Consumer – I/O Fund

FAAMG Stocks Trading At Precarious Valuations

Posted on May 15, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on May 10, 2023,07:45am EDTForbes Forbes on May 10, 2023,07:45am EDT

The mega-cap stocks that are known as FAAMG reported earnings recently. These names are driving the market higher, especially Microsoft and Apple. In fact, the percentage of Microsoft and Apple’s combined weighting in the S&P 500 has never been higher.

The S&P 500 weighting is according to market cap, which is price times float. The longer buying happens in these two names, accompanied with selling in other areas of the index, the percentage weighting becomes stretched to unhealthy extremes. This is not characteristic of a burgeoning bull market; instead, it is the type of behavior we usually see at market tops.

Also worth noting, since the February top, we are seeing a strong rotation into Big Tech while aggressive selling is taking place in other areas of the market. Take a look at the market cap weighted NASDAQ-100, which has over40% weighting into the FAAMG stocks, compared to the equal weighted NASDAQ-100.

Source: I/O FUND

While the NASDAQ-100 has made a series of higher highs, led mostly by the FAAMG names, the equal weighted index has made a series of lower highs. We are seeing similar price action in small caps as well as most economically sensitive sectors. This is typically not the sign of a healthy market.

FAAMG Stocks Trading at Precarious Valuations

As you’ll see below, there’s little room in FAAMG valuations compared to their 5-year historic averages. Apple and Microsoft both trade above their 5-year median on the top line and bottom line whereas the others are getting quite close given the low growth rates and macro uncertainty. The only exception is Amazon.

Microsoft is leading on valuation at 10 compared to the FAAMGs that are at 7 or below. Most are within range of their five-year average valuation except Amazon at 2.0 today compared to an average valuation of 3.6.

Source: YCHARTS

Amazon has a P/E ratio of 247.79, compared to 32.96 for Microsoft, 29.22 for Meta, 28.13 for Apple, and 23.32 for Alphabet. The FAAMGs are trading within range of their historical valuation except for Amazon with a five-year average P/E ratio of 93.48.

Source: YCHARTS

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FAAMG Earnings Overview:

There were some puts and takes in the most recent earnings reports. Despite price telling us we could be nearing a top, there are some fundamental signs that FAAMG stocks may be overstretched in the near term.

Below, you’ll find that consensus points toward a bottom for FAAMG stocks yet it will require consensus materializing in the coming quarters in order for the stock price action to hold. In other words, the market has front run the rebound in growth and now we must wait and see if this rebound unfolds.

Alphabet: Search is Resilient

Alphabet’s revenue grew by 2.6% YoY or 6% in constant currency, for a total of $69.8 billion, primarily helped by the resilience in Search and the momentum in Cloud business. Although this is marginal growth, below you can see that Alphabet is expected to accelerate in revenue growth over the next few quarters from 2.6% to an expected 9.4% in Q1 of next year.

Source: SEEKING ALPHA

Operating margins were soft at 25% of revenue compared to 30% last year. Net income declined (8.4%) YoY to $15.1 billion. This resulted in EPS of $1.17 compared to $1.23 for the same period last year.

Source: YCHARTS

The drop in profits was mainly due to $2.6 billion in charges related to the reduction in the company’s workforce and office space, and was offset by $988 million in depreciation from servers and network equipment.

Google Cloud revenue grew by 28% YoY to $7.45 billion and reported its first profitable quarter bringing in $191 million operating income.

Microsoft: Top Line and Bottom Line Beat

Microsoft’s revenue grew 7.1% YoY and 10% in constant currency to $52.9 billion. Management’s revenue guidance for next quarter is $54.85 billion to $55.85 billion, representing YoY growth of 6.7% at the mid-point. Similar to Google, a noticeable acceleration is expected in the second half of the year.

Source: SEEKING ALPHA

Azure grew by 27% and 31% YoY in constant currency and came in at the higher end of management guidance of 30% to 31%.This is down from 38% growth in constant currency last quarter. Next quarter will also mark a deceleration with management guiding to 26.5% in constant currency. This includes 1% from AI services.

Source: I/O FUND

Operating income grew by 9.8% YoY to $22.35 billion. The net profit margin was 34.6% compared to 33.9% in the same period last year which resulted in EPS of $2.45 compared to $2.22 in the same period last year.

