Category: Tech Stocks

Google And Facebook Stock: Is Weak Ad Demand Priced In?

Posted on by io-fund

This article was originally published on Forbes on Apr 13, 2020,01:14am EDTForbes on Apr 13, 2020,01:14am EDT

Facebook, Google and Twitter have warned that Q1 is going to be lower than originally forecast. Media analysts have also weighed in with a consensus that ad demand will be weakened this year. Meanwhile, little has been provided for future guidance, which will test the belief that the effects of the Coronavirus has been priced in.

There is no doubt that many of these companies will have a comeback. The timing of this relies on many factors, especially consumer spending, which is intricately tied to unemployment. In other words, ad demand will return but the path may be as the fickle the advertisers who fuel the industry.

First, the Good News for AdTech stocks …

Usage across mobile and over-the-top television has been skyrocketing. Facebook reported an increase of 50% in messaging in countries where the coronavirus was hit the hardest. In Italy, there was 70% more time spent across apps. This was reported on March 24th and one can only imagine what the United States’ usage has been over the past few weeks as some of this usage falls into the second quarter. Group calling increased over 1,000% – which is no surprise for anyone work-from-home trends. (I wrote a full length analysis on Zoom Video here).

Pinterest delivered some positive news this week stating first-quarter sales and user growth were better than expected. The company stated first quarter revenue will be between $269 million to $272 million. Monthly active users in Q1 of 365 million to 367 million are well above the consensus of 352.7 million users.

Along with its social media peers, Twitter reported an increase in total monetizable daily active users (mDAU) of 23% year-over-year and an increase of 8% quarter-over-quarter.

Over-the-top media usage has also received a lot of attention from investors and for good reason. With more people spending time indoors, nearly every application has increased its footprint. Total streaming hours were up 24% between March 1st to March 16th from a year ago, according to Comscore, with Roku and Amazon up 16%.

According to a survey from Consumer Technology Association, 26% of American households started using online streaming services for the first time during the coronavirus pandemic. Meanwhile, 48% are watching streaming services more often than before.

Live TV is also benefiting from the surge in usage with viewership up 102% from a year ago across the seven channels surveyed.

Now, the Not-So-Good News for Adtech Stocks …

Typically, an increase in usage is linear with an increase in ad revenue. It makes sense that the bigger the audience, the more ad space (especially on mobile) and the higher the ad rates. In this rare quarantine situation, however, major advertisers have closed for business, are reporting layoffs and cutting costs in unison, leading to lower ad spend despite the increase in eyeballs.

There is simply no frame of reference for the effects a quarantine can have on advertisers. As of now, we only have reports that skyrocketing usage is not correlating to more ad spend.

Twitter has stated first quarter revenue will be down compared to the year-ago quarter after the company pulled guidance. In the press release, the company stated, “the near-term financial impact of this pandemic is rapidly evolving and hard to measure.”

This means Twitter could see a loss of 10-15% of revenue from its previous guidance of $825 to $885 million despite mDAU being up 23%. This is calculated based on the company stating revenue will be down slightly from the year-ago quarter, which was $786 million.

For a frame of reference, Twitter reported 21% growth in mDAU in Q4 which correlated to 11% increase in revenue. This further supports impact for Q1 falling in the the 10-15% range if “revenue is slightly down” year-over-year.

Mark Shmulik of Bernstein raised his price target for Twitter to $29 from $27 while stating he is on the sidelines partly due to concerns about Twitter’s ability to monetize its active user base. According to MarketWatch, Shmulik recently stated “We caution about placing too much stock into engagement as (1) everyone has seen a spike in engagement (2) unclear what happens to engagement levels post-COVID, and (3) it’s valueless if you can’t monetize.”

Facebook did not offer many details in their release other than to state “we don’t monetize many of the services where we’re seeing increased engagement, and we’ve seen a weakening in our ads business in countries taking aggressive actions to reduce the spread of COVID-19.”

According to LightShed partners, 12 of the top 50 advertisers are ailing auto makers; another 11 are quick-serve restaurant chains. This matches channel checks by Needham that showed lower spending in travel, retail, consumer packaged goods and entertainment, which represents 30 to 45% of Facebook’s total revenue.

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MarketWatch recently covered the revised analyst estimates on the outlook for Facebook, including statements from Needham and a variety of analysts. Q1 is being revised from $18.56 billion to $17.99 billion with EPS of $1.95 revised to $1.85 a share, according to FactSet as of April 6.

EMarketer released data showing a decline of $20 billion in ad revenue. As Twitter pointed out, the situation is evolving rapidly and this estimate is already insufficient as the data was collected up until March 6th, prior to San Francisco and New York going into a quarantine. The data also did not take into account the Olympics being postponed until 2021.

Cowen & Company estimates Google and Facebook will see “$44 billion in worldwide ad revenue evaporate.” This reflects a 18% decline in revenue for Google and a decline of 19% for Facebook compared to Cowen’s previous forecast. Cowen believes the ad business will bounce back in 2021. In a trickle-down effect, Cowen predicts Twitter will also see a decline of 18% and Snap a decline of 30%.

