Month: February 2024

Positions Report – February, 2024

Posted on by io-fund

For reference to terminology used, please look at technical analysis under our resources section here. Regarding the horizontal lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.here. Regarding the horizontal lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.

Elliott Wave counts are meant to provide context. Each colored count represents the most probable paths given the current price data. 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, so that we can better manage risk. 

The Big Picture

If we look at the secular bull market that started in 2009, we have a clear 5 wave pattern that has taken more than ten years to mature.  There are currently three interpretations of how this pattern can be interpreted, which can give us clues on what the next move will be.

  • Red  – This count has wave 1 ending in April of 2010, followed by a relatively quick and shallow 2nd wave. One of the guidelines in Elliott Wave Theory is that when wave 2 (or 4) is quick and shallow, expect wave 4 (or 2) to be complex and deep. This is known as the Rule of Alteration, which states that the two corrective moves in a 5 wave pattern will be different and non-matching in both size and complexity.

That being said, wave 4 started in late 2018 and ended at the COVID low, ending one of the toughest corrective periods in nearly a decade. This was followed by the final 5th wave into the January 2022 top.

What has followed has been a secular bear market where 2022 was the (A) wave. This was followed by a cyclical bull market, which is the (B) wave. What will follow this move higher will be the (C) wave, which should retrace all of 2023.

  • Blue – This interpretation of the secular bull market is identical to the red count above, except in one specific way – we are still in the secular bull market. Instead of the final 5th wave of the secular bull market ending in January 2022, it is still developing.
  • Green – This interpretation of the secular bull market has the 2022 top as the end of the large 3rd wave. This means that 2022 was the end of the large 4th wave, and we are building up for a vertical move higher, which would be the halfway point of the final 5th wave.

I find this count to be a low probability. Until SPX breaks above 5050 in a vertical fashion, I am not taking this count seriously.

Now that we have the aerial view in place, all that matters is how this final move in 2024 is being interpreted, and what levels/patterns can tell us what count is in play. So, if we focus only on the final 5th wave of the secular bear market, you can see specifically where the 3 counts diverge.

The red count has been my primary for some time. It states that we are in the (B) wave of a secular bear market. This should be followed by a large degree (C) wave that would retrace all of 2023.

My concerns with this count is that the (B) wave appears to be a 5 wave move. It can be counted as a complex corrective pattern (WXYZ); however, these patterns are rare on such a large time scale. Also, the (B) wave is now longer than the length of the (A) wave, which is also rare to see.

The blue count asserts that 2022 was a very deep and complex 4th wave, which followed a very shallow and simple 2nd wave in June of 2020. Though this interpretation is seemingly extreme, considering the length and depth of the 4th wave in 2022, what makes me seriously consider it is the pattern that 2023 has taken. It is a textbook diagonal pattern, which only shows up as either the 1st wave (leading diagonal) or the 5th wave (ending diagonal).

The rules that define an ending diagonals pattern are as follows: 

  • It is a 5 wave move.
  • The 4th wave is very deep, and tends to go into 1st wave territory.
  • Each of the 5 waves is made up of smaller 3 wave patterns.

Image by FBS

Now, compare this template to what has unfolded in 2023 – 2024.

It is difficult to interpret this pattern in any other way. And, for this reason, I have been considering the blue count much more seriously.

I have struggled with the blue count because it seemed forced. In order to make it work, you would have to force the 2nd wave to be the June dip in 2020, when the first obvious correction was in September of 2020. Furthermore, it would require one to make the bear market of 2022 a small degree dip in a larger uptrend, which also seemed forced.

Neither of these qualms breaks any rules, it is simply rare to see the them in play on such a large degree. However, the obvious diagonal pattern began unfolding in late 2022 has me willing to look past this.

In conclusion, the red or blue counts best fit the price data going back to 2009. They both require one to accept rare occurrences, which spells out the complexity of the 2022 – 2023 market patterns. However, what they both have in common is what is important – heightened volatility should return soon, and be the norm for the next year or more.

How these two differ is also worth noting. The C wave in a correction is usually considered the crash. Waves A and B are the setup. So, if the red count is in play, I would expect 2024 – early 2025 to be the C wave crash. We will know this because the C wave will be a 5 wave pattern pointing down.

The blue count would be the (A) wave, which would be a 3 wave pattern pointing down. If this is the case, we should see a deep retrace in 2024, followed by a notable (B) wave bounce into 2025. This would put the start of the (C) wave crash into mid-late 2025.

Supporting Markets

There is always a market leading the one you are tracking. For example, the Canadian TSX tends to lead the US, while the German DAX tends to lead the Canadian TSX. For this reason, we track a multitude of markets that seemingly has no relationship to tech. However, they do when you see that all markets are interconnected, and some can provide clues to where our markets are heading.

NASDAQ-100 (NDX)

When we focus on the NDX chart, we can see a very mature pattern – 5 clean and full waves off the October 2022 low. Price is currently at our long-term target, and warning zones around 17735 – 18000 while providing another warning with internal momentum of this move higher. Note how the composite index has given us 3 lower highs while price made 3 higher highs. Now, look at how the final lower high in the Composite Index is below the moving averages. This tends to mark local highs, at minimum.

The best case scenario that I have for the larger pattern in NDX is that we are actually completing the 3rd wave, not the 5th. This would mean that we should see an 8 – 14% drop with one final swing higher into year-end.

In order to get an idea of what count might be in play, it will serve us to look into the leading constituents of the NASDAQ-100. This takes us into the FAANGs plus MSFT and NVDA, which have been deamed the “magnificent 7.”

Microsoft, Apple, Nvidia, Amazon, Google, Meta, Tesla collectively account for over 29% of the total weighting of the S&P 500 and 40% of the NASDAQ-100’s total weighting. Because of this rare concentration into only a handful of stocks, we can see important companies in other sectors continue lower while the broad market pushes higher. So, the health of these Big Tech stocks is crucial for a continued uptrend within the broader market.

Microsoft 

Microsoft is completing a very large 3rd wave, which started at the 2009 low. The halfway point of this move higher takes us right into the $415 region, which is where MSFT is currently stalling. If this count is accurate, then the coming volatility will take us back into the $310 – $190 region, which will set up a generational buying opportunity for the large degree 5th wave to follow.  Note how momentum and volume are both trending lower as price trends higher. This is classic 5th wave behavior, and supports the above thesis.

If we zoom into the final 5th wave higher that started at the 2022 low (bellow), we can see a very mature 5 wave pattern that has formed. Also, the final 5th wave of this larger 5th wave is complete, while momentum and volume continue to fade.

What I find interesting is that the midpoint of the final 5th wave move higher takes you exactly to $415. MSFT remains one of the cleanest patterns that I track, and it appears that we have a fully formed 5th wave of a 5th wave of a 5th wave. This is concerning, and tilts the balance of risk to the downside from these levels.

Apple (AAPL)

Apple’s monthly chart looks a lot like MSFT above. We have a completed 5 wave pattern that started in 2016. We pushed higher off the 2022 low with less momentum and less volume than prior swings, which further supports this being a 5th wave. The midpoint of this move is pointing to $197 – $200, which is where AAPL is stalling.

If we zoom into the final 5th wave of this large pattern, we can also see some interesting confluences. First off, we do have a full 5 wave pattern in place, which means any extension higher would be short lived. The mid-point of this 5 wave move also targets the $197 – $200 region, which further support the risk right here on the long-side of this market.

It’s worth noting that Apple has not broken above its December 2023 high. The rest of the market has moved higher without Apple. Considering that this has not happened since the new bull market started in 2022, and that it accounts for such a large portion of the major indexes, this is a warning. Apple has to reclaim $200 and hold this breakout for the market to see a sustained move higher from here.

Nvidia (NVDA)

The pattern is a clear 5 wave move that started in October of 2022, with the large gap in 2023 being the midpoint of this move. That puts us in the final 5th wave, which needs a smaller 4th wave drop and 5th wave swing to new highs in order to complete. Nvidia looks like it can push higher.

Amazon (AMZN)

We’ve been spot on with AMZN since August of 2023. It was one of the reasons we were heavy buyers in the fall correction last year, because it was an incomplete 5 wave pattern. Our target was $153 and we have stretched above this price point, while completing a full 5 wave move off the low.

I’m counting this 5 wave move as the C wave in a larger (B) wave. We should see a 5 wave drop form on the next larger correction to confirm this thesis. However, until it reverses, AMZN is still helping the broader market remain elevated.

Meta (META)

META has been one of the strongest FAANGs, as it continues to push higher. Like NVDA it is in the final 5th wave of a very large 5 wave pattern off the November 2022 low. Also like Nvidia, it still needs a 4th and then 5th wave higher to complete the larger pattern. META appears to have higher to go.

Google (GOOGL)

Google best counts as needing one more swing high to complete the 5th wave pattern. The gap down from its last earnings has put GOOGL back around it December 2023 high, with little buying interest since. Unlike NVDA, META, AMZN, and MSFT, it is not contributing to any further upside in the broad markets. A move below $135 will put the top in for GOOGL and take the final swing higher off the table.

Tesla (TSLA)

Tesla has been a large drag on the NASDAQ-100, as it has confirmed the large head and shoulders pattern due to the prior gap down after earnings. It continues to break key support zones and has increased the odds for a move back to $100. In order to confirm a bottom, of sorts, we need to see a move back above $220. 

In conclusion, the magnificent 7 in 2023 is turning into the magnificent 4 in 2024. With Apple, Google, and Tesla either well below their December 2023 high, or just above it, these names have not helped the broader markets push higher since. This is a divergence that is concerning to see, considering the importance of these stocks in the current environment.

Russell 2000 (IWM)

Small Caps stirred up a lot of excitement as they led the broader markets higher from the November 2023 low. However, since the December top, they have been lagging substantially. In fact, IWM is currently about 7% below its December high, while the NASDAQ-100 is about 7% above its December high.

Considering small caps are a risk-on play, this is not the type of divergence you want to see. At best, I can see IWM making a 5th wave push into the $210 region. However, if it breaks bellow $185, then the odds favor the top being in for small caps.

Ark Innovation Fund (ARKK)

Arkk is a fantastic proxy for high beta growth. When inflation is decelerating and growth is accelerating, we tend to see ARKK do really well. Like small caps, ARKK went vertical off the November 2023 low. The market was pricing in a soft landing, which included 6 rate cuts into expanding global liquidity. This is the perfect environment for beaten down risk-on stocks.