Source: YCHARTS

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Meta: Back to Positive Growth

The company’s revenue grew by 2.6% YoY and 6% on constant currency to $28.6 billion. This is a positive as Meta’s revenue has declined YoY in the last three quarters.

Management’s revenue guidance for the next quarter is between $29.5 billion to $32 billion, representing a YoY growth of 6.7% at the mid-point. Analysts expect revenue to grow 7% YoY to $30.84 billion.

Source: SEEKING ALPHA

The operating income declined by (15%) YoY to $7.2 billion as total expenses rose 10% YoY. The operating margin was 25% compared to 31% in the same period last year. The net income declined by (24%) YoY to $5.7 billion, resulting in EPS of $2.20 compared to $2.72 in the same period last year.

Source: YCHARTS

The company recorded $1.14 billion in restructuring charges related to layoffs, facilities consolidation, and data center. Excluding these charges, the operating margin would be 4% higher and EPS would be $0.44 higher.

Amazon: AWS is Slowing

The company’s revenue grew by 9.4% and 11% YoY in constant currency to $127.4 billion. Analyst consensus is for growth of 8.2% next quarter.

Source: SEEKING ALPHA

The operating margin was 3.8% compared to 3.2% in the same period last year. Net Income was $3.2 billion or $0.31 per share compared to a net loss of ($3.8) billion or ($0.38) per share in the same period last year.

The net income included a pre-tax valuation loss of ($0.5) billion from the investment in Rivian Automobile compared to a pre-tax valuation loss of ($7.6) billion in the same period last year.

Source: YCHARTS

AWS revenue grew by 16% YoY to $21.4 billion. This is lower than the 20% growth in the December quarter and a remarkable slowdown from the 37% in the same period last year.

Management discussed in the earnings call that April AWS revenue growth further decelerated to 11%. This is due to the ongoing tough macro environment, causing customers to optimize their cloud spending in the recent quarter.

The company’s CEO, Andy Jassy, also highlighted cautiousness in the enterprise customers. “In AWS, what we’re seeing is enterprises continue to be cautious in their spending in this uncertain time. Customers are looking for ways to save money however they can right now. They tell us that most of it is cost optimizing versus cost cutting, which is an interesting distinction because they say they’re cost optimizing to reallocate those resources on new customer experiences.”cost optimizing versus cost cutting, which is an interesting distinction because they say they’re cost optimizing to reallocate those resources on new customer experiences.”

Notably, despite the market rewarding Microsoft’s report, cost optimization is not isolated to one hyperscaler and investors can expect to see more evidence of optimizations in future reports.

Apple: More Buybacks to Appease the Street

Apple’s revenue declined by (2.5%) YoY to $94.84 billion. Management commented that they expect YoY performance to be similar to the March quarter. Analysts expect revenue to decline (1.7%) YoY to $81.53 billion in the next quarter following these comments.

Source: SEEKING ALPHA

iPhone sales grew by 1.5% YoY to $51.3 billion. Mac revenue declined by (31%) YoY to $7.2 billion. iPad revenue declined by (13%) YoY to $6.7 billion. Wearables, home and accessories revenue was flat, and the services segment revenue grew by 5.5% YoY to $20.9 billion.

The operating margin was 29.9% compared to 30.8% in the same period last year. The operating expenses of $13.66 billion were lower than management guidance of $13.7 billion to $13.9 billion, which the market saw as a positive.

Net income declined by (3.4%) YoY to $24.2 billion with a net profit margin of 25.5% compared to 25.7% in the same period last year. EPS came in at $1.52 and remained unchanged from the same period last year.

Source: YCHARTS

Apple returned $23 billion to the shareholders through dividends and equivalents of $3.7 billion and $19.1 billion in share repurchases. The board also authorized an additional $90 billion share repurchase and increased the quarterly dividend by 4% to $0.24 per share.

Analyst Comments:

Deutsche Bank analyst Benjamin Black raised the firm's price target on Alphabet to $125 from $120 and kept a Buy rating on the shares. He noted, “The company reported solid Q1 results with the biggest takeaway being the stabilizing growth trends at Search and YouTube, which beat Street expectations.”stabilizing growth trends at Search and YouTube, which beat Street expectations.”