If Cowen’s forecasts are correct, this will be the first time that Google and Facebook will report negative revenue year-over-year since the companies were founded in 2001 and 2004, respectively. Google’s annual revenue last year was $160.7 billion with Cowen currently forecasting $127.5 billion this year in revenue. Facebook’s revenue last year was $69.66 billion with Cowen forecasting $67.8 billion for the upcoming year.

Google and Facebook have plenty of cash, yet smaller ad-tech companies may be more exposed to the spiraling effects of losing business rapidly.

Snap has not released a formal statement in regards to guidance but there’s evidence the company is not entirely insulated. In support of Cowen’s estimates, some of Snap’s largest advertisers are exposed to reduced ad spend, such as movie and media brands Disney, Comcast and AT&T, and also consumer brands Coca-Cola and Hershey’s.

Roku is harder to determine as the company generates revenue from ads and also licensing fees and/or commissions from other content apps. Most analysts believe the lower ad demand will not offset the other segments with a forecast of 15% decline this year. Michael Pachter of Wedbush lowered estimates for Roku’s average revenue per user (ARPU) from 30% to 21% in Q1 and from 40% to 26% in Q2. For the rest of the year Pachter sees a recovery with FY20 only decreased from 24% to 20%.

Notably, LightShed pointed out that digital ad spend will see the effects more immediately while television ads will see more of the effects in Q2. This is because advertisers make commitments to buy from big TV networks months in advance.

Conclusion:

In my opinion, the situation is hard to quantify. We are on the brink of earnings reports, where more will be revealed, yet these earnings will show minimal impact as ad spend was likely reduced only at the end of the quarter in March.

Next quarter is where the majority of the effects will be felt. If companies decline to provide forward guidance, which seems to be the trend thus far, the market will have to rely on sell-side analysts for guidance. I think this is a disadvantage as companies have a more sobering outlook.

For instance, JP Morgan is predicting 23% GDP growth in Q3 of this year, yet Apple is rumored to be delaying the 5G iPhone release in September. This information does not line up. Similarly, ad-tech companies must consider that revenue growth and earnings growth will require travel, sports, restaurants and consumer packaged goods returning to their former state of a 10+ year economic boom. In other words, JP Morgan has the liberty to withdraw bold predictions as the situation evolves while tech companies cannot so easily release new information.  

I personally believe we will not see ad spend return to pre-Coronavirus levels until 2021 at the earliest and 2022 at the latest. Many advertisers are under extreme conditions of balancing a lack of demand for their products, furloughed work forces, and will need to hoard cash to sustain the recovery period until demand returns.

As of now, there is an undeniable red flag in ad-tech as usage is not linear to revenue. This has not occurred in the history of any ad company currently only on the market. The next three months will split the market into two camps: those who believe the market has “priced in” the full effects of the Coronavirus and those who believe there is too little information to price and predict the length of the recovery.

No camp is right or wrong, we simply haven’t been here before.

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.

Ad-Tech: Keep an Eye on Mobile OS Changes

Posted on by io-fund

INTRODUCTION:

The announcement that Facebook is killing off web supply on Audience Network is actually quite important. This is because the story is changing. You can expect a lot of questions on the next earnings call in regards to this announcement.

To be clear, for Facebook, web supply is not as important as mobile supply. Right now only web supply has been affected. This article suggests that mobile supply could be next. If so, then the story will change quite a bit for Facebook — and Twitter. Google is also in this camp, but Google has search and is more protected and diversified. Due to Google’s strength in AI, a pullback would be welcomed. Smaller companies like Criteo will also be affected.

For Facebook and Twitter, if mobile supply is cut off, we could see a lower average revenue per user become the norm across these platforms.

I would never suggest someone sell a winning position, however, if you’re in Twitter or Facebook, then be mindful of any drawdowns between now and January of 2022 for these less diversified ad companies (compared to Google). Twitter is up 20% this year, so feel free to ride that wave, but have a mental stop and understand the difference between a story or product that has changed compared to undulating market sentiment.

If the ad-tech industry changes how mobile supply operates on the back end, funds and institutions will know first. Funds have full-time analysts to track this. I agree with the Pivotal Research analyst who grew bearish after the Chrome browser changes and Apple’s iOS 13 changes … investors are growing complacent because they have seen some strong earnings reports despite data privacy headwinds. That quote from Pivotal matches my understanding of the situation.

We first covered this in the Google 2019 PDF in July. I also covered this for MarketWatch a few months later in October. However, this has taken time to evolve (hence the market’s complacency).

The real tourniquet on data collection is not coming from regulations, rather it’s coming from the browsers and mobile operating systems, which I describe below.

What is Changing: Browsers Now, Mobile OSs Likely to Follow

Although many consider Cambridge Analytica a temporary issue, the advertising industry would say the privacy changes that began with the GDPR, or the General Data Protection Regulations, had serious side effects. These privacy rules were a decade in the making, and were enacted by the European Union about two months after Cambridge Analytica broke. There was quite a bit of speculation by the Wall Street Journal and others that the GDPR would actually make Google and Facebook stronger (which is not true).