However, since the December 2023 top, ARKK is current 15% below that high, compared to the NASDAQ-100, which is 7% above its December high. Once again, high beta should continue to lead in a soft landing environment, yet it is back to lagging the broader indexes, which is concerning.

ARKK has the potential for a 5th wave swing into the mid-high $50s. However, if it breaks $44.75, then the top is in, as it will resume its leadership down. If we break below $44.75, I’m expecting it to be a vertical drop, which will further signal a top is in for this ETF.

Dow Jones Industrial Average (DJI)

The Dow has resumed a leadership role, as it is now pushing higher without the NASDAQ-100. If we look at the larger structure, it very much looks like we are in the final move of a large (B) wave.

Note the two distinct moves higher off the 2022 low and from the November 2023 low. These two clear moves higher punctuated an incredibly complicated and messy pattern that is clearly a B wave. Even though the Dow is making new highs, unlike SPX, I cannot count this as a 5th wave move. This means the Dow is leading SPX and NDX in the larger pattern, and it will be a primary chart that I plan to follow on any prolonged down move.

In conclusion, we continue to see concerning divergences between key markets. While risk-on markets like ARKK and IWM are lagging, notably, we are now seeing the NASDAQ-100 start to lag for the first time, when compared to the S&P 500 and Down Jones Industrial Average. Furthermore, within the NASDAQ-100 (and S&P 500), Apple, Google and Tesla are not contributing to this move higher, which is making this push to new highs risky, as fewer key stocks are contributing.

Time Analysis

W.D. Gann was the master of cycles. Through his methods, he was able to provide meaningful time analysis that can help investors track inflection points. Using his methods, we have been able to identify these turning points with a high degree of accuracy. No method is perfect, but Gann’s methods are more accurate than most techniques that I use. 

The major time factors (cycles) that are worth monitoring are below.

The first major time factor was late January, which is where the NASDAQ-100, so far, started lagging other markets. In this period, Apple made a lower high, as Tesla and GOOGL gapped down. 

The next one is around February 14 then late February. As stated before, we will likely continue to see a topping process, as seen in in the FAANGs above. In other words, markets will top one after the other, as we continue to see more markets top into the February time factors.

Regarding these time factors, what matters the most is how we are trending into them. They do not tell you what will happen, only that something will happen. The vast majority of the time we see a reversal of the trend moving into these periods.

The monthly Dow Jones chart suggests that January and February of this year will be important. The bellow chart tracks various cycles from extreme highs and lows. Gann noted that counting from these lows on the daily, weekly and monthly charts can indicate when a trend reversal will likely happen.

The numbers that tend to mark a meaningful time factor are 45, 49, 72, 90, 144, 180, 360. The chart below counts 180 months from the 2009 low, which takes you to right now. Also, 49 months from the COVID high and 72 months from the 2018 top takes you to right now, as well. This is lining up with a big cycle (the green symbol on the chart) that tends to show up at notable turning points.

Considering that we are trending up into this time factor with a large degree 5 wave pattern in place on the S&P 500, which is being accompanied with notable divergences, it looks like January/February of 2024 will be an important turning point to monitor.

I/O Fund Portfolio

We are continuing to raise cash in our portfolio, while positioning for a potential decoupling within the crypto complex. We have been taking substantial gains in CRWD, MSFT, and moderate gains in NET and AMD. We have also been layering into Bitcoin and adding another alt coin, Solana.

From a charting perspective, it appears that crypto is setting up for a continued push higher, which is strangely contrasted with many equity charts appearing to be completing very mature patterns. This means one of two things: 1) that one of these markets is lying, and based on our pivots, we will be able to make the necessary pivot if this is happening; 2) a catalyst will trigger a decoupling, which would cause crypto to push higher, while equities move lower.

As a practice, I prefer to manage each chart on its own. So, until crypto breaks a critical support zone, which would align it with the coming volatility in equities, we will continue to lean into the charts and what they are suggesting.

Hedge Signal

I asked the creator of our hedge signal, Vincent Duchaine, CEO of WelathUmbrella, to comment on the state of our hedge signal. Here is what he has to say…

The I/O Fund hedge signal is currently in risk-on mode. However, in the original design of the hedging strategy, one of the patterns we back tested was to hedge at a long-term market channel resistance and go long at channel support. For a visual, note the blue channel and how the market historically reacts at these levels.

The results were quite rewarding. However, the issue was that after 10 years of oscillating in this channel, the money that flooded the market in 2020 allowed the Nasdaq to break out of that channel, which is historically rare, and last happened in 1999. So, A new channel emerged around the time we started developing the I/O Fund signal.

If we look at history, there were so few instances of a market breaking out of its larger channel, that it was impossible to conclude that the market would settle back inside of it after breaking out. For this reason, we deactivated that line of code in the original strategy that used these channels to help layer into and out of hedges.

That being said, time has passed and the market has already reacted 4 times to the original channel resistance. This is not an incredible amount of data, but considering that these are lines where the market has reacted numerous times before 2020, I suggested to Knox to consider hedging at that line. We decided that if the market reacts again, we will reintroduce it in the code to the strategy.

When hitting the upper channel on the Nasdaq, there are usually two scenarios that unfold. In the first case, the market reacts instantly and goes down. This has happened several times, including at the end of July last year. In some other instances, like in early 2020 and in August 2018, QQQ slightly overshot the channel, giving time for SPY to reach its own resistance line.

At this moment, it seems that scenario 2 is unfolding and that the Nasdaq has slightly overshot its channel resistance line. Interestingly, SPY just hit its channel resistance yesterday and didn’t manage to break through.

In terms of the internal metrics that make up the hedge, the current market environment is one that tends to precede a risk-off signal. While QQQ sits at an all-time high, market breadth has not been very good since the beginning of the year.

As stated above, small caps and high beta stocks peaked around December 28th while the rest of the broad markets went higher. Internally, fewer stocks are participating as the market pushes higher, and this type of behavior tends to precede volatility.

We built this detection system into the signal, which is one of the reasons it has the ability to trigger relatively close to market tops. As the market breadth continues to degrade, regardless of price highs, the system will move closer to signaling a hedge.

There are other modalities that could trigger a hedge. For example, if we detect a significant defensive movement in the options market, or a sudden rise in volatility.  So, the signal is monitoring many areas of the market that tend to signal coming volatility.

One thing that is clear to me is that this market currently carries a high level of risk. Some statistical analysis we recently conducted suggests that, with some of the CBOE Skew readings we recently observed, we can expect (with an 82% historical chance) a correction on SPY greater than the regular 6-7% healthy pullback. More in the range of 10%, which should translate into something around 14% on the QQQ.

Advanced Micro Devices (AMD)

Prior to their earnings report, we had a very bullish count that we were tracking as a potential. This would have required a gap higher, which would have put us in a 3rd wave (halfway point) of the larger uptrend. Instead, the market reacted poorly, as AMD tested critical support around $159.

I’m leaving this bullish count on the chart in green. We would need to see a vertical move $190 for me to start considering it again. I find this count unlikely when I look at other charts, but the potential is still possible as long as we hold $159. Below $159, and the larger top will likely be in. If this is the case, for those that missed our large buying spree of AMD in the $110 – $90 range, will likely get a chance at the prices again.

Nvidia (NVDA)

*Please refer to the above analysis in the FAANG section of this report.

Super Micro (SMCI)

This chart is one of the more difficult ones I’ve had to map out. So, regarding SMCI, I’ll try to keep it to what I do know, which is the vertical moves on heavy volume and momentum are 3rd waves. The question that I have is what degree?

If we put the chart of linear scale, where the Y access is delineated with equal price movements, the below chart appears the be in a large degree 3rd wave. In other words, the move from 2022 – 2023 was wave 1, while the recent correction was wave 2. This would make the vertical move higher wave 3. If true, the larger 5 wave pattern should reach around $900 before completing. Note how this move higher is being met with max volume and max momentum. This is characteristic of 3rd waves.

Now, let’s look at the same chart on logarithmic scale. This is where the y access is delineated by percentage changes instead of equal price changes. 

Even though we are seeing max volume and momentum here, the pattern better fits as a 5th wave instead of a 3rd wave. This will also align SMCI with NVDA and META, both need a 4 and a 5 to complete the larger pattern higher.

So, both counts require a drop and push higher to complete either the 3rd or 5th wave move. Below $660 will be your first indication that this 4th wave is underway. A move below $440 will indicate that the larger uptrend is over, for now.

Bitcoin (BTCUSD)

*Please refer to the in depth crypto report here, which was posted last week.here, which was posted last week.

The only update that I have is that I have raised the breakout zone for Bitcoin, which will determine if the correction is still in play (green) or if we are taking the more direct path higher (blue). We need to go vertical over $49,360 in order to confirm the blue count. Below this level and the door remains open for a move back $38,000 – $36,000, which would complete this correction.

Netflix (NFLX)

Netflix looks like META and NVDA here. The gap higher was a 3rd wave, and it looks like we are getting the 4th wave now. What is missing is a final swing higher to complete wave 5, which is likely targeting $602. Look for divergences on this move higher for confirmation. Netflix needs to hold $525 if this 4th wave wants to extend lower. Below this level, and the odds will favor a top being in.

Crowdstrike (CRWD) 

CRWD is in the final moves of a large degree 3rd wave. The midpoint of this move higher could see it push into the $333 region, if we break above $320. However, note the volume and momentum is decelerating as price moves higher. Eventually, this 3rd wave will give to a deep 4th wave, which we will use to buy. Unlike many stocks that I track, CRWD appears to need a large 5th wave to new highs once the coming large 4th wave is complete. Look for a break below $292 to signal the larger 4th wave is underway.

Ethereum (ETHUSD)

*Please refer to the in depth crypto report here, which was posted last week.
here, which was posted last week.

Marvell (MRVL)

It’s difficult to see MRVL in anything other than a large degree (B) wave. Look at how overlapping and messy the uptrend has been since the 2022 low. In fact, while the rest of the market is in a vertical C wave, MRVL is in a diagonal for its C wave, which is a low quality uptrend pattern. If this is accurate, we should see one more swing higher into the $78 – $90 region before topping. If any further weakness breaks below $62, then the top is already in.