Wedbush Securities analyst Dan Ives said in a research note. "It's clear that in Redmond's enterprise backyard the company is gaining more market share on the cloud front with many enterprises making this transformational shift on the shoulders of Microsoft,"gaining more market share on the cloud front with many enterprises making this transformational shift on the shoulders of Microsoft," He further said, "Cloud growth and the overall outlook for the June quarter was solid and much better than feared given recent noise in the market and will be music to the ears of investors this morning digesting results."Cloud growth and the overall outlook for the June quarter was solid and much better than feared given recent noise in the market and will be music to the ears of investors this morning digesting results."

BMO analyst Keith Bachman upgraded Microsoft (MSFT) shares to outperform. He stated that he now has "higher conviction" that any headwinds to Azure are likely to moderate by the end of the year, while opportunities in artificial intelligence can help the longer-term. "While the stock is not inexpensive, we think the durable growth opportunities warrant a premium valuation."

RBC Capital analyst Brad Erickson raised the firm's price target on Meta Platforms to $285 from $225 and kept an Outperform rating on the shares. Brad said, “The company's Q1 results were better-than-feared and the simple three-fold bull case – dominating engagement vs. competition, restoring lost signal post-IDFA, and cutting costs – is increasingly coming into view.” RBC believes that further upside is still achievable for Meta on engagement share gains and the ongoing conversion improvement eventually leading to incremental spend.

Citi analyst Ronald Josey raised the firm's price target on Meta Platforms to $315 from $260 and kept a Buy rating on the shares. “With engagement rising, newer advertising products attracting incremental spend, and a more streamlined organization, Meta's momentum in Q1 can continue.”“With engagement rising, newer advertising products attracting incremental spend, and a more streamlined organization, Meta's momentum in Q1 can continue.” the analyst tells investors in a research note.

Conclusion:

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

Right now, we do not believe FAAMG stocks are in a buy zone. Instead, some are trading higher than their 5-year median on valuations despite a weaker macro backdrop and fundamental weakness. The market is front-running the anticipated revenue rebound. Most of this rebound is based off low comps, and there could be soft growth in the future for some of these names.

You can learn more here including information on our next webinar, this Thursday at 4:30 pm Eastern, where we review our positions live.

Equity Analyst Royston Roche contributed to this article.

Snapchat Reported Accelerating Growth. Here’s What to Expect From Pinterest.

Posted on April 26, 2021June 30, 2026 by io-fund

Pinterest reports on Tuesday, April 27 after market close. The stock recently dropped as much as 10.8% in one day due to reports that the company had a soft ending to Q1.

We wanted to take this opportunity to present the app data for Pinterest and provide an in-depth preview of the upcoming earnings report, which shows approximately 4% sequential growth and 21% growth year-over-year for DAUs. Interestingly enough, this is approximately the same YoY growth level that Snap reported for DAUs in its most recent earnings report, which we cover below.

A glimpse at the App Data

Please note, we use app data to spot trends—we do not use app data to make earnings calls on what a company will report. We use Apptopia data, a provider of app intelligence and competitor tracking service.Apptopia data, a provider of app intelligence and competitor tracking service.

Pinterest user engagement remained strong in Q1 2021 despite loosening of Covid restrictions, based on app data from Apptopia. Similar to Snapchat, which reported earnings April 22 and grew DAUs 22% YoY, Q1 user trends for Pinterest were mostly positive.

In Q1, daily active users were up 4.12% QoQ versus 5.09% the previous quarter, and up 21.16% YoY.

Source: Apptopia with graphs by David MarlinDavid Marlin

In Q1, monthly active users were up 4.09% QoQ versus 5.15% the previous quarter, and up 21.64% YoY.

Downloads were down 5.80% QoQ versus up .28% the previous quarter, and up 18.69% YoY.

Sessions were up 1.99% QoQ versus 5.11% the previous quarter, and up 20.07% YoY.

Pinterest reports Tuesday, April 22 after close and is guiding for Q1 2021 revenue growth in the low 70% range YoY with non-GAAP operating expenses at a similar level compared to last quarter. The consensus estimate is $475.11 million, up 74.71% YoY, according to Seeking Alpha.

Pinterest executives have warned that reopening could reduce engagement. Like other adtech stocks, Pinterest saw record high engagement but reduced advertiser demand in Q1 and Q2 2020, as advertisers slowed or paused their spend. Advertisers during these early-Covid quarters shifted away from awareness campaigns and towards high performance ads. Later, revenue growth accelerated in Q3 and Q4 as advertiser demand returned.