The GDPR’s biggest accomplishment was to put in context the issues around tracking people and collecting data across apps or websites where no relationship exists. Having these standards allowed others outside of the EU to follow. 

The main set of regulations that followed the GDPR is the California Consumer Privacy Act (CCPA). The CCPA was put on the 2018 ballot and passed, and is now currently in effect as of January 1st, 2020.

Browsers

Apple has been whittling away at data tracking on the Safari browser since 2017. I covered this in-depth back in July for our premium members.

Apple’s initial release of Intelligent Tracking Prevention had little effect on Google but did have an effect on publishers. Google stated at CES 2019 that publishers were seeing half the CPM value as a result of ITP’s impact (CPMs is a common way to pay for advertising and is based on cost per 1,000 impressions).

Apple then released ITP 2.1 in an attempt to stop Google and Facebook’s tracking methods, and furthered the attempt with ITP 2.2. The subsequent releases shortened the amount of time a cookie could be stored to 24 hours to prevent loopholes unique to Google and Facebook.

As covered in the PDF, there have been rumors for some time that Google planned to follow in Apple’s footsteps. Adweek reported on this in April of 2019. We now have confirmation that Google will be following in Apple’s footsteps by 2022 by eliminating third-party cookie tracking with the Chrome browser.

Mobile Operating Systems

The main takeaway from this write-up is to keep an eye on changes in mobile operating systems. The browsers are not as primed for data collection as the mobile device. The main impact will be at the mobile device level.

The second change was to cut off apps like Facebook Messenger and Whatsapp from using a loop hole that allows them to continue tracking user activity even when the app is closed.

Ad industry professionals are speculating that Audience Network on mobile may not survive future iOS privacy changes. Facebook, Twitter and others may be forced to shut down their ad exchanges on mobile through a slow squeeze. If this happens, we are dealing with an important change in the story for Facebook and Twitter.

Regarding Snap, TTD, Rubicon and Pinterest …

Before I go into more depth on Facebook and Twitter, I want to cover a few of the other stocks we’ve actually initiated coverage on – Snap, TTD, RUBI, and PINS.

Regarding Snap:

These changes are connected to the reason I pulled out of my Snap recommendation. Snap’s big growth potential was based on launching an Audience Network of their own. This was looking less and less likely. Without this, growth for Snap will be slower than what I would need to recommend a real growth opportunity. They’ll probably nudge up in monthly active users quarter-over-quarter but I don’t see a new trajectory like I did from the filter changes in Q2 2019 or from the highly anticipated Audience Network (that is probably now defunct).

Regarding Pinterest:

Facebook has been very restless since the privacy concerns. We saw the company attempt a blockchain project, which I felt strongly would not succeed the week it was announced.

They also attempted a dating offshoot, which is unlikely to convert users from well-established Match/Tinder. Then there was Lasso based off TikTok. They’re also aiming for a WePay feature in Whatsapp. Now they are going after Pinterest with Hobbi.

Just remember, acquisitions are more successful than an upstart for bigger tech companies (Instagram, Whatsapp). The Facebook social platform is a phenomenal success but there is basically no track record of launching something new and converting users for nearly 15 years.

Regarding Pinterest, I wouldn’t over-react to another one of Facebook’s announcements. I would expect there to be many more pivot attempts from them in the future. Pinterest has a strong foundation and is ran by a very solid founder/CEO.

Ideally, the browser and OS changes shift ad dollars away from Facebook – this is a very real possibility. If so, Pinterest’s ad model is well situated for the future of AI and product discoverability.

Quick note on The Trade Desk and Rubicon/Telaria:

There are two reasons to drop cookies or pixels on browsers and/or track app activity through mobile software.

1) The first is for attribution, which allows the advertiser to know an ad was seen or an ad video was completed.

2) The second is a bit more nefarious, which is to actually track your activity and create behavioral profiles for advertisers to target. This more nefarious data collection is the culprit prompting changes across browsers and mobile operating systems.

TTD and Rubicon are not deep in the business of data collection (#2) because they do not have the conflict of interest of also being a large publisher with 2 billion users (Facebook) or 400 million users (Twitter). They are in the business of ad serving and attribution (#1). There are retargeting ad exchanges, like Criteo, who have seen major declines in stock price.

In addition, attribution (#1) will need to be resolved for everyone’s sake because publishers still need to make money. The Apple ecosystem is based on millions of app publishers making money. Online activity – and many websites — are also supported by ads. Attribution is not a privacy concern and it doesn’t lead to privacy issues when done correctly.

In other words, TTD and Rubicon’s core business model is not reliant on data collection because they are not heavy retargeting companies. Therefore, I don’t see the story changing right now for those companies. They do need attribution but the whole ecosystem will need this. I’ll be listening for TTD’s answers to these questions on the earnings call but I expect them to echo something similar to what I’ve described. If they say something else, then I’ll circle back.

Similar to Pinterest, I’m curious to see if the changes will divert ad dollars away from FB and towards TTD and RUBI as the backend changes should level the playing field.

More on Audience Network, MoPub and AdMob …

First and foremost, it’s important to understand that the more data you have, the more your revenue grows exponentially. There is nothing linear about data (or data science or data mining).

