supercomputer.

Analyst notes on the data center are mixed with some expecting a slowdown for AMD and Intel (see below). For our purposes, AMD’s release of the 5nm Genoa Zen 4 in Q4 along with the strong performance of Milan should help to hedge a broader data center slowdown. Bergamo is also expected this year, which offers cloud optimized capabilities.

Management was quite clear on the last earnings call to expect a double digit decline sequentially for the data center but to also expect YoY growth from 2022 to 2023 with a stronger second half of the year. Embedded is expected to have a positive impact whereas PCs are expected to bottom in the March quarter.

Microsoft came in better-than-expected on PCs, which has some read through for AMD. Per our Microsoft write-up: “More Personal Computing declined by (9%) YoY to $13.3 billion and was better than the mid-point of the management guidance for a decline of (16.7%). The PC segment revenue witnessed better than expected results in all businesses. The guidance for the next quarter represents a YoY decline of (5.6%).”

Per Microsoft’s CFO: “We saw better-than-expected PC demand, as noted earlier, particularly in the commercial segment, which has higher revenue per license, although results continue to be negatively impacted by elevated channel inventory levels.”

Intel’s guidance in the most recent earnings report also reflects the PC downturn being near an end.

Financials:

Estimated Revenue and EPS:

AMD has seen downward revisions on revenue and EPS. At the same time, analysts are increasing their price targets. We’ve been talking a lot about a rebound for semis on our quarterly webinars both in Q1 and Q2. There’s still another weak quarter to go for AMD with Q2 being the anticipated low for the top line.

EPS is similar with growth returning in Q3 into the foreseeable future:

Margins:

Adjusted gross margin guide of 50% for adjusted gross profit of $2.65B, which is in line with previous quarters
Guided for $1.6B in operating expenses for an adjusted operating margin of 19.8%. This is lower than previous quarters due to lower revenue

Cash Flow:

Operating cash flow margin of 10% last quarter was lower than previous quarters when revenue was higher
Free cash flow margin of 7.9% last quarter was lower than previous quarters when revenue was higher
AMD has $5.9B in cash and $2.5B in debt

Noteworthy:

Last quarter, AMD missed with guidance for the March quarter at $5.3B compared to $5.52B expected. In addition to this, analysts were concerned about the lower adjusted operating margin of 23% versus 27% a year ago and lower adjusted net margin of 19.6% versus 23% a year ago.

Regarding margins, these are expected to return to normal once PCs rebound.

Management guided for data center to be down “double digits” sequentially per the last earnings call. Per AMD’s CFO Jean Hu: “Year-over-year Data Center and Embedded segment revenue are expected to grow, offset by lower Client and Gaming segment revenue. Sequentially, Embedded segment revenue is expected to increase. Client and Gaming segment revenue are expected to decline largely consistent with seasonality. Data Center segment revenue is expected to decline due to elevated levels of inventory with some cloud customers.”

Per the AMD’s CEO Lisa Su:

“Sure, Ross. So let's see. We said the Client and Gaming segments would be seasonal. So you would expect that the Data Center would be more than seasonal. So maybe to help you size that, think about the Data Center sequential drop as double digit, whereas the Client and the Gaming segments are more like single digit, if that helps.”

Also, per last quarter’s call, this quarter is expected to be the bottom for PCs.

Headlines:

AMD introduced the new Ryzen Z1 Series processors for handheld PC gaming consoles. AMD is partnering with Asus to launch the first Ryzen Z1 Series device with the Asus ROG Ally, a premium handheld PC console, featuring up to a Ryzen Z1 Extreme processor.

Analyst Notes:

“March notebook shipments were up 41% month-over-month, 18% above Citi's expectation, driven by new product launches and pull-in demand at quarter end, Citi analyst Christopher Danely the analyst tells investors in a research note. The firm says overall Q1 shipments were down 9% quarter-over-quarter, well above seasonality and Citi's forecast of down 15%. It reiterates Neutral ratings on Intel (INTC) and AMD (AMD), expecting the data center downturn to negatively impact both companies.”

“Morgan Stanley analyst Joseph Moore raised the firm's price target on AMD to $102 from $87 and keeps an Overweight rating on the shares ahead of the company's report scheduled for Tuesday, May 2. The setup for the quarter is "interesting," as the stock has appreciated 40% year-to-date into "an obvious negative event at least as far as data center is concerned" and 90% of the firm's conversations are "appearing to lean negative," the analyst tells investors. However, AMD is pointing to relevant exposure to AI "for really the first time in the company's history around MI300," and "anyone with AI exposure has rallied materially," the analyst added.”

“Cleveland Research is lowering its estimates for AMD below consensus for Q1 and Q2 on further weakness in near-term Server demand and notes that its 2023 forecasts are "moving slightly lower" given its expectations for total server units to be down year-over-year.”

Buy/Sell Plan

Please check the forum tomorrow for the Buy/Sell plan and chart update from Knox.