Chainlink (LINKUSD)

This is a perfect 5 wave move higher. The 5th wave, which we are in, is targeting $20 – $22. Note how the current push higher is on much less volume and momentum. This is classic 5th wave behavior. So, once it is complete, we should see a deep retrace, at least, back into the prior range we were just in.

Also, this completed 5 wave pattern means one of 3 things: 1) We are only finishing wave 1 of a very large 5 wave pattern with targets over $100; 2) We are finishing the A wave of a 3 wave pattern that is targeting around $60; 3) This is the final push in a very large correction, with targets around $2.

The key will be HOW we correct. Three waves down means the bearish count is dead, and we should buy heavily. Five waves down means that something more sinister is in play, and we need to clock our gains.

Microsoft (MSFT)

*Please refer to the above analysis in the FAANG section of this report.

Cloudflare (NET) 

NET appears to be in C wave within a larger (B) wave. It looks like it needs a 5th wave higher, which we are getting due to the current earnings report.  As we’ve seen several times, earnings can alter a count or confirm one. So, how the market reacts to the gap will help us determine if we are going higher.

Micron (MU)

The monthly chart of MU is interesting. Note the detrend oscillator is at the same amplitude that marked the 2022 high. However, price is lower and taking the shape of a very messy and overlapping uptrend. The pattern fits a B wave. The detrend oscillator on a 7 day period has a remarkable ability to signal topping/bottoming zones based on prior extreme highs/lows, so it is signaling a warning.

I do think MU has one more swing high in it, which would take us into the $92 or $94 region. If we instead break below $75 on any additional weakness, the top will be in. We need to see a vertical move over $99 in order to suggest something more bullish is playing out.

Solana (SOLUSD)

*Please refer to the in depth crypto report here, which was posted last week.here, which was posted last week.

Recommended Reading:

Cloudflare Q4: Key Metrics Accelerate

Posted on by io-fund

Cloudflare beat on both revenue and EPS figures in what management dubbed an “exceptionally strong” Q4. Revenue growth held steady at the 32% range in the quarter, and while cash flow generation was superb, GAAP profitability remains elusive with little change to the bottom line.

Under the hood, the key metrics shined by accelerating where it matters most – RPO, Paying Customers, Annual Contract Value and Customers Paying over $100K.

Revenue and EPS:

Cloudflare has been able to slightly accelerate revenue in the last two quarters, yet the guide implies that management is not confident revenue will sustain in the >30% growth range. Cloudflare’s price action tends to be strong because although the cloud stock has decelerated on a YoY basis from 42% growth, its peers have decelerated much further. As a general rule, the further away a cloud stock is from the 20% growth mark, the better. Cloudflare is comfortably above this.

Revenue:

  • Revenue in Q4 was $362.5 million, beating estimates of $353 million and representing YoY growth of 32%.
  • Cloudflare accelerated in the September quarter to 32.2% from the June quarter at 31.54%. Although minimal, it’s one of the few best of breeds that has done so.
  • Next quarter management is guiding for revenue to be $373 million at midpoint, implying YoY growth of 28.5%. Therefore, the thin acceleration we saw in the previous two quarters may not hold.
  • For FY23, revenue totaled $1.297 billion, increasing 33% YoY from $975.2 million. For FY24, management guided revenues to be $1.65 billion at midpoint, implying YoY growth of 27.3%.

EPS:

  • Adjusted EPS was $0.15, beating estimates of $0.12 and representing YoY growth of 150%. GAAP EPS was ($0.08), beating estimates of ($0.11).
  • For FY23, non-GAAP EPS was $0.49, increasing 277% YoY. GAAP EPS was ($0.55), a minor improvement from ($0.59) in FY22.

Margins:

While Cloudflare was able to demonstrate strong improvement in adjusted (non-GAAP) margins in Q4 and for FY23, GAAP margins were little changed down the line, highlighting the headwinds created by elevated levels of SBC on a path to GAAP profitability. Stock based compensation is 21.3% of revenue, or $77.3 million in the most recent quarter, which is in line with previous quarters.

Adjusted operating profit increased to $39.8 million, up 2.5X from $16.9 million in the year ago quarter. However, next quarter adjusted operating profit is expected to be between $34 to $35 million, so this is something to watch.

  • GAAP gross margin for Q4 expanded 30 bp QoQ and 170 bp YoY to 77%. Non-GAAP gross margin expanded 20 bp QoQ and 150 bp YoY to 78.9%.
  • GAAP operating margin in Q4 was (-11.8%) compared to (-11.7%) last quarter and compared to (-18.5%) in the year ago quarter. Non-GAAP operating margin was 11.0% compared to 12.7% last quarter and compared to 6.1% in the year ago quarter. The lack of margin expansion QoQ is a weakness to this report and something to watch.
  • GAAP net margin was (7.7%), down 70 bp QoQ but up 900 bp YoY.

On an annual basis, the adjusted operating margins have expanded nicely with Cloudflare having a flat adjusted operating margin in mid-2022 to having mid-single digit adjusted operating margins to now having high-single digit adjusted operating margins. The market has reacted favorably to Cloudflare becoming profitable on an adjusted basis.

  • For FY23, GAAP gross margin was 76.3%, a 20 bp YoY improvement. Non-GAAP gross margin improved 10 bp YoY to 78.3%
  • GAAP operating margin was (14.3%), a 630 bp YoY improvement. Non-GAAP operating margin was 9.4%, a 670 bp YoY improvement, up from 3.7% in FY2022. The company had $122M in adjusted operating profit.
  • GAAP net margin was (14.2%), a 560 bp YoY improvement. Non-GAAP net margin was 13.1%, a 950 bp YoY improvement.

For FY2024, management stated that both cash flow and operating profit will be lower in the first half and higher in the second half. Management guided for operating profit of $154 to $158 million.

Though operating and free cash flow margins improved quite dramatically YoY, GAAP operating and net margins barely budged, with SBC weighing down on strong growth in gross profit.

Cloudflare reported nearly 35% YoY growth in gross profit to $279.2 million in Q4, though operating income improved less than 16% YoY to ($42.8 million). This partly stemmed from high SBC, at $77.3 million, or 21.3% of revenue, in Q4.

Total operating expenses were 115% of gross profit in Q4, down from over 124% in the year ago quarter. For the full year, that ratio was nearly 119%, compared to 127% in FY22. While Cloudflare is making progress in reducing spend, it will struggle to become GAAP profitable without cost cuts so long as it maintains SBC at or above 20% of revenue. Operating expenses are growing nearly 8 points slower than revenue, at around 25% in Q4, but again, this growth rate must moderate significantly should revenue growth decelerate to below 30%, as guided for FY24.

Cash and Debt:

Cloudflare’s cash flow generation was remarkably strong, with operating cash flow more than doubling YoY with free cash flow turning sharply positive. The consistent and strong cash flow is key to Cloudflare’s positive price action. The company reported record FCF in Q4 of $50.7 million.

  • Operating cash flow was $85.4 million in Q4, or 23.6% of revenue up from 20% in the September quarter yet down from 28% of revenue in the year ago quarter.
  • For FY23, operating cash flow increased 106% YoY to $254.4 million, or 19.6% of revenue.
  • Free cash flow was $50.7 million in Q4, or 14% of revenue and is up from 12% of revenue in the year ago quarter. For FY23, free cash flow was $119.5 million, up from negative free cash flow of (-$39.8 million) in FY22.
  • One of the differences between operating cash flow and free cash flow is network capex. This is a primary reason why FCF can be minimal at times. Network capex was 8% in the most recent quarter and was lower than 10% in the same quarter last year due to greater efficiency from its infrastructure. Network CapEx is expected to be 10% to 12% of revenue in 2024, including the additional investment due to the AI opportunity.
  • Cash, equivalents and short-term investments totaled $1.673 billion.
  • Convertible debt totaled $1.283 billion.

Key Metrics Accelerate:

Per management: “We blew away our previous record for new ACV [annual contract value] booked in the quarter. In Q4, new ACV booked grew nearly 40% year-over-year, making it not only our record in absolute ACV but also the fastest percentage growth we've seen since 2021.”

Paying customers increased 17% YoY to 189.8K, a third-straight quarter with customer growth accelerating after slowing to just 13% growth in Q1.increased 17% YoY to 189.8K, a third-straight quarter with customer growth accelerating after slowing to just 13% growth in Q1. Growth in customers with >$100K ARR accelerated 1 point to 35% in Q4, reaching 2,756, and accounting for 66% of revenue, up from 63% in the year ago quarter.

Per management on the call: “We saw particular strength in our largest customers with a record number of net new customers spending more than both $0.5 million a year and $1 million a year on an annualized basis. We signed our largest new logo with an expected total contract value over $30 million and our largest customer renewal with a total contract value of $60 million.”

  • Customers paying over $500,000 totaled 346, up 56% YoY.
  • Customers paying over $1 million totaled 118 customers, up 39% YoY.
  • Revenue from large customers increased to 66% of revenue, up from 63% in the year ago quarter.
  • For FY2023, revenue from large customers represented 64% of total revenue compared to 61% in 2022 and 54% in 2021.

Deferred revenue of $347.6 million is up 11% QoQ from $311.5 million in the previous quarter and is up 50.8% YoY from $230.4 million in the year ago quarter.

RPO accelerated to $1.245B, up 37% YoY compared to 30% YoY growth last quarter. The QoQ RPO growth of 15% is the highest for at least two years (we began tracking Cloudflare closely in Q4 2021).

DBNRR was 115% in Q4, a 1 point sequential decline. This needs to be watched as we move along. Management stated last quarter when DBNRR was 116%: “We continue to believe the recent decelerating trend in DNR stabilizing near these levels.”

Geographically, revenue growth surged in EMEA, while revenue growth in the US remained steady QoQ at 29.8% to $188.1 million. EMEA revenue increased 38.2% YoY to $101.2 million, an acceleration from the 36% growth rate recorded in the region in Q3.

Additional Earnings Call Commentary

Mark Anderson, the former CEO of Alteryx and former President of Palo Alto Networks, is joining Cloudflare as President of Revenue. In the opening comments, there was also mention of a 3-year contract with the U.S. Department of Commerce worth $33 million. Plus, a leading technology company signed a 3-year $66 million contract for Cloudflare’s Zero Trust products.

In 2023, Cloudflare deployed GPUs in 120 cities and has plans deploy inference-specific GPUs in nearly every city of their global network to be within milliseconds of every device connected to the internet. As stated in a previous write-up, this will be important for the edge network. Per management: “from our launch in September to the month of December, the average number of daily workers' AI request increased 9x.”