According to last week’s ad-tech analysis, we anticipate a small deceleration YoY in user engagement due to tougher comps—engagement reached record levels last March, according to the Q1 2020 earnings report—with strong international growth. Despite usage trends being mixed, if we see an ad rebound revenue can still climb higher.

Pinterest fell as much as 10.8% on April 16, after a cautious report from independent research firm Cleveland Research that was summarized by Seeking Alpha.

Pinterest ended Q1 had a softer end to Q1 "than mid-quarter expectations would indicate and some agencies/partners are noting a deceleration from Q4 levels," according to Seeking Alpha’s synopsis of the report, which added that "some omni-channel retailers are seeing Pinterest spending decelerating."

Below, we look at Q1 2021 results from Snapchat for clues about the potential adtech rebound and compare this to Apptopia data, a provider of app intelligence and competitor tracking service.

What to look for in the upcoming report

Going into Covid, Pinterest had less exposure to highly impacted verticals such as travel, according to the Q1 earnings report. When asked in Q1 what is holding Pinterest back from capturing more travel-related advertising dollars, CEO Ben Silbermann said the company is optimizing for core shopping verticals such as home décor and apparel.

“I will say that when we look at our plans for increasing kind of purchasing activity on Pinterest, travel is not the first place that we’re optimizing for,” Silbermann said. “We think there’s a really big opportunity in a lot of our core shopping verticals, which is why shopping and conversion-driven events continues to be a focus.”

Ad dollars follow planning activity, which is why ad spending moved away from categories such as wedding planning and travel events, according to the Q1 earnings report. As normal events and activities return, we expect ad dollars to follow at some point this year.

For the full year, Pinterest executives are expecting positive trends due to investments in new tools like shopping and automation; international expansion; and monetization into Latin America during the first half of the year, according to the last earnings report. Latin America is forecast to see 10.2% YoY growth in digital ad spending this year, after an 18.4% drop last year, according to a report from Dentsu.

Snapchat Doubles Active Advertisers

Global digital ad spending is projected to grow 10.1% YoY, with 18% growth in social media, according to the Dentsu report, which we discussed recently in our earnings coverage of Pinterest, Snapchat, Twitter, and Facebook.

To read our adtech earnings preview, click here.

Snapchat reported earnings April 22, achieving the highest year-over-year revenue and daily active user growth rates in over three years, according to the earnings report. Snapchat grew revenue to $770 million, up 66% year-over-year, and grew DAUs 22% year-over-year to 280 million. The company also approximately doubled its active advertiser base YoY, and offered strong guidance of 80% to 85% YoY revenue growth.

Traditionally strong categories for Snapchat, such as theatrical films, have started to return, and the company is seeking to increase categories where it is well positioned but has had less exposure, including travel and leisure.

The approach could pay off, according to the report from Dentsu. Sectors that restricted advertising the most due last year are set for the biggest recovery, with ad spend in travel and transport forecast to grow nearly 30%.

Conclusion

Despite mixed reports about Pinterest’s upcoming earnings report, we are seeing similar year-over-year growth in DAUs as Snapchat reported, which is 21.16% and 22% respectively. We are hopeful that with an ad-rebound in many sectors that Pinterest will also have a healthy earnings report, where low ad revenue last year will offset tough comps in usage.

Disclaimer: I/O Fund currently owns shares of Snap and Pinterest. In addition, the author, Jessica Ablamsky, owns shares of Pinterest, has owned options on Pinterest, and may own options on Pinterest again in the future. Jessica Ablamsky has owned options on Snapchat in the past and may purchase shares or own options again in the future. The content in this article is intended to be used for informational purposes only. The author has not received any compensation from any third party or company discussed in this article. The content is the expressed opinions of the author and is intended for educational and research purposes. Any thesis presented is not a guarantee of any particular stock’s future prices, so please factor this risk into your own analysis. It is very important that you do your own analysis before making any investments based on your personal circumstances. The author is not a licensed professional advisor. Please seek counsel form a licensed professional before acting on any analysis expressed in this article, to see if it is appropriate for your personal situation.