Google, Facebook and Twitter were uniquely positioned in the early days of native apps and mobile browsers because they were the first to build and own large audiences.

Due to this positioning, the bright idea occurred to these companies to acquire or build ad exchanges. Basically, they figured out that ad exchanges are able to insert code across a lot of websites and apps, which in turn, pumps a lot of data. 

The ad exchanges are called AdMob (Google), MoPub (Twitter) and Audience Network (Facebook). The purpose of this was to collect data from as many sources as possible to pump their ARPU on the social platforms they own.

Maybe think of Google, Twitter and Facebook’s ad exchanges as the gasoline in a Ferrari. The gas isn’t worth much compared to the vehicle, but in turn, the vehicle doesn’t go very far without the gas. Data fuels the machine. It’s not worth discussing the value of the gas, which in this case, might be $40.

Facebook says Audience Network pulls in about $3 billion. That’s irrelevant because it’s pumping data for higher ARPUs on their own platform. This is why Facebook makes much higher ARPU than other sites.

Twitter’s MoPub also has software inside many apps that Twitter does not own. The purpose is to collect data, that in turn, leads to higher CPMs/ARPU on Twitter because they now have more data and better targeting than the competitors.

To illustrate, when you close your Facebook app, and you open a Bloomberg or Fidelity app, Facebook now knows you’re a stock investor and can send you a Charles Schwab ad. This information is then sold to advertisers on the Facebook feed. The software that tracks your activity outside of Facebook is Audience Network but the revenue is reflected on Facebook’s ARPU.

Facebook’s social feed does not have as much valuable data as you might think. It’s your cross activity that compounds into perfect behavioral profiles. Facebook may know you went to the Bahamas based on your last social media update, but did you fly first class? How often do you check stock trading apps while on vacation – once per week or five times per day? Do dine out or get delivery in your hotel room?

Tracking activity with Audience Network helps them determine if they should show you a Mercedes Benz ad on Facebook, whereas your posts on Facebook are not enough to tell them your income bracket and spending patterns. Or maybe they’ll show you a Grubhub ad if you ordered in.

This is a fairly challenging concept for people outside the ad industry to understand. The Facebook bulls continually revert back to thinking Facebook’s revenue comes only from the Facebook app, Instagram, Whatsapp. They’ll cite Audience Network generates $3 billion, etcetera.

Google is more protected with search and their response was more muted on the recent earnings call. Facebook’s was a bit more cautionary. I’ve included clips below.

RECENT EARNINGS CALLS:

Google had the following to say in the recent earnings call:

  • On page 30 of Alphabet’s most recent annual report, the company reflected slowing growth across “Google Network Members’ properties”

“Our Google Network Members’ properties revenues increased $1,537 million from 2018 to 2019. The growth was primarily driven by strength in both AdManager (included in what was previously referred to as programmatic advertising buying) and AdMob, partially offset by the general strengthening of the U.S. dollar compared to certain foreign currencies.

Our Google Network Members’ properties revenues increased $2,394 million from 2017 to 2018, primarily driven by strength in both AdMob and AdManager, offset by a decline in our traditional AdSense businesses. Additionally, the growth was favorably affected by the general weakening of the U.S. dollar compared to certain foreign currencies. “

Source: ABC.XYZ/InvestorABC.XYZ/Investor

On the earnings call, an analyst from BMO Capital Markets asked about Chrome changes. Sundar PIchai anwered the following:

“And so we are engaged in these issues, and we anticipate and structurally work on them early on. So it’s how we broadly approach these things. And so there’s nothing notable to call out, other than there will be continued changes in these ecosystems, and our ability to anticipate and adapt is key to the years ahead.

Facebook had the following to say in the recent earnings call:

Dave Wehner, on the Q4 2019 Facebook earnings call:

“We expect our year-over-year total reported revenue growth rate in Q1 to decelerate by a low-to-mid single digit percentage point as compared to our Q4 growth rate. Factors driving this deceleration include the maturity of our business, as well as the increasing impact from global privacy regulation and other ad targeting related headwinds. While we have experienced some modest impact from these headwinds to date, the majority of the impact lies in front of us.”

Analyst Brian Nowak of Morgan Stanley asked Wehner to expand on the comments above:

“Yes, we are seeing headwinds in terms of targeting and measurement, but as I noted, the majority that impact lies in front of us. Just as a reminder we utilize signals from user activity on third-party websites and services in order to deliver relevant and effective ads to our users, and in that regard, there are sort three overlying factors that I’d point to, and I spoke to these on prior calls as well.

First the recent regulatory initiatives like GDPR and now CCPA have impacted, and we expect will continue to impact our ability to use such signals.

Secondly mobile operating systems and browser providers, such as Apple and Google, have announced product changes and future plans that will limit our ability to use those signals, and then finally, we’ve made our own product changes that gives users the ability to limit our use of such data signals to improve ads and other experiences, and there I’d point to something like the rollout of Off Facebook Activity controls, and that’s at 100 percent today.

So each of these factors limits our ability to target and measure the effectiveness of ads on our platform and that can negatively impact our advertising revenue growth. Both Mark and Sheryl talked about importance of ad targeting for small businesses, and I think it’s important to note that the regulatory and platform changes will have a disproportionate impact on the ability of small businesses to use ads to grow and thrive.”