Notably, the outperformance this quarter was driven by Cloudflare’s Zero Trust and SASE security products with AI not yet materially impacting revenue. When an analyst asked why Cloudflare is showing so much strength in Zero Trust, the CEO replied: “And what we find is when we're in the consideration set, we're just a next-generation platform, and we're faster, we're more secure, we're more reliable, and we're a better solution for a lot of vendors. And so not only are we winning the greenfield opportunities, but we're increasingly winning opportunities from first-generation Zero Trust vendors where their customers aren't satisfied with the solutions they have and they're moving fully to us.”

More on AI Inference at the Edge:

Although AI is not materially impacting revenue right now, it inevitably will in the next couple of years. This company is well positioned for AI inference at the edge, which we’ve covered in a deep dive here. Part of this is building out GPU capacity which is why capex will increase to 10%-12%.

Here was a good question to help timing for Cloudflare’s AI potential.

Question
Timothy Horan (Analysts)

Related to the previous question. Can you maybe update us on your best guess on timing when the Workers platform, starts to drive some material revenue when it starts to move the needle? And maybe the same thing for AI. I know you said kind of not this year. And what do you think for both these platforms, what does this mean for overall growth rates for the company?

Answer
Matthew Prince (Executives)

Yes. I think what has been interesting has been that Workers is a big piece of a lot of the deals that we see. So it's still in somewhere around 20% of the large deals that we closed, have some workers component to it. And that's held actually fairly steady, but those deals are continued to go up and up. So it depends on how — we don't break out the various pieces of Cloudflare because we think that the platform functions very well as one unified platform.

And we close more deals because we have workers involved. But a lot of times, that includes our reverse proxy security services oftentimes includes our Zero Trust security services. And what we really want to be is not a one-trick pony for any one of our customers. We want to actually have multiple different things that they rely on and be that strategic vendor that provides a broad set of solutions to them. So I think it's already materially driving new business and large deals.

But as the Workers platform, I think the AI space, I think a lot of the money, which is being spent on AI right now, especially with some of the hyperscale public cloud, a lot of that is for training of models that is not — we are not the right place to actually do model training. But as that transitions over time and people start to figure out how can you take those — the models that you've built and turn them into real products. I think that's where you'll start to see a much more significant share of — you'll start to see revenue that is showing up that is meaningful to us. In terms of delivering the value in the AI space.

But I think it's — we're still so early. And I think that the thing to track is less about us. It's more about how long does it take product managers and engineers to really figure out how to harness these new tools into — and providing customer value. I think we've seen a ton of — I mean, the challenging thing with AI is, it is really easy to make a demo, but it's very hard to make a product. There's a ton of value that will be created here, but I think it's going to still take some time. And I think it's going to be up to some things that are somewhat out of our control. But I can't imagine being better positioned than we are.

Macro Remains a Headwind:

Given the strong price action, I want to highlight that management is still not fully confident in the macro environment:

Matthew Hedberg 

Great color. If I can ask one follow-up to Thomas. Your guide for '24 revenue, I think calls for about 600 basis points of deceleration. Obviously, you talked about a lot of positive sequentially, but also some of the caution that you still have about the macro. Just wondering if you could unpack a little bit more some of the assumptions there. I think you noted maybe NRR might be nearing a bottom. But just what's built into that in terms of like logo adds, maybe an improvement in NRR, but just sort of unpack that a little bit more.

Answer
Thomas Seifert 

Yes. Obviously, we had a very good fourth quarter with a lot of good data points, pointing in the right direction. The improvement that Matthew was talking about on the go-to-market side. Not only in terms of productivity, but pipeline improved, the deal size has improved and linearity went better. We also saw their best quarter-over-quarter improvement from an RPO perspective. This is all pointing in the right direction.

But we still have to cope with the fact that one data point alone is hard to change your prediction and your trajectory. So we are still cautious that everything else that is going on. Matthew mentioned in his part that the big scenes that we saw last year from a macroeconomic perspective, skittishness of buyers and budget releases is continuing. And I think this informed our view for the year. And obviously, we'll adjust our strategy and approach to the year as we have — unless we collect more data points. But it served us well over the last 4 years as a public company, to look really hard at the data we have and draw the right conclusions from it. And I hope that '24 will get us to the same outcome

FY2024 Revenue Growth Helped by Government Deals:

Following a question about the U.S. Dept of Commerce deal, the CEO stated the following about the public sector:

“I think that our federal business as well as our SLED business, state local education, and our global government business has all been real signs of strength. And I think that, that, in part, is because of the fact that the world is getting scarier and we're seeing more attacks […] More than half of the world's population will vote in 2023 in elections. And so I think the fact that we've been leaders in protecting elections and making sure that elections are run without cybersecurity being part of the story has gotten us in the conversation in a lot of places around the world. […] So I would expect that, that business continues to be strong throughout 2024.

Your second question is kind of the flip side of that, which is I think that the macro continues to be challenging. There are two hot wars going on right now. I think we are not out of the woods economically in terms of getting totally ahead of inflation. Again, I think in the U.S., that looks better than some of the other places in the world. There's a lot of ways that you can imagine the world continues to get more complicated. And I think IT buyers need to be skittish. Q4 definitely felt like people were starting to make decisions, and they were starting to say that there are certain things that are must-have versus nice-to-have. And I think we continue to be sorted into the must-have bucket.”

Conclusion:

Cloudflare’s price action today was certainly welcomed, and not all that surprising given the Big 3 is accelerating on cloud. There’s bound to be some cloud stocks that beat this quarter if the bellwethers are showing a rebound of sorts. Cloudflare provided hints in the last earnings report that it was a solid choice compared to its peers.

We are especially excited for Cloudflare’s potential in the future (next 1-2 years), as the CEO pointed out that most AI spend is on training, yet they are well positioned for when the focus is on inference and the edge. We see this stock as a winner in the next phase for AI, which we detailed in our most recent webinar and in our deep-dive here.

This 20%-ish move will put Cloudflare at or just above that resistance level of 20 Fwd P/S for cloud valuations. What cloud investors need to see in the (very) near term (next 1-3 months) is if cloud can push past the 20 Forward P/S resistance it’s been hitting since the FED lowered rates OR will cloud resume a more blow-off top valuation of 40 Forward P/S which we saw for about 1-2 years in 2020-2021. There is risk in both scenarios so each investor will need to decide for themselves how to handle cloud positions now that cloud stocks are reaching that resistance. There is no easy answer – yes, these are great stocks, quality companies, that will do well long-term — but they are also pricey right now. We will keep you up to date on our real-time decisions via text alerts.

Damien Robbins, Equity Analyst at the I/O Fund, contributed to this article.

Recommended Reading:

Big Tech Q4 Earnings: Capex Increases

Posted on by io-fund

Below, we look at key Big Tech earnings reports and the major takeaways from Alphabet, Meta and Apple.

Alphabet Q4 results: Cloud accelerates while ad revenue falls short

Alphabet beat top-line and bottom-line estimates. The company’s revenue growth of 13% was the highest growth since Q2 2022. Google Cloud revenue accelerated four points from 22% in the previous quarter to 26% in Q4. However, the company’s ad revenue fell short of estimates as it grew by 11% YoY to $65.5 billion and missed consensus estimates of $65.8 billion. The rise of Capex also led to the stock selling off post-results.

However, the rise of Capex is a notable positive for AI accelerators, which our portfolio is loaded with as the increase in capex will funnel through to GPUs and other AI beneficiaries. Per Alphabet’s earnings call: “In 2024, we expect investment in CapEx will be notably larger than in 2023.”In 2024, we expect investment in CapEx will be notably larger than in 2023.”

Revenue and EPS:

Revenue grew by 13% YoY to $86.31 billion, beating estimates by 1.2%. Analysts expect revenue to grow 13% YoY to $78.58 billion in the March quarter and 11% in the next two quarters.

GAAP EPS came at $1.64 and beat consensus estimates by 2.8%. This is up from $1.05 in the same period last year.

Margins

  • Gross margin improved 300 bps YoY to 56.5% yet was 20 bps lower than the Sept quarter.
  • Operating margin improved 360 bps YoY to 27.5% yet was 30 bps lower than the Sept quarter.
  • Net margin improved 610 bps YoY to 24% yet was 170 bps lower than the Sept quarter.

This year’s December quarter expenses included $1.2 billion in exit charges related to office space optimization, and last year's Dec quarter included $1.2 billion in inventory-related charges.

The CFO reiterated the company’s efforts to reduce costs in the earnings call and this should further help the company to improve its margins. “Turning to margins and expenses. As we have repeatedly stressed, we remain committed to our framework to durably reengineer our cost base as we invest to support our growth priorities. Key contributors to moderating our expense growth include: first, product and process prioritization to ensure we have the right resources behind our most important opportunities and to reallocate resources where we can; second, organizational efficiency and structure. We're focused on removing layers to simplify execution and drive velocity.”

Cash Flows and Balance Sheet

  • Operating cash flow margin was 21.9% compared to 31.1% in the same period last year and 40% in the Sept quarter.
  • Free cash flow margin was 9.2% compared to 21.1% in the same period last year and 29.5% in the Sept quarter.
  • Cash flows were lower mainly due to the deferral of tax payments to the fourth quarter. The CFO said in the earnings call, “We delivered free cash flow of $7.9 billion, which was affected by the timing of the $10.5 billion tax payment we made on October 16 that we called out previously related to the deferral of certain tax payments to the fourth quarter.”
  • Capex also increased 45% YoY to $11 billion in the Dec quarter, which also led to the lower free cash flow.

The CFO said in the earnings call. “With respect to CapEx, our reported CapEx in the fourth quarter was $11 billion, driven overwhelmingly by investment in our technical infrastructure with the largest component for servers followed by data centers. The step-up in CapEx in Q4 reflects our outlook for the extraordinary applications of AI to deliver for users, advertisers, developers, cloud enterprise customers and governments globally and the long-term growth opportunities that offers. In 2024, we expect investment in CapEx will be notably larger than in 2023.”driven overwhelmingly by investment in our technical infrastructure with the largest component for servers followed by data centers. The step-up in CapEx in Q4 reflects our outlook for the extraordinary applications of AI to deliver for users, advertisers, developers, cloud enterprise customers and governments globally and the long-term growth opportunities that offers. In 2024, we expect investment in CapEx will be notably larger than in 2023.”