Small Caps: Breaking Out

Posted on December 9, 2019June 30, 2026 by io-fund

There are many reasons to have an allocation to small caps in a portfolio. For one, they offer further diversification with a lower correlation to the broad market. However, the primary reason is that, over time, history has shown small caps tend to outperform the more popular large caps. According to Ibbotson Data, this outperformance, on average, is 2.2% per year.

The Set-Up

Ken French, the professor from Dartmouth who compiled the data in the graph above, discovered there is a seasonality for small caps when you average out all of the data we have going back to the 1920s.

From February through December, the average small cap stock tends to underperform. However, from Dec 20 – Jan 31, the average small cap stock tends to outperform by a noticeable amount

This data is showing that over the December 20 -January 31st time frame, the average relative performance of small caps over large caps is about 2.5%. This may not seem like a lot, however, keep in mind this is sourced from 89 years worth of data, which is statistically significant.

Today, we are seeing an important anomaly in the small cap region that we haven’t revisted in about 20 years.

The above chart shows that small caps, in blue, tend to do better during an uptrend, just like Ken French outlined, and also tend towards sharp reversals in downtrends. With more returns, typically comes more volatility. However, today we are witnessing a relative outperformance of large caps that we haven’t seen since the late 90s.

Euphoric emotion disconnected these two markets during the late 90s, while pessimistic emotions disconnected the markets today. The fear of a recession has taken the current market to levels we also haven’t seen since 2008. Mutual Fund/ETF equity outflows are at historic levels, and short interest has run above the historic average. The risk-on trades have been penalized, small caps being one of them.

Today, we are not only entering the season for small caps,but we’re doing so with small caps showing significant under performance relative to the broad market. If the fear of a recession was overblown, then small caps have some catch-up in order to revert to the mean.

To further build the case, the weekly chart above is showing that the RSI is breaking 60. This is a great sign for building momentum for small caps. In a healthy uptrend, we want to see the RSI above 60 and oscillating above 30 – the higher the oscillation, the healthier.

If we zoom in to highlight the last year, the weekly chart above is showing that small caps are starting to show signs of life. They are breaking above the 60 line on the RSI, the MACD is pointing up, and small caps have broken through their downtrend and closed above the resistance we’ve seen this year. Also, it’s worth noting that small caps are less than 10% away from all time highs.

Review of Our Small Caps (TLRA and WIFI)

Fundamental coverage can be found in PDF form by searching for the stock name.

Boingo Wireless (WIFI)

Boingo (WIFI) appears to have bottomed at the 50% retrace, which is ideal for a wave-2 bottom. We have gotten 5-waves off that low, which is also encouraging. It still has some work to do to confirm this uptrend, but so far, the structure is providing us with a 1-2 set-up pointing up. If it is valid, the 3rdwave is typically targeted around the 161.8% of wave-1, which puts us in a much higher region above the blue lines beginning around $13.50 with the potential to climb higher with a breakout.

If you want to go in on WIFI, I’d put a hard stop just under $9.55. Below this level invalidates the set-up and opens the door for more downside before a new uptrend can commence.

Telaria (TLRA)

Since we covered Telaria (TLRA), the stock is up about 12%. However, the structure is more ambiguous than WIFI, which is why I’m suggesting a tighter stop. I am leaning toward the more bullish set-up, which has us tagging the range in the red box above. However, we also have a potential 1-2 set-up pointing down. If TLRA closes below $6, this will invalidate the uptrend and suggest further downside.

KEEP IN MIND …

We have been leaning cautiously so far, and are due for a correction. Stocks are stretched as they are, and a correction would be healthy for further gains.

However, with the seasonality of small cap relative strength approaching in December/January, coupled with them breaking out right now, it’s worth acknowledging current set-ups are in place for two of our favorite small cap plays.

SNAP Update: October 21st

Posted on October 22, 2019June 30, 2026 by io-fund

I was excited about playing the momentum for this stock last earnings season when I released the PDF at about $14 a share and it popped to $17 a share about a week after we published.

I felt confident on the probabilities of a big earnings beat because the company had released new filters that pushed it’s downloads to new highs. They also had announced beta-testing for Audience Network, a way to monetize the 190 million users outside of the Snapchat application.

Funds and institutions will pile in for Audience Network because of what it did for Facebook. However, Audience Network hasn’t opened beyond beta-testing and there hasn’t been an update since April, when the company stated it would be released in the “coming months.”