Rubicon and Telaria Merger

Posted on by io-fund

On Thursday, The Rubicon Project and Telaria announced plans for an all-stock merger. The combined companies state this will be the largest independent supply-side platform (SSP). Rubicon shareholders will own 52.9% and Rubicon CEO Michael Barret will become CEO of the new company with a stock ticker $RUBI. The deal is expected to close in the first half of 2020.

Aggregate revenue for the combined company grew 32% to $217 million for the year ending September 30, 2019. The combined company will also have $150 million in cash and no debt. Both companies had market caps around $350 million prior to the merger. The merger is expected to reduce costs by $15-$20 million with 600 employees.

The main benefit to this merger is that Rubicon will now be truly omni-channel (i.e. desktop, mobile, connected TV, video, etcetera) without having to build a connected TV platform, which can take two to four years.

In turn, Telaria is now able to attract larger media companies who want to work with fewer partners across various types of inventory. The combined company is a full-service SSP that will require advertisers and publishers to work with fewer vendors.

The company expects Connected TV ads to make up mid-to-high teens as a percentage of business. Previously, Telaria’s CTV ad business accounted for 44% of the most recent quarter’s total revenue.

Strengths and Weaknesses

Strengths

Supply-side is typically the better side of the deal when compared to the demand side.

On a high-level overview, this is because publishers (the supply side) own the content and the data, and therefore, they control the relationship. Advertisers are fickle and will quickly switch who they are working with according to the best pricing at the time.

Please note: there is a full-length report on the differences between SSPs (Telaria/Rubicon) and DSPs (The Trade Desk)  in the Telaria PDF.in the Telaria PDF.

Telaria and The Rubicon Project onboard publishers. This provides a slight advantage to onboarding advertisers. Nearly every major success in advertising is on the publisher side. Facebook and Google own the content and the data. Gaming exceeds Hollywood and music more than 15X on revenue due to owning content and data with free-to-play alone/ad-supported exceeding Hollywood’s revenue alone. The Superbowl charges record-high prices by owning the content and the viewer data. Therefore, having a larger SSP in the Connected TV ad space is intriguing to say the least.

The most important strength and catalyst for the merger is Connected TV ads, of course. There are many statistics provided in the Telaria PDF and Roku/TTD PDF to support my conviction on CTV ads.

Read the Roku/TTD PDF here covering Connected TV ads.Roku/TTD PDF here covering Connected TV ads.

Weaknesses

Rubicon has some weaknesses around growth that are important to discuss. Although revenue was up 27% year-over-year, the revenue was flat at essentially 0% quarter-over-quarter at $37.64 in Q3 compared to $37.87 in Q2 2019. In Q4, Rubicon is guiding for year-over-year growth of 15-16% at $47 million-$48.5 million. The EV/revenue reflects the lackluster growth at 2.17 compared to The Trade Desk’s EV/Revenue of 19 and Telaria at 4.7.

According to the most recent earnings call, the CEO stated, “we got dinged by [new transparency methods] slightly.” Basically, what happened is some app publishers have not converted to the new standards (likely due to development constraints) and this is affecting demand (advertisers are starting to require the new transparency methods). The new transparency methods are app.ads.txt, which reduces app ad fraud by requiring app publishers to provide text files that list the ad networks authorized to sell their inventory.

Another issue affecting Rubicon is supply-path optimization, or sellers.json. In many instances, Rubicon is a reseller rather than the SSP with the direct relationship with the publisher. Advertisers are pushing back on resellers as more middlemen can increase costs in the real-time bidding process and create opportunities for fraud.

With that said, the aggregate company with Telaria and Rubicon combined has year-over-year growth of 32% for Q3 compared to The Trade Desk’s at 38%. It’s the lack of revenue in the most recent quarter and the upcoming quarter for Rubicon that is concerning (not the TTM).

Regarding weaknesses, I can’t stress enough that the advertising market is incredibly tough as there is not much intellectual property to stave off competitors. For SSPs and DSPs, it is a relationship-based business and a pricing war. I would personally not go long on any ad platform (that does not own the content) without a stop in mind. At the very least, a wide stop should be considered.

About Walled Gardens & CCPA

As Telaria CEO Mark Zagorski stated, this is “an opportunity for someone to create really The Trade Desk of the sell-side — a real alternative to those walled gardens.”

The walled gardens he is referring to are Google and Facebook. They provide little transparency to advertisers and publishers. Meanwhile, they lock publishers into their ecosystems, and advertisers with precise data targeting.

These two companies essentially wiped out the ad industry around 2014-2016 and both Rubicon and Telaria come from the wreckage of those years (Telaria’s path was covered in the PDF). This should be behind us now as what Google and Facebook did is increasingly seen as anti-competitive due to leveraging private data as a means of shutting down ad competitors.

One nod towards the end of the anti-competitive behavior was Amazon opening up its Connected TV ad platform. I am fairly confident this was to thwart any future legal issues and is a healthy sign that the days of iron-clad walled gardens may be behind us.