As stated, comments on capex are good for our semiconductor portfolio mix.

The company has cash and marketable securities of $110.9 billion compared to $119.94 billion in the Sept quarter. Meanwhile, debt was $13.25 billion compared to $13.78 billion in the Sept quarter. The company repurchased $62 billion worth of shares in 2023.

Key Metrics:

Google Cloud Revenue

Google Cloud revenue grew by 26% YoY to $9.2 billion, helped by the increasing contribution from AI. Even though the growth is slower than the 32% growth in the same period last year, it has accelerated from 22% in the previous quarter.

The operating margin for Google Cloud came in at 9% compared to 3% in the previous quarter and negative (0.2%) in the same period last year. The strong growth in the quarter also helped the company to narrow the gap to 4 percentage points with Microsoft Azure’s leading growth of 30% compared to 7 percentage points in the previous quarter.

The CFO said, “The Cloud team is intensely focused on bringing the benefits of Gemini, our industry-leading AI technology, to enterprises and governments globally, and we are gratified with the level of engagement. The strong demand we are seeing for our vertically integrated AI portfolio is creating new opportunities for Google Cloud across every product area.” 

Google Advertising Revenue

Google Advertising revenue grew by 11% YoY to $65.5 billion, compared to 9% growth in the previous quarter and a (-4%) decline in the same period last year. However, they fell short of the consensus estimates of $65.8 billion.

  • Google Search and other advertising revenues grew by 13% YoY to $48 billion. It was up from 11% growth in the previous quarter and a decline of (-2%) in the same period last year.
  • YouTube ads revenues grew by 16% YoY to $9.2 billion. It is up from the 12% growth in the previous quarter and a decline of (-8%) in the same period last year.
  • Network advertising revenues declined by (2%) YoY to $8.3 billion.

Earnings Call

The company’s CEO Sundar Pichai was positive on the launch of Gemini and said in the earnings call, “We closed the year by launching the Gemini era, a new industry-leading series of models that will fuel the next generation of advances. Gemini is the first realization of the vision we had when we formed Google DeepMind, bringing together our two world-class research teams. It's engineered to understand and combine text, images, audio, video and code in a natively multimodal way and it can run on everything from mobile devices to data centers.

Gemini gives us a great foundation. It's already demonstrating state-of-the-art capabilities and it's only going to get better. Gemini Ultra is coming soon. The team is already working on the next versions and bringing it to our products. That starts with Search.”Gemini Ultra is coming soon. The team is already working on the next versions and bringing it to our products. That starts with Search.”

He also mentioned that subscriptions revenue reached $15 billion in annual revenue, up 5x since 2019, helped by strong demand for YouTube Premium and Music, YouTube TV, and Google One. The CFO said, “Subscriptions, Platforms and Devices revenues, which we previously referred to as other revenues, were $10.8 billion, up 23%, primarily reflecting growth in YouTube subscription revenues.”

Conclusion:

While the overall report was good, it is clear that the market expects perfection in key metrics. The slight miss in the advertisement revenues and the rise of capex overshadowed the acceleration in Google Cloud. With that said, for our purposes, the increase in capex commentary is critical to hear for our current portfolio mix, which is overweight AI semis.

Meta Q4: Back to Juggernaut Status

Meta’s Q4 report beat on the top and bottom lines and initiated a $0.50 dividend in a surprise move, The strength of the report is cementing the Facebook parent’s status as a juggernaut of tech once more. Key metrics were very strong across the board, and Q1’s guide pointed to 25% revenue growth at the midpoint, suggesting that 2023’s momentum is continuing into next quarter.

Revenue and EPS:

  • Meta reported revenue of $40.11 billion for Q4, above the higher end of its guide of $36.5-$40.0 billion range and beating estimates for $39.17 billion. Revenue grew 24.7% YoY.
  • For the full year, Meta reported revenue of $134.9 billion, representing YoY growth of 15.7%.
  • Meta guided for $34.5-$37 billion in revenue for Q1, representing YoY growth of 24.8%
  • EPS of $5.33 beat estimates by 7.9%, and represented YoY growth of 203%.
  • For the full year, Meta reported EPS of $14.87, representing YoY growth of 73.1%.

Margins:

  • Gross margin was 80.8% in Q4, a 100 bp QoQ decline but a 670 bp YoY improvement.
  • Operating margin was 40.8% in Q4, a 50bp QoQ and 2090 bp YoY improvement.
  • Net margin was 34.9%, a 100 bp QoQ and 2060 bp YoY improvement.
  • For the full year, gross margin was 80.8%, a 240 bp YoY improvement.
  • For the full year, operating margin was 34.7%, a 990 bp YoY improvement.
  • For the full year, net margin was 29.0%, a 910 bp YoY improvement.

Accelerating ARPU

Although Q1’s guide is for 24.8% growth, triple-digit EPS growth and strong YoY expansion in margins, the highlight of the report lies within acceleration in ARPUs to record levels – ahead of what is expected to be a strong ad market backdrop this year.

Growth in ad impressions cooled, but remained above 20% (versus a fairly tough comp at 23% in the year ago quarter). Ad pricing returned to growth, increasing 2% YoY after seven quarters of declines. We highlighted in mid-January while discussing Meta’s clear leadership in the social media space that “what investors should watch for is if improved ad targeting from AI features can help drive ad pricing back to growth, supported by a favorable spending backdrop and continuing strength in ad impressions globally.” Meta delivered exactly that, though impressions growth decelerated a bit more rapidly QoQ than in Q3.

This recovery and inflection in ad pricing helped drive an acceleration in advertising revenue growth. Overall advertising revenue increased 23.8% YoY to $38.7 billion, a rapid acceleration from the 4.1% growth posted in Q1 when Meta inflected back to growth. US & Canada ad revenue grew 18.5% YoY, while Europe ad revenue growth was the strongest, increasing 32.7% YoY.

Accelerating ARPUs in Facebook’s two core geographies drove this growth – we said two weeks ago that Meta was “on track to potentially reach a record level” for ARPU in Q4, and it did exactly that.

ARPU in US & Canada accelerated to 16% YoY to $68.44, compared to 14% YoY growth in Q3 and a (3%) YoY decline in the year ago quarter. Europe ARPU growth remained steady compared to Q3 at 34% YoY to $23.14, up from 14% YoY in Q2 and a (12%) YoY decline in the year ago quarter. Meta has displayed unbelievable strength in improving monetization in US & Canada, with ARPU rising nearly $20, or 40%, since Q1. 

Q1 will be the next true test for Meta, as it needs to show that it can maintain this strength in ARPU, though it faces a very easy comp with 1% growth in ARPU in the three regions highlighted above. If Meta can report US & Canada ARPU above $60 and Europe ARPU above $20, it will be well on track to proving that it can successfully and meaningfully increase monetization via AI. Q1’s strong guide at nearly $1.9 billion above consensus estimates at midpoint suggests that this is possible.

What also cannot be written off is Meta’s ability to deliver strong operating margin expansion and generate substantial cash flow, while continuing to invest heavily in AI and AR.

In Q4, operating margin expanded over twenty percentage points YoY to 40.8%, the second straight quarter with operating margin above 40% since Q1 and Q2 2021. As a result, FY23 operating margin improved 990 bp YoY to 34.7%. This is helping drive a strong improvement in the bottom line, with Meta reporting a net margin of 34.9%, a second straight quarter above 33% and a strong 2040 bp YoY expansion.

This operating margin expansion comes as Meta continues to pour substantial amounts of cash into Reality Labs. Operating losses for Reality Labs totaled ($16.1) billion for FY23, generating a ~1195 bp headwind to operating margin.

Not only has Meta driven a visible increase in operating margin while meaningfully accelerating revenue over the last four quarters, but it has also driven a massive increase in cash flow.

For FY23, Meta delivered 40.9% YoY growth in operating cash flow to $71.1 billion, as it saw OCF margin expand 940 bp YoY to 52.7%. This is the highest margin among the Magnificent 7. Free cash flow also increased 134% YoY to $43.01 billion, with FCF margin increasing 1610 bp YoY to 31.9%.

Commentary:

Meta guided for a strong Q1, calling for 24.8% YoY growth though it comes against a weak 2.6% YoY comp; however, the ad market backdrop is looking increasingly favorable and supportive of a high-teens growth rate, with current expectations pointing to 16.7% revenue growth for Meta in 2024 to $157.6 billion.

Social media ad spend is expected to remain robust in 2024, with one of the fastest projected growth rates in the ad industry at +13.8% to reach $227.2 billion globally, less than 1% shy of search ad spend.

In the US, growth is expected at a similar rate, with Insider Intelligence projecting 13.5% YoY growth to $82.9 billion for US social network ad spending. This marked a $7.8 billion increase from the Q1 2023 forecast, as Insider Intelligence sees the market benefiting from “higher ad loads, a focus on lower-funnel ads, and an improved advertising economy,” driven by Meta and TikTok.

CEO Mark Zuckerberg said Meta’s year of efficiency in 2023 paid off, with the company returning to strong revenue growth with strong engagement across its apps, while it also “established a world-class AI effort that's going to be the foundation for many of our future products.” By the end of 2024, Meta will have approximately 350,000 H100 GPUs and 250,000 H100 equivalents (perhaps a mix of AMD’s MI300X and/or Meta’s in-house ASICs?), to power its AI ambitions, which span LLMs, in its Llama, Llama 2 and Llama 3, Reels, and other AI features and new products.

Meta is also starting to see more positive contributions from products outside of Facebook, primarily Reels, Meta’s answer to TikTok. Management said Reels “and our discovery engine remain a priority and major driver of engagement,” and “Reels is now contributing to our net revenue across our apps.” Management added that it is seeing “sustained growth in Reels and Video overall as daily watch time across all video types grew over 25% year-over-year in Q4.” Reels can continue to aid growth for Meta in 2024, and while its engagement rate of ~6-9% is slightly below TikTok’s average engagement of 9-11%, Reels is estimated to have higher reach and interactions, which can benefit ad pricing despite the lower engagement rate.

While 2023 was Meta’s year of efficiency, 2024 may shape up to be Meta’s year of leverage. Key metrics support a return to >40% operating margin for the full year and a possible >33% net margin, driven by increasing ad pricing after inflecting back to growth, strong engagement and impressions growth, aided by the release of numerous AI features. Reaching those margins for the full year would imply EPS growth of nearly 38% to $20.50 on $160B in revenue.