If/when this does happen, Snap will report higher revenue but I don’t see any evidence that we’re there yet. I also haven’t seen any new filters that would suggest new app downloads or viral popularity (even if short-lived, these are great for momentum plays). We now see Snap testing dynamic ads, which are popular on Instagram. These will not have an effect on earnings this quarter.

TikTok is a looming threat to social media apps, as well. However, if/when I hear anything about Audience Network officially launching, I will be an immediate buyer.

For this earnings report, I am on the sidelines for Snap. I like more confirmation from app download reports than what I’m getting right now.

However, Knox trades more on technicals and he is getting into the trade ahead of earnings. Here is his take on the situation:

SNAP Technicals

By Knox Ridley

After Snap hit my stop at $14, closing the position for nice little gain, I’m getting back into SNAP and here is why:

5 waves up (in purple) that hit all the Fibonacci points.
3 waves down from the recent high (A,B,C), and the C wave hit the 138.2% extension and is turning back up.
Just reclaimed the 10-day EMA – a show of changing momentum.
If we take the length of the uptrend (the bottom of 1- and the peak of 5)and multiply it by the Fibonacci ratios, SNAP turned up right at the 38.2% time marker, which coincides with the MACD turning up, and the Stochastic/RSI turning up.
We now have 5-waves up on the 3 minute chart when you zoom into the most recent push up. This is a tell of the bigger direction that is unfolding.

I’m going long, but cautious of the overall market, hence I’m placing a stop at $13. If you want to give it more room to breathe, I’d place it just under the .382 retrace level in black.

Here’s the chart:

July 25th – Social App at $17

Posted on July 25, 2019June 30, 2026 by io-fund

The fundamental analysis and technical analysis provided prior to earnings played out nicely this week. Snap crushed on DAU (daily active users), as our data had indicated the company would. For ad companies, DAU plays into higher revenue. The bigger story for Snap this year has not officially launched – Audience Network.

We will keep you updated if anything changes fundamentally.

Technical Update:

Provided by TA contributor, Knox Ridley:

Snap broke out yesterday. As you can see in the chart above, Snap was following a steady trend channel (in blue), bouncing between this channel until today.

Our previous TA noted that Snap’s support was $14 and resistance was $17. Snap retraced, closed just above $14 on Friday/Monday and then sky rocketed above $17 the day following earnings. It not only closed above $17 but did so with high volume.

This is always a bullish sign. We will likely see it retest the upper trend channel (outlined in the lite blue dotted line, trending up), before testing the $20 resistance level above (in yellow). As long as Snap stays within this upward trend (outlined by the lower blue line), Snap should continue it’s upward movement.

Regarding the internals of Snap – notice the top yellow circle. This is highlighting the current price breaking through the upper Bollinger Band, while the lower Bollinger Band moves down. This is a very bullish indicator, which is supportive of higher prices.

Further supporting the internal strength, the RSI closed above the descending trend line, showing some new found buying pressure. As long as Snap holds the 55-50 region on the RSI, we should continue upward. However, keep in mind that broad market forces can raise and sink all ships, regardless of fundamentals. If the $14 support region is broken due to a weakening broader market, we could see the price fall into the green box on the chart ($12.50-$9.50).

Per Beth’s analysis, fundamentals are strong. The should be seen as a long term hold that will benefit from Audience Network in the second half of the year. If you’re in, mind your stops if the broader market moves downward. If you have yet to make a position, follow Snap’s retrace to the upper trend channel previously mentioned. That would be a good time to enter.

SNAP Forum:

Please check out our forum and post there if you traded Snap or have questions on Snap for community discussion. One user posted some great information on the number of funds moving into the stock over the past two quarters. Here’s the post:

Institutions have been moving into SNAP over the last 2 quarters:
Date # funds:

Sep 2018, 177 funds
Dec 2018, 168 funds
Mar 2019, 198 funds
Jun 2019, 321 funds

July 22nd Update: Social App Pivot

Posted on July 22, 2019June 30, 2026 by io-fund

There was a new web analytics report from SimilarWeb released last week that showed an increase of traffic to Snap’s advertising URL, up 23% YoY, compared to Facebook’s URL, up 4%. The comparison is provided to illustrate a common growth metric for ad URL traffic on social ads with the understanding FB receives much higher traffic volume.