With that said, there will need to be some finesse from ad platforms on the privacy side. California has passed the California Consumer Privacy Act (CCPA) that will take effect very soon on January 1st. The law is a bit vague as to how to define the selling of consumer data, which Facebook is already preparing to fight.

The reason this is applicable to The Trade Desk or Rubicon/Telaria is these companies typically have various tracking code for omni-channel campaigns, such as TTD’s Universal Ad ID. Interesting enough, Telaria’s CTV ad platform could be protected as they are partnered with Nielson for data, an industry staple for nearly 100 years. Nielson typically collects data on viewing habits rather than on private individuals, so Telaria could actually have an edge if privacy laws prevent the tracking of individuals.

The above paragraph is not something to worry about right now, but I will be keeping an eye on it to make our readers aware if the CCPA extends to omni-channel tracking methods.

Conclusion

The ad industry is often messy and convoluted, which we are seeing with Rubicon’s most recent quarter. They’ve made it clear their intention is to compete with The Trade Desk. While TTD is the first mover, this merger can offer better data for targeting purposes due to being a supply-side platform.

Small Caps: Breaking Out

Posted on 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.

 

Pinterest Update

Posted on by io-fund

We weren’t expecting the market reaction we saw today with Pinterest and are now trying to determine if this was an over-reaction connected to the eBay and Etsy earnings, or if it’s indicative of a long-term trend in sentiment towards Pinterest, specifically. Etsy was down 15% today.

There was some misinformation circulating on the revenue miss, which is frustrating. Yahoo Finance! reported a miss of $2.5 million whereas the actual miss was $900,000. The lower number is confirmed by both CNBC and Reuters. Barlcays said on the call that Pinterest came in above their estimates. I put more info on Yahoo’s mistake below.

Other metrics:

  • Company beat on earnings per share of 1 cent vs. expected 4-cent loss
  • Beat on monthly active users of 322 million vs expected 311.8 million
  • Miss by 1 cent on average revenue per user of 90 cents vs 91 cents, per FactSet
  • Company guided for improved 2019 adjusted loss of -$10M to -$30M compared to previous estimates of -$25M to -$50M
  • Company slightly improved the guidance on the low end to $1.1 billion to $1.115 billion. According to Refinitiv, analysts were expecting sales of $1.2 billion although this does not match company guidance.

I’m torn as the international ARPU is weighing on the company, as I spelled out in great detail in the PDF, yet the growth is also decent for a company of this size and I see a path to profitability here. If Pinterest can crack international ARPU, it will make an excellent stock and has the potential for surprising upside. Notably, Pinterest discussed a partnership with Shopify on the earnings call.

As I stated in the PDF, social media buy-and-hold positions should be done at valuations below 10 P/S, therefore, I do not have a buy-and-hold position. For my current momentum play, I am going to wait to see if Pinterest holds $19 at tomorrow’s close that Knox outlines below.

I think the sell-off today was irrational but that’s never stopped the market before, therefore, I’ll give it another chance tomorrow while holding firm to the $19 stop. If it closes below $19, we’ll close our position and regroup.  

Technical Analysis:

The symmetrical move of PINS recent decline that started in July compared to the first decline in May (A)=(C), coupled with the RSI positive divergence shown in the last report, technically speaking, are indicators that lead to high probability trades. However, the market’s shift in sentiment towards high beta tech stocks is unpredictable, and PINS, even with reporting a miss of $900K in revenue yet with a few upside surprises like monthly active users and adjusted EPS, was a steeper decline than anticipated.

The original analysis provided stop suggestions at $24.50 or $22, depending on your risk tolerance. We have blown through both after hours, and look to be opening just above the 161.8% extension around $19.30, creating a massive gap, and all new lows.

One thing about the market is that it hates gaps, and more times than not, eventually will fill them in. We believe the earnings report may have been an over-reaction. We are personally going to see if the price closes above the 161.80% retrace at $19 before closing the position.

Yahoo! Finance Error ..

Not sure how many people pay attention to Yahoo! Finance but they made an error and reported a miss of nearly 250% higher than the actual miss ($900K vs. $2.5M). May have not had any material impact but I thought it was important to look deeper into this.

This was confirmed inaccurate after checking Yahoo’s website more closely. i.e. it was not a different reporting source for analyst estimates, rather was a misprint.

Pinterest Premium Analysis

Posted on by io-fund

46042228-46d0-40bd-961c-f35d9bb304d6_Pinterest-premium-report.pdf

Pinterest Premium Analysis

Pinterest – Timing Looks Better Now  

I’ve been cautious about Pinterest in the past as social media often has a hard time holding its value in the months that follow the IPO. Pinterest’s lock-up period is behind us with the expiration having occurred on October 15th – same day as Zoom. 

My best guess is that the IPO lock-up is already reflected in the price going into these earnings, and Pinterest has a high probability of doing well in the next quarter. Pinterest has proven itself as a solid social app in its first few quarters on the public market – something that few of its predecessors have done.  