AI can help provide increased operating leverage, similar to what we have seen with Microsoft as it boosts growth and creates additional engagement opportunities. Meta is investing heavily in both AI and non-AI hardware and data centers, with its capex guided for $30 to $37 billion in 2024.

Meta said that for “generative AI, we fully rolled out our Meta AI assistant and other AI chat experiences in the U.S. at the end of the year and began testing more than 20 GenAI features across our Family of Apps.” Increasing user engagement via AI features can drive higher ad loads, and thus higher pricing by increased optimization: Meta said that its “approach to optimizing ad levels in our apps has become increasingly sophisticated” as it continues to deliver performance gains for advertiser campaigns.

Note on Meta’s Capex:

The management has guided $30 billion to $37 billion in 2024, an increase of $2 billion at the high range of the prior guide. The guide represents 19.2% YoY growth in capex at the mid-point compared to an actual $28.1 billion in 2023. Since 2023 was a ‘Year of Efficiency,’ the company’s capex was down (12.3%) YoY compared to a growth of 66.5% in 2022.

Apple: Strong Q1 FY24 results overshadowed by weak guidance

Apple beat on the top line and bottom line. The profit margins and cash flow margins improved in the Dec quarter. The gross margin guide for the March quarter was also strong. However, management’s revenue outlook for the next quarter implies revenue will decline (5%) YoY and miss consensus estimates by 6%. China revenue of $20.8 billion also missed analyst estimates of $23.8 billion.

Revenue and EPS

Revenue grew by 2.1% YoY to $119.58 billion, beating estimates by 1.1%.

  • iPhone sales accelerated to 6% YoY growth to $69.7 billion, up from 3% in the Sept quarter, partly due to strong demand for the iPhone 15 line-up.
  • Mac Sales rebounded to 1% YoY growth to $7.8 billion from a (34%) decline in the September quarter. We want to watch this line item for a rebound in the broader PC market.
  • iPad sales disappointed as they declined by (25%) YoY to $7 billion. The slide was steeper than the Sept quarter decline of (10%).
  • Wearables, home, and accessories revenue declined by (11%) YoY to $12 billion, from a (3%) decline in the Sept quarter.
  • Services revenue grew by 11% YoY to $23.1 billion. Services remain a long-term opportunity for the company to monetize its installed base of over 2.2 billion active devices. Services revenue grew 16% in the Sept quarter.

GAAP EPS grew by 16% YoY to $2.18, beating estimates by 3.6%.

Margins

Gross margin improved 70 bps sequentially and 290 bps YoY to 45.9%. The management guide for the next quarter is in the range of 46% to 47%.

Operating margin improved 370 bps sequentially and 310 bps YoY to 33.8%.

Net margin improved 270 bps sequentially and 280 bps YoY to 28.4%.

Cash flow and balance sheet

Operating cash flow margin improved 930 bps sequentially and 440 bps YoY to 33.4%. Free cash flow margin improved 970 bps sequentially and 560 bps YoY to 31.4%. Free cash flow also benefitted from lower capex when compared to the same period last year.

The company has cash and marketable securities of $172.6 billion and debt of $108 billion. They repaid $4.0 billion of commercial paper and had net cash of $65 billion compared to net cash of $51 billion in the Sept quarter. Management reiterated its plan to be net cash-neutral over time. The company returned about $27 billion to the shareholders in the recent quarter in the form of dividends and share repurchases.

What to watch in the coming quarters

  • While providing the outlook for the next quarter, the CFO said they expect foreign exchange to be a 2-percentage headwind. The outlook suggests that revenue will decline by (5%) YoY in the March quarter and this missed consensus estimates by 6%. iPhone sales are expected to decline by about (10%) YoY in the March quarter.

The CFO said, “As a reminder, in the December quarter a year ago, we faced significant supply constraints on the iPhone 14 Pro and 14 Pro Max due to COVID-19 factory shutdowns. And in the March quarter a year ago, we were able to replenish channel inventory and fulfill significant pent-up demand from the constraints. We estimate that this impact added close to $5 billion to the March quarter's total revenue last year. When we remove this impact from last year's revenue, we expect both our March quarter total company revenue and iPhone revenue to be similar to a year ago.” We estimate that this impact added close to $5 billion to the March quarter's total revenue last year. When we remove this impact from last year's revenue, we expect both our March quarter total company revenue and iPhone revenue to be similar to a year ago.”

The company is facing competition from other smartphone companies in China due to foldable designs and advanced AI features. The company’s total revenue from China in the recent quarter was $20.8 billion, which missed estimates of $23.8 billion.

  • The performance of the services segment will also be crucial as the company has an installed base of over 2.2 billion active devices and over 1 billion paid subscriptions. The management expects a similar double-digit revenue growth rate in the next quarter to what the company reported in the December quarter: 11% YoY growth.

Management is expected to share more details later this year on how the company plans to capitalize on Artificial Intelligence. Tim Cook said in the earnings call. “That includes artificial intelligence where we continue to spend a tremendous amount of time and effort, and we're excited to share the details of our ongoing work in that space later this year.”

Vision Pro launched and has sold an estimated 200,000 units.

Lastly, the recent changes to the app store to comply with the EU’s Digital Markets Act are to be watched. The impact is limited at the moment since the change is only to Europe. The company will have lower commissions on the app store in Europe, which will now range between 10% to 17% instead of the typical 30%.

The CFO answered an analyst’s question on the call on the impact of the changes. “As Tim said, these are changes that we're going to be implementing in March. A lot will depend on the choices that will be made. Just to keep it in context, the changes applied to the EU market, which represents roughly 7% of our global app store revenue.”

Conclusion

The company's strengths are strong margins, cash flows, a stable balance sheet, and a loyal customer base. Tackling the revenue slowdown in China and capitalizing on its vast installed base is crucial for the company. Keep an eye on the app store commissions as Europe’s move to reduce these commissions will likely serve as inspiration to developers globally to push for the same.

Equity Analysts Damien Robbins and Royston Roche contributed to this article.

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Big Tech Q4 Earnings: Capex Increases

Posted on by io-fund

Below, we look at key Big Tech earnings reports and the major takeaways from Alphabet, Meta and Apple.

Alphabet Q4 results: Cloud accelerates while ad revenue falls short

Alphabet beat top-line and bottom-line estimates. The company’s revenue growth of 13% was the highest growth since Q2 2022. Google Cloud revenue accelerated four points from 22% in the previous quarter to 26% in Q4. However, the company’s ad revenue fell short of estimates as it grew by 11% YoY to $65.5 billion and missed consensus estimates of $65.8 billion. The rise of Capex also led to the stock selling off post-results.

However, the rise of Capex is a notable positive for AI accelerators, which our portfolio is loaded with as the increase in capex will funnel through to GPUs and other AI beneficiaries. Per Alphabet’s earnings call: “In 2024, we expect investment in CapEx will be notably larger than in 2023.”In 2024, we expect investment in CapEx will be notably larger than in 2023.”

Revenue and EPS:

Revenue grew by 13% YoY to $86.31 billion, beating estimates by 1.2%. Analysts expect revenue to grow 13% YoY to $78.58 billion in the March quarter and 11% in the next two quarters.

GAAP EPS came at $1.64 and beat consensus estimates by 2.8%. This is up from $1.05 in the same period last year.

Margins

  • Gross margin improved 300 bps YoY to 56.5% yet was 20 bps lower than the Sept quarter.
  • Operating margin improved 360 bps YoY to 27.5% yet was 30 bps lower than the Sept quarter.
  • Net margin improved 610 bps YoY to 24% yet was 170 bps lower than the Sept quarter.

This year’s December quarter expenses included $1.2 billion in exit charges related to office space optimization, and last year's Dec quarter included $1.2 billion in inventory-related charges.

The CFO reiterated the company’s efforts to reduce costs in the earnings call and this should further help the company to improve its margins. “Turning to margins and expenses. As we have repeatedly stressed, we remain committed to our framework to durably reengineer our cost base as we invest to support our growth priorities. Key contributors to moderating our expense growth include: first, product and process prioritization to ensure we have the right resources behind our most important opportunities and to reallocate resources where we can; second, organizational efficiency and structure. We're focused on removing layers to simplify execution and drive velocity.”

Cash Flows and Balance Sheet

  • Operating cash flow margin was 21.9% compared to 31.1% in the same period last year and 40% in the Sept quarter.
  • Free cash flow margin was 9.2% compared to 21.1% in the same period last year and 29.5% in the Sept quarter.
  • Cash flows were lower mainly due to the deferral of tax payments to the fourth quarter. The CFO said in the earnings call, “We delivered free cash flow of $7.9 billion, which was affected by the timing of the $10.5 billion tax payment we made on October 16 that we called out previously related to the deferral of certain tax payments to the fourth quarter.”
  • Capex also increased 45% YoY to $11 billion in the Dec quarter, which also led to the lower free cash flow.

The CFO said in the earnings call. “With respect to CapEx, our reported CapEx in the fourth quarter was $11 billion, driven overwhelmingly by investment in our technical infrastructure with the largest component for servers followed by data centers. The step-up in CapEx in Q4 reflects our outlook for the extraordinary applications of AI to deliver for users, advertisers, developers, cloud enterprise customers and governments globally and the long-term growth opportunities that offers. In 2024, we expect investment in CapEx will be notably larger than in 2023.”driven overwhelmingly by investment in our technical infrastructure with the largest component for servers followed by data centers. The step-up in CapEx in Q4 reflects our outlook for the extraordinary applications of AI to deliver for users, advertisers, developers, cloud enterprise customers and governments globally and the long-term growth opportunities that offers. In 2024, we expect investment in CapEx will be notably larger than in 2023.”

As stated, comments on capex are good for our semiconductor portfolio mix.

The company has cash and marketable securities of $110.9 billion compared to $119.94 billion in the Sept quarter. Meanwhile, debt was $13.25 billion compared to $13.78 billion in the Sept quarter. The company repurchased $62 billion worth of shares in 2023.

Key Metrics:

Google Cloud Revenue

Google Cloud revenue grew by 26% YoY to $9.2 billion, helped by the increasing contribution from AI. Even though the growth is slower than the 32% growth in the same period last year, it has accelerated from 22% in the previous quarter.

The operating margin for Google Cloud came in at 9% compared to 3% in the previous quarter and negative (0.2%) in the same period last year. The strong growth in the quarter also helped the company to narrow the gap to 4 percentage points with Microsoft Azure’s leading growth of 30% compared to 7 percentage points in the previous quarter.

The CFO said, “The Cloud team is intensely focused on bringing the benefits of Gemini, our industry-leading AI technology, to enterprises and governments globally, and we are gratified with the level of engagement. The strong demand we are seeing for our vertically integrated AI portfolio is creating new opportunities for Google Cloud across every product area.” 

Google Advertising Revenue

Google Advertising revenue grew by 11% YoY to $65.5 billion, compared to 9% growth in the previous quarter and a (-4%) decline in the same period last year. However, they fell short of the consensus estimates of $65.8 billion.

  • Google Search and other advertising revenues grew by 13% YoY to $48 billion. It was up from 11% growth in the previous quarter and a decline of (-2%) in the same period last year.
  • YouTube ads revenues grew by 16% YoY to $9.2 billion. It is up from the 12% growth in the previous quarter and a decline of (-8%) in the same period last year.
  • Network advertising revenues declined by (2%) YoY to $8.3 billion.

Earnings Call

The company’s CEO Sundar Pichai was positive on the launch of Gemini and said in the earnings call, “We closed the year by launching the Gemini era, a new industry-leading series of models that will fuel the next generation of advances. Gemini is the first realization of the vision we had when we formed Google DeepMind, bringing together our two world-class research teams. It's engineered to understand and combine text, images, audio, video and code in a natively multimodal way and it can run on everything from mobile devices to data centers.

Gemini gives us a great foundation. It's already demonstrating state-of-the-art capabilities and it's only going to get better. Gemini Ultra is coming soon. The team is already working on the next versions and bringing it to our products. That starts with Search.”Gemini Ultra is coming soon. The team is already working on the next versions and bringing it to our products. That starts with Search.”

He also mentioned that subscriptions revenue reached $15 billion in annual revenue, up 5x since 2019, helped by strong demand for YouTube Premium and Music, YouTube TV, and Google One. The CFO said, “Subscriptions, Platforms and Devices revenues, which we previously referred to as other revenues, were $10.8 billion, up 23%, primarily reflecting growth in YouTube subscription revenues.”

Conclusion:

While the overall report was good, it is clear that the market expects perfection in key metrics. The slight miss in the advertisement revenues and the rise of capex overshadowed the acceleration in Google Cloud. With that said, for our purposes, the increase in capex commentary is critical to hear for our current portfolio mix, which is overweight AI semis.

Meta Q4: Back to Juggernaut Status

Meta’s Q4 report beat on the top and bottom lines and initiated a $0.50 dividend in a surprise move, The strength of the report is cementing the Facebook parent’s status as a juggernaut of tech once more. Key metrics were very strong across the board, and Q1’s guide pointed to 25% revenue growth at the midpoint, suggesting that 2023’s momentum is continuing into next quarter.

Revenue and EPS:

  • Meta reported revenue of $40.11 billion for Q4, above the higher end of its guide of $36.5-$40.0 billion range and beating estimates for $39.17 billion. Revenue grew 24.7% YoY.
  • For the full year, Meta reported revenue of $134.9 billion, representing YoY growth of 15.7%.
  • Meta guided for $34.5-$37 billion in revenue for Q1, representing YoY growth of 24.8%
  • EPS of $5.33 beat estimates by 7.9%, and represented YoY growth of 203%.
  • For the full year, Meta reported EPS of $14.87, representing YoY growth of 73.1%.

Margins:

  • Gross margin was 80.8% in Q4, a 100 bp QoQ decline but a 670 bp YoY improvement.
  • Operating margin was 40.8% in Q4, a 50bp QoQ and 2090 bp YoY improvement.
  • Net margin was 34.9%, a 100 bp QoQ and 2060 bp YoY improvement.
  • For the full year, gross margin was 80.8%, a 240 bp YoY improvement.
  • For the full year, operating margin was 34.7%, a 990 bp YoY improvement.
  • For the full year, net margin was 29.0%, a 910 bp YoY improvement.

Accelerating ARPU

Although Q1’s guide is for 24.8% growth, triple-digit EPS growth and strong YoY expansion in margins, the highlight of the report lies within acceleration in ARPUs to record levels – ahead of what is expected to be a strong ad market backdrop this year.

Growth in ad impressions cooled, but remained above 20% (versus a fairly tough comp at 23% in the year ago quarter). Ad pricing returned to growth, increasing 2% YoY after seven quarters of declines. We highlighted in mid-January while discussing Meta’s clear leadership in the social media space that “what investors should watch for is if improved ad targeting from AI features can help drive ad pricing back to growth, supported by a favorable spending backdrop and continuing strength in ad impressions globally.” Meta delivered exactly that, though impressions growth decelerated a bit more rapidly QoQ than in Q3.

This recovery and inflection in ad pricing helped drive an acceleration in advertising revenue growth. Overall advertising revenue increased 23.8% YoY to $38.7 billion, a rapid acceleration from the 4.1% growth posted in Q1 when Meta inflected back to growth. US & Canada ad revenue grew 18.5% YoY, while Europe ad revenue growth was the strongest, increasing 32.7% YoY.

Accelerating ARPUs in Facebook’s two core geographies drove this growth – we said two weeks ago that Meta was “on track to potentially reach a record level” for ARPU in Q4, and it did exactly that.

ARPU in US & Canada accelerated to 16% YoY to $68.44, compared to 14% YoY growth in Q3 and a (3%) YoY decline in the year ago quarter. Europe ARPU growth remained steady compared to Q3 at 34% YoY to $23.14, up from 14% YoY in Q2 and a (12%) YoY decline in the year ago quarter. Meta has displayed unbelievable strength in improving monetization in US & Canada, with ARPU rising nearly $20, or 40%, since Q1. 

Q1 will be the next true test for Meta, as it needs to show that it can maintain this strength in ARPU, though it faces a very easy comp with 1% growth in ARPU in the three regions highlighted above. If Meta can report US & Canada ARPU above $60 and Europe ARPU above $20, it will be well on track to proving that it can successfully and meaningfully increase monetization via AI. Q1’s strong guide at nearly $1.9 billion above consensus estimates at midpoint suggests that this is possible.

What also cannot be written off is Meta’s ability to deliver strong operating margin expansion and generate substantial cash flow, while continuing to invest heavily in AI and AR.

In Q4, operating margin expanded over twenty percentage points YoY to 40.8%, the second straight quarter with operating margin above 40% since Q1 and Q2 2021. As a result, FY23 operating margin improved 990 bp YoY to 34.7%. This is helping drive a strong improvement in the bottom line, with Meta reporting a net margin of 34.9%, a second straight quarter above 33% and a strong 2040 bp YoY expansion.

This operating margin expansion comes as Meta continues to pour substantial amounts of cash into Reality Labs. Operating losses for Reality Labs totaled ($16.1) billion for FY23, generating a ~1195 bp headwind to operating margin.

Not only has Meta driven a visible increase in operating margin while meaningfully accelerating revenue over the last four quarters, but it has also driven a massive increase in cash flow.

For FY23, Meta delivered 40.9% YoY growth in operating cash flow to $71.1 billion, as it saw OCF margin expand 940 bp YoY to 52.7%. This is the highest margin among the Magnificent 7. Free cash flow also increased 134% YoY to $43.01 billion, with FCF margin increasing 1610 bp YoY to 31.9%.

Commentary:

Meta guided for a strong Q1, calling for 24.8% YoY growth though it comes against a weak 2.6% YoY comp; however, the ad market backdrop is looking increasingly favorable and supportive of a high-teens growth rate, with current expectations pointing to 16.7% revenue growth for Meta in 2024 to $157.6 billion.

Social media ad spend is expected to remain robust in 2024, with one of the fastest projected growth rates in the ad industry at +13.8% to reach $227.2 billion globally, less than 1% shy of search ad spend.

In the US, growth is expected at a similar rate, with Insider Intelligence projecting 13.5% YoY growth to $82.9 billion for US social network ad spending. This marked a $7.8 billion increase from the Q1 2023 forecast, as Insider Intelligence sees the market benefiting from “higher ad loads, a focus on lower-funnel ads, and an improved advertising economy,” driven by Meta and TikTok.

CEO Mark Zuckerberg said Meta’s year of efficiency in 2023 paid off, with the company returning to strong revenue growth with strong engagement across its apps, while it also “established a world-class AI effort that's going to be the foundation for many of our future products.” By the end of 2024, Meta will have approximately 350,000 H100 GPUs and 250,000 H100 equivalents (perhaps a mix of AMD’s MI300X and/or Meta’s in-house ASICs?), to power its AI ambitions, which span LLMs, in its Llama, Llama 2 and Llama 3, Reels, and other AI features and new products.

Meta is also starting to see more positive contributions from products outside of Facebook, primarily Reels, Meta’s answer to TikTok. Management said Reels “and our discovery engine remain a priority and major driver of engagement,” and “Reels is now contributing to our net revenue across our apps.” Management added that it is seeing “sustained growth in Reels and Video overall as daily watch time across all video types grew over 25% year-over-year in Q4.” Reels can continue to aid growth for Meta in 2024, and while its engagement rate of ~6-9% is slightly below TikTok’s average engagement of 9-11%, Reels is estimated to have higher reach and interactions, which can benefit ad pricing despite the lower engagement rate.

While 2023 was Meta’s year of efficiency, 2024 may shape up to be Meta’s year of leverage. Key metrics support a return to >40% operating margin for the full year and a possible >33% net margin, driven by increasing ad pricing after inflecting back to growth, strong engagement and impressions growth, aided by the release of numerous AI features. Reaching those margins for the full year would imply EPS growth of nearly 38% to $20.50 on $160B in revenue.

AI can help provide increased operating leverage, similar to what we have seen with Microsoft as it boosts growth and creates additional engagement opportunities. Meta is investing heavily in both AI and non-AI hardware and data centers, with its capex guided for $30 to $37 billion in 2024.

Meta said that for “generative AI, we fully rolled out our Meta AI assistant and other AI chat experiences in the U.S. at the end of the year and began testing more than 20 GenAI features across our Family of Apps.” Increasing user engagement via AI features can drive higher ad loads, and thus higher pricing by increased optimization: Meta said that its “approach to optimizing ad levels in our apps has become increasingly sophisticated” as it continues to deliver performance gains for advertiser campaigns.

Note on Meta’s Capex:

The management has guided $30 billion to $37 billion in 2024, an increase of $2 billion at the high range of the prior guide. The guide represents 19.2% YoY growth in capex at the mid-point compared to an actual $28.1 billion in 2023. Since 2023 was a ‘Year of Efficiency,’ the company’s capex was down (12.3%) YoY compared to a growth of 66.5% in 2022.

Apple: Strong Q1 FY24 results overshadowed by weak guidance

Apple beat on the top line and bottom line. The profit margins and cash flow margins improved in the Dec quarter. The gross margin guide for the March quarter was also strong. However, management’s revenue outlook for the next quarter implies revenue will decline (5%) YoY and miss consensus estimates by 6%. China revenue of $20.8 billion also missed analyst estimates of $23.8 billion.

Revenue and EPS

Revenue grew by 2.1% YoY to $119.58 billion, beating estimates by 1.1%.

  • iPhone sales accelerated to 6% YoY growth to $69.7 billion, up from 3% in the Sept quarter, partly due to strong demand for the iPhone 15 line-up.
  • Mac Sales rebounded to 1% YoY growth to $7.8 billion from a (34%) decline in the September quarter. We want to watch this line item for a rebound in the broader PC market.
  • iPad sales disappointed as they declined by (25%) YoY to $7 billion. The slide was steeper than the Sept quarter decline of (10%).
  • Wearables, home, and accessories revenue declined by (11%) YoY to $12 billion, from a (3%) decline in the Sept quarter.
  • Services revenue grew by 11% YoY to $23.1 billion. Services remain a long-term opportunity for the company to monetize its installed base of over 2.2 billion active devices. Services revenue grew 16% in the Sept quarter.

GAAP EPS grew by 16% YoY to $2.18, beating estimates by 3.6%.

Margins

Gross margin improved 70 bps sequentially and 290 bps YoY to 45.9%. The management guide for the next quarter is in the range of 46% to 47%.

Operating margin improved 370 bps sequentially and 310 bps YoY to 33.8%.

Net margin improved 270 bps sequentially and 280 bps YoY to 28.4%.

Cash flow and balance sheet

Operating cash flow margin improved 930 bps sequentially and 440 bps YoY to 33.4%. Free cash flow margin improved 970 bps sequentially and 560 bps YoY to 31.4%. Free cash flow also benefitted from lower capex when compared to the same period last year.

The company has cash and marketable securities of $172.6 billion and debt of $108 billion. They repaid $4.0 billion of commercial paper and had net cash of $65 billion compared to net cash of $51 billion in the Sept quarter. Management reiterated its plan to be net cash-neutral over time. The company returned about $27 billion to the shareholders in the recent quarter in the form of dividends and share repurchases.

What to watch in the coming quarters

  • While providing the outlook for the next quarter, the CFO said they expect foreign exchange to be a 2-percentage headwind. The outlook suggests that revenue will decline by (5%) YoY in the March quarter and this missed consensus estimates by 6%. iPhone sales are expected to decline by about (10%) YoY in the March quarter.

The CFO said, “As a reminder, in the December quarter a year ago, we faced significant supply constraints on the iPhone 14 Pro and 14 Pro Max due to COVID-19 factory shutdowns. And in the March quarter a year ago, we were able to replenish channel inventory and fulfill significant pent-up demand from the constraints. We estimate that this impact added close to $5 billion to the March quarter's total revenue last year. When we remove this impact from last year's revenue, we expect both our March quarter total company revenue and iPhone revenue to be similar to a year ago.” We estimate that this impact added close to $5 billion to the March quarter's total revenue last year. When we remove this impact from last year's revenue, we expect both our March quarter total company revenue and iPhone revenue to be similar to a year ago.”

The company is facing competition from other smartphone companies in China due to foldable designs and advanced AI features. The company’s total revenue from China in the recent quarter was $20.8 billion, which missed estimates of $23.8 billion.

  • The performance of the services segment will also be crucial as the company has an installed base of over 2.2 billion active devices and over 1 billion paid subscriptions. The management expects a similar double-digit revenue growth rate in the next quarter to what the company reported in the December quarter: 11% YoY growth.

Management is expected to share more details later this year on how the company plans to capitalize on Artificial Intelligence. Tim Cook said in the earnings call. “That includes artificial intelligence where we continue to spend a tremendous amount of time and effort, and we're excited to share the details of our ongoing work in that space later this year.”

Vision Pro launched and has sold an estimated 200,000 units.

Lastly, the recent changes to the app store to comply with the EU’s Digital Markets Act are to be watched. The impact is limited at the moment since the change is only to Europe. The company will have lower commissions on the app store in Europe, which will now range between 10% to 17% instead of the typical 30%.

The CFO answered an analyst’s question on the call on the impact of the changes. “As Tim said, these are changes that we're going to be implementing in March. A lot will depend on the choices that will be made. Just to keep it in context, the changes applied to the EU market, which represents roughly 7% of our global app store revenue.”

Conclusion

The company's strengths are strong margins, cash flows, a stable balance sheet, and a loyal customer base. Tackling the revenue slowdown in China and capitalizing on its vast installed base is crucial for the company. Keep an eye on the app store commissions as Europe’s move to reduce these commissions will likely serve as inspiration to developers globally to push for the same.

Equity Analysts Damien Robbins and Royston Roche contributed to this article.

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Special Webinar Replay – February 1, 2024

Posted on by io-fund

Watch Knox's webinar replay as he discusses the state of the market, as well as individual positions in the I/O Fund portfolio. This week, we are opening up the weekly webinar to all of the I/O Fund subscribers. Whenever we are approaching what could be a significant inflection point in the markets, we want to inform all of our members so that they are prepared. This week, we will be discussing the risks present in this market, the various scenarios that we see playing out in 2024, as well as doing a deep dive into the FAANGs and Bitcoin.

Timestamps:

00:00 – Broad Market

16:19 – Supporting Indices/Markets

36:02 – FAANGs

43:25 – Nvidia

44:10 – Netflix

45:16 – Tesla

45:58 – Google

47:52 – Bitcoin

56:13 – Q&A

I/O Fund Crypto – Updated Technical Analysis

Posted on by io-fund

The I/O Fund has been an advocate of technical analysis since inception. Sentiment is a major driver in growth, and the only way to measure it with some accuracy is through technical analysis.

While we use this practice as an addendum to our fundamental analysis, it is the primary tool that we use within crypto. The reason for this is that crypto does not have consensus estimates or earnings reports. There are sparse news events regarding crypto, yet we tend to see wild swings in both directions. Though these moves may seem random, they are not. And, because of this reality within the crypto space, we lean into technical analysis more so than with equities. 

In this report, you will get a snapshot of the larger pattern we believe is playing out, as well as the I/O Fund’s buy plans for each of our 3 crypto holdings, plus one new addition that we are watching – Solana. 

Bitcoin (BTCUSD)

If we zoom out to a weekly chart, The larger pattern I am following has the 2021-2022 bear market as a correction within a larger uptrend. That would put us around the halfway point for the final 5th wave rally, which should take us to the $100,000 region.

The risk remains elevated until Bitcoin goes vertical. The current pattern off the 2022 low is only 3 waves up. Because the new bull cycle is only 3 waves, it leaves the door open to the possibility that the 2023 bull cycle is actually a correction within a larger bear market. As long as any further weakness in Bitcoin holds above $25,100 we see no need to game plan for this more bearish potential.

If we zoom into the new bull market structure, there are three paths this new bull cycle can take.

  •  Red Count – This path has us in a large degree 3 wave pattern, marked with an (A), (B), (C). Here, we should see a deep retrace back into the $35,000 – $27,000 region. This will complete the (B) wave drop, as the following (C) wave will take us to our overhead targets.
  • Green Count – This path has the current bull cycle taking a standard 5 wave pattern. If this is in play, we should see the current bounce fail under $47,000, then drop back to the $37,000 – $36,000 range.  We should then turn back up in a vertical move higher. This will be a more direct path to our overhead targets.
  • Blue Count – This is a more bullish variation of the Green path.  This path will not see a further drop. Instead, we will see a direct breakout over $47,000 and head to $56,000 next.

These are all bullish interpretations of the current price structure. As long as any further weakness holds $25,100, then I see no reason to abandon these outcomes. Below this critical support, and the bull cycle that is targeting $100,000, is in jeopardy of not playing out. This would imply that all of 2023 was a large degree corrective bounce in a much larger bear market. The early tell will be a 5 wave drop through some of our listed supports.

Ethereum (ETHUSD)

All coins that we follow are tracking the larger crypto cycle that is expressed above through Bitcoin. Ethereum also has a large degree bullish pattern that is playing out.

When it comes to the potential bullish patterns, we find it helpful to always take it one step at a time. As of now, we are in a minor correction that must hold $1,650, then turn back up in a vertical fashion. If this happens, we will raise our critical support and fine tune our overhead targets.

When we zoom in on this pullback, we can get a better idea of potential targets.

It looks like ETHUSD needs one more drop toward the $2000 region in order to complete this pullback. If we instead continue to push higher, we will need to break above $2592 in order to suggest this correction is over. We could even see Ethereum push toward $1845 and $1645 and still maintain the bullish uptrend. However, below $1650 will threaten the larger bullish count we are tracking.

Chainlink (LINKUSD)

The larger pattern has LINKUSD in the 5th wave of a very large diagonal pattern. The 5th wave should play out as a large 3 wave pattern, marked A,B,C on the chart below.

If we zoom into the current uptrend, it appears to be developing into a solid 5 wave pattern. This is encouraging, and supports the bigger pattern above.

The current breakout above $17.60, if it holds, should see a move to the $20 – $23 region. This should complete the 1st series of 5 wave moves higher, and then give way to a notable pullback.

Solana (SOLUSD)

Note how vertical the uptrend in SOLUSD is. It is clearly a 5 wave pattern, that is incomplete. This is supportive of higher levels.

It appears that the correction has completed, and we are making a higher low before pushing into the $130 – $140 region. Ideally, we will get one more drop into the low $90 – upper $80 region. Any further weakness needs to hold $84, or we could see a deeper retrace back into the $70s. the critical support for SOLUSD is the $60 region. This level must hold if the larger uptrend is going to continue. 

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