This is positive news. The report also confirmed that the popular filters maintained an increase in daily active user growth, up from 10 million to 11.6 million (peaking around 13 million with the new filters). One concern was if the filters had created an artificial new high, which does not look to be the case.

Due to the increase in app usage from this past quarter, illustrated in the PDF, the probability that Snap will beat earnings is the more likely scenario. If for some reason Snap does not beat earnings, I will still have a buy rating on the stock due to Audience Network. This will be a major breaking out point for the company’s revenue (Audience Network in testing as of April).

In the article released 7/19, Audience Network is what Goldman is referring to as “Our checks with advertisers also lead us to believe that the company’s continued innovation in its ad-stack, particularly in self-serve, should allow SNAP to substantially improve monetization of user time spent on the platform over time.”

Technical Update:

Snap is currently trading at the $14 support level, and is holding as of today. Per our technical analysis, if Snap closes below $14, we could see it trade within the green box on the original chart ($12.50 – $9.50 range), before taking us up beyond the $20 range. Listen to your stops, and understand that Snap’s growth story regarding Audience Network is a matter of when, not if. The increase in app usage should also translate to an increase in quarterly revenue.

Keep in mind, there is high volatility in this stock. With the price retreating down to support levels as we head into earnings, there is likely to be a strong reaction tomorrow after- hours. Snap has jumped as much as 22% after a strong earnings report and dropped as much as 14%.

Regarding stops, we purposefully suggested wider stops to keep you from exiting prematurely, but also to get you out with a minor loss in case a correction occurs. We may be early to Audience Network compared to the broader market, but that’s by design.

Social App Pivoting – July 2019

Posted on July 17, 2019June 30, 2026 by io-fund

Social App Pivoting – July 2019

SECTION 1: SNAP – Fundamental Analysis

1A. SNAP’s Bad Streak Coming to an End

Snap has seen remarkable volatility in its stock price this year, down 80 percent from its peak in March of 2017 at $29 to a low of $5 in December of 2018. The stock is currently trading in the $15 range, at time of writing.

Previously, in August of 2018, I had a sell recommendation on Snap. I am changing this to a buy

recommendation due to a few key reasons. For one, Snap should report higher than usual user growth, which has become known to the market. Secondly, Snap is extending its monetization methods and this is not widely known to the market. The increase in user growth should be reported in Q2 and the new monetization method should take effect by Q3.

Background:

Snapchat is one of the best platforms for Millennials and Gen Z audiences. The company reaches between 75% to 90% of people aged 13 to 35. The issue that Snapchat has faced is flat to declining daily active users (DAU) and monthly active users (MAU). Overall, the company does not report enough growth to command a social network multiple.

Revenue growth and profit margins have been problematic for Snap. The most recent quarter showed an improved gross profit margin of about 36%, however, in the quarters following the IPO, Snap reported negative gross profit.

The company switched to selling ads programmatically through software algorithms instead of through salespeople – this led to lower ad prices and resulted in lower revenue. Snap also had a redesign that halted Snapchat’s user growth.

2A. App Sessions Skyrocketing

Snapchat’s new gender-swapping filter has been extremely popular and this should show up in the earnings results for Q2 2019. Downloads and sessions have surged causing Snapchat to rank #4 overall in China’s App Store, its highest rank there in more than four years.

According to app intelligence provider, Adam Blacker of Apptopia, Snapchat had its most downloads ever dating back to January 1st, 2015 at 2 million compared to the average daily downloads of 665,000. As Apptopia has noted, retention will need to be proven, with retention likely higher for Snapchat Games than Snapchat filters.

Regardless of retention, the surge in user activity will be a welcome relief for investors.

Predictably, this app activity placed Snapchat as the number one downloaded app in the United States for the first time since March of 2017. We will be monitoring this intelligence closely to see if Snapchat places in the top spot for June of 2019, as this would indicate further additional strength in the stock’s key metrics for the upcoming quarter.

3A. Average Revenue Per User

Snap’s average revenue per user (ARPU) is on an upward trend. This helped cause the stock rally we saw in the past few quarters.

4A. Audience Network

Less widely known to the market is Snap’s plans to monetize its Millennial data across other mobile applications. Snap will no longer be confined to monetizing the 190 million users on the platform, and instead, will use the data to broker ads across various mobile applications. This will have a parabolic effect on the company’s average revenue per user (ARPU).