Pinterest is strongest in the fourth quarter. Unlike Snap which lowered guidance going into Q4, this should be Pinterest’s best quarter. In fact, Pinterest is second to Facebook for generating holiday revenue (although Facebook in the lead by a wide margin). In the event Pinterest remains steady this earnings season, I’m interested to see if the issues with Twitter and the lowered guidance from Snap will help investors view Pinterest as a good option, comparatively. 

Q4 tends to outperform historically …. 

Overall, Pinterest has a stellar business model that functions like a hybrid between e-commerce, social media and display advertising. Pinterest refers to this as a discovery engine. Similar to Shopify, Pinterest challenges the dotcom era e-commerce companies that still dominate retail, such as eBay and Amazon, an area overdue for disruption. 

In the past, I have been critical of Pinterest’s international ARPU. In the S-1 filing, the company was somewhat evasive about it when quoting the overall key metrics. I was vocal about this around the IPO as it’s the lowest ARPU I’ve ever seen from a social site. Note: overall ARPU for Pinterest is healthy due to the United States averaging out international. I expand on this point below.

Ben Silberman is a classic founder-CEO who flies under the radar. I’ve seen him speak quite a few times and he has an excellent reputation in Silicon Valley as someone who is ahead of the trend curve and is patient in his outlook. He is not hasty and you won’t see him in the limelight much, although he has the ideal, impassioned Founder-CEO recipe. 

Fundamentals & ARPU

In Q2 2019, Pinterest reported 62% revenue growth year-over-year of $261 million. Analysts were expecting $233.7 million in revenue. Adjusted EPS was -$0.06 versus expected -$0.08. The company raised revenue guidance slightly from $1.06 billion at the midpoint to $1.105 billion. This was a solid earnings report. Monthly active users also exceeded expectations at 300 million versus 291 million.

Average Revenue Per User  

In the past, I have been a critic of Pinterest’s international ARPU. To be clear, I still see this as an important risk to continually monitor as a disproportional amount of growth is coming from international (80% growth) yet the ARPU is so low, that it could damage operating margins long-term and lead to losses. 

The United States users monetize at $9 average revenue per user annually while the international user monetize at a mere 25 cents per user, as of 2018. This is what that looks like:

Pinterest’s international revenue is growing at 199% last quarter, but this is because the numbers are so small. To compare, Facebook’s international ARPU is at $7 and has never been below $1.50 as a public company even with the stock struggled in 2012. Twitter has seen below $1 ARPU but was also hovering at 5 price-to-sales during some of this time period compared to Pinterest’s 16 P/S. Meanwhile, SNAP has nearly 1500% more ARPU in the rest of world region at $1.24.

Pinterest is Niche, yet Fires on Many Cylinders     

The United States is where nearly all of Pinterest’s revenue originates. Pinterest’s top five countries are the United States, Brazil, India, Turkey and Russia. Many investors are discouraged by the skew in demographics towards women, as they view this as limiting the addressable market. However, 80 percent of household purchases are decided by women. 

In addition, Pinterest is adding many male subscribers; depending on the source the percentage of new subscribers that are male falls between 40-50%. This will put the gender split between women and men at 70/30 by 2022. 

Relative to market cap, Pinterest is ranked among heavyweights when you consider its digital reach. It nips at the heels of eBay and Twitter and could easily rival Wal-mart in a couple of years (on digital reach). This is important because 87% of Pinterest users have purchased a product due to exposure on Pinterest and nearly half of Pinterest users have a household income over $100,000. 

For retailers, Pinterest rivals Instagram despite having a fraction of the user base. One out of every 2 Millennials use Pinterest with Pinterest driving the same percentage of product discovery among Millennials as Instagram despite having one-fourth the user base. 

Source: Kleiner Perkins

Valuation                 

Pinterest I wrote at length about Pinterest’s valuation on my free blog when the company went public. There aren’t many examples of successful investments in social media trading at above 10 price-to-sales. Historically, Facebook traded at a price-to-sales of 15 between 2013 and 2016, however the company had 1.2 billion users at that time and 63% YoY growth and $1.5 billion to $3 billion in profits. 

Pinterest is a better comparable to Twitter and Snap’s user base in the 300 million range. Twitter did have a P/S above 15 when posting 75% growth but did not last long as the price was down nearly 50% within two quarters. Notably, Pinterest is a discovery engine and I believe the ARPU has the ability to surpass Twitter and to steadily climb rather than be driven by only traditional ads. Snap has also seen sudden corrections above the 10 P/S mark even when reporting 50% YoY quarterly growth. 

With that said, as noted above, advertisers and retailers see Pinterest as a more valuable platforms as users are in a shopper mindset.

In the conclusion below the technical analysis, I point out the probability is higher that Pinterest remains strong this quarter and next quarter fundamentally when compared to peers Twitter and Snap. The technicals are setting up nicely and don’t raise any flag, with the information we have today. 

For a larger buy-and-hold investment, I’d like to get Pinterest below 10 P/S but I am playing momentum in the short-term. 

Technical Analysis                   

By Knox Ridley

Symmetrical Correction  

Pinterest, from a technical perspective, is suggesting a nice set-up. 

First of all, the structure of PINS is a clear 3,3,5 correction. In other words, if you follow the blue A, B, C, they each have an internal structure, which is highlighted with the orange circled letters.  So, the A-wave is a 3-wave move, the B-wave is a 3-wave move, and the C-wave unfolded in a 5-wave drop. This 3,3,5 structure is very common with corrections. 

Most notably, the length of the A-wave drawdown is the exact length of the C-wave drawdown. In other words, we have a symmetrical A=C correction, which is also very common.  This is referred to as the 100% extension of Wave A (So, A=C), which is shown as the blue support on the right. Another visual of this is below.

The length of the first drawdown was about 33.5%. The length of the second drawdown was a little over 34%. Price tends to correct in symmetry, which can offer a guidepost for bottoms as well as help guide risk/reward setups. 

RSI Divergence 

If you look at the RSI pattern in relation to the price action above, we have a clear positive divergence between the RSI and the price. As the price is making lower lows, the RSI is making higher highs, suggesting fading downside momentum. This suggests a possible trend reversal. 

Furthermore, the price is trading just below the 10-day exponential moving average (EMA), and the 20-day EMA. These moving averages give more weight to recent price action, and are indications of short term and mediumterm trends. They should act as resistance, but I’m expecting PINS to take them back, which will add further evidence of an upward trend reversal in progress.

Conclusion  

The market has been challenging lately, but we like this set-up. The fundamentals and technicals seem to agree that Pinterest has a higher probability of receiving a positive reaction to earnings. You can place a stop just under the 100% extension at $24.50. If you want to give it more breathing room, place your stop below the 123.6% extension at $22.00.

SNAP Update: October 21st

Posted on 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:

Connected TV Small Cap

Posted on by io-fund

cb15be9f-e24f-4cf4-94d0-d62736934ca2_Telaria-2019-Analysis.pdf

Telaria 2019 Analysis

Overview of Connected TV Advertising:

 Connected TV advertising is in my top three favorite tech trends for near-term gains, as discussed in the PDF that covers Roku and The Trade Desk. This is a massive opportunity that is occurring right now and should be given close attention. 

 Connected TV takes the best part of mobile (audience data) and combines it with the best part of television (brand messaging). This is a very important trend for brand dollars that should not be dismissed as “eyeballs migrating to OTT.”  

 The opportunity is much larger than represented by the number of people who are cutting the cord as

Connected TV ads are not merely a 1:1 ratio. Rather, these ads represent a higher ratio as the demand (advertisers) consider the medium more valuable. There is evidence that Connected TV is closer to a 2:1 and up to a 5:1 ratio in terms of its value to advertisers in terms of the rates they are willing to pay.

 It may be hard for investors to imagine that some advertisers don’t like working with Google, Facebook and mobile or desktop, in general. This is a very real issue in the advertising world. Many big brands are not convinced that these mediums offer true, lasting impressions. They also do not trust the measurement offered as it’s behind a blackbox that they have no control over. Nielson offers an audience measurement system that many brands are accustomed to for traditional television. 

Below is an illustration of television holding its own against mobile. Keep in mind, this is despite 5 billion mobile devices entering the market over the past decade compared to 2 billion television sets. The 34% who have held onto their television budgets are the advertisers this PDF is referring to, plus any of the remaining advertisers who are frustrated with a lack of measurement and click fraud on the other mediums.  

Connected TV ads already see a $20 average revenue per user, according to Roku’s earnings. This is 200% more than social ads, such as Twitter, at $9 ARPU. It took Facebook over a decade to surpass $20 per user while we can trace the relevant emergence of Connected TV ads to late 2017/early 2018. You’ll also see below that Telaria’s CPMs on Connected TV ads are nearly 5x higher than average CPMs and have surpassed Facebook’s CPMs at the height of its dominance (and even with all of that Facebook data).  

For quick reference, here are some CTV ad statistics referenced in the August PDF which related to the overall size of the opportunity:

Mobile’s share of programmatic video will peak in 2020 at 53.9%. By 2021, mobile’s share will dip below the 50% mark due to the rise of CTV ads. 

To illustrate the growth of CTV, SpotX saw the share of impressions it serves through connected TV increase from 15% in Q1 2018 to 33% in Q1 2019. Innovid also saw CTV ads jump from 13% to 27% and Extreme Reach reported an increase from 15% to 44% over the time span of a year. Telaria reported triple digit growth in revenue from Connected TV ads at 133% year-over-year.

To date, CTV ads account for $8.2 billion of the $70 billion spent on global TV advertising in 2018. Data is driving personalized ads with data-driven video increasing 79% in 2018. Customized ads combining localization and personalization can generate over 12,000 unique versions with the largest customized ad having over 200,000 customized versions. This provides an engagement lift of over 78%.

According to CMO.com, an eye-tracking survey revealed that TV commands 2x the active viewing attention compared to YouTube and 15x the active viewing attention of Facebook. Completion rates are also higher on connected TV at 95% compared to 75% on desktop and 72% on mobile. Brands are convinced they should integrate with digital audience data with 28% saying they have already done so, but 68% plan to do so by September 2019.

Telaria Overview

Telaria is a volatile small-cap stock and even solid earnings has not helped to stabilize the price. Revenue was up