Audience Network is a software development kit (SDK) that allows advertisers to use Snapchat data to reach audiences outside of Snap on the applications that install the software. The flat daily active users (DAU) growth on Snap will become less important as Snap will effectively broker ads to a scalable audience outside of the native Snap application. Full-screen, vertical video ads will appear across third-party mobile applications.

Snap has data on a lucrative demographic that few companies have ownership of, as both Facebook and Twitter are out of favor with this age group. Snap’s Audience Network will open up the ability to reach the Millennial and Gen Z audience segments across a much larger total addressable market.

The product was announced on April 4th, however, the company will now need to sign up application developers and advertisers before the revenue shows up in quarterly results. The formal launch will occur later this year.

Conclusion: Buy recommendation on Snap with price target of $17-$23

Catalyst: Audience Network should not be underestimated. Facebook launched an Audience Network in 2014 when the average revenue per user (ARPU) hovered around $12 in the United States. Audience Network was the turning point for Facebook’s ARPU reaching the $26 we see today in the United States region. The market is preparing for renewed user growth from Snap in the current quarter, however, Audience Network is what will cause the stock to climb and is still relatively unknown to the broader market.

SECTION 2: SNAP – Technical Analysis

Technical Analysis provided by Knox Ridley

Background:

Snap is out of favor with a tarnished sentiment – and for good reason based on a string of bad earnings and questionable management decisions in 2018. As mentioned in the fundamental analysis, the stock was down 80 percent from its peak in March of 2017 at $29 to a low of $5 in December of 2018.

However, Snap currently is in a quiet and strong uptrend. We do not think the market will ignore Snap for long, and we believe their next earnings report could be a turning point. Regardless of the upcoming earnings, we want to enter Snap before Audience Network goes live and becomes public knowledge.

The technicals of Snap are strong, as it just confirmed an inverse Head and Shoulders pattern by breaking the $14.47 neckline, then re-testing that support, and trending upward from there. Holding for 6-18 months will be important to let Audience Network take effect, while keeping a close eye on privacy laws. Because of this time frame, we can get a clear picture of Snap’s price pattern on the daily chart – below.

2B: Technical Overview

Using the RSI to measure Snap’s internal strength, Snap is clearly in a bullish position (holding above 65). However, you’ll notice that the buying pressure is starting to falter. This is evident in how the RSI is making lower highs while the price of Snap is making higher highs. This is Negative Divergence, with a sign of weakening buying pressure, and could signal a short term draw down. As long as Snap does not break below 60 on the RSI, it will remain in a strong bullish position.

Regarding the price pattern of Snap, we can a see a classic Inverse Head and Shoulder pattern, outlined in blue, that was recently confirmed once Snap broke above the neckline around $14.47. This is a bullish pattern that has played out. As long as Snap can hold the $14 support, the stock has the potential to trend higher to the $20-$23 range.

If the RSI breaks 50 and then moves below 43, which has recently been a strong ceiling for Snap once it enters a sustained downtrend, we will be looking to our stops to exit our position, or add more depending on the price action. However, in a market environment like the one we have, where we see a divergence between the upwards price of the broad market and the decelerating data in the economy, using stops is highly suggested. This will allow you to lower risk while investing in the remaining upside of this bull market.

2C: Elliot Wave Analysis

With limited price data due to Snap’s IPO in 2017, we’ll use this data as a rough guide to Snap’s general direction. It appears as though we are finishing an impulsive 5 waves up in a Wave (1) of (5). This is very bullish for the intermediate to long term for Snap, while being bearish in the short term. The question remains: how far will the Wave (2) retrace take us? As long as the broad market cooperates, and based on the current strength of Snap’s price action this year, a large retrace is not anticipated. The green box indicates the most likely target if Snap cannot break the $17 range. Above $17, and the Wave (2) retrace will be moved significantly up, making our current entry much safer.

Conclusion:

The line in the sand will be $14. Below $14, and we will likely see the green box come into play. On other hand, above $17 and our next level of pullback will likely be around the $20-$23 range, before taking us higher. Keep in mind that Snap is a volatile stock, so we will set a wide stop to give it room to breathe; however, we do not want to get caught up in a major market downturn, so our stop will allow us to play the upside, while avoid any severe losses. We recommend a 25-35% trailing stop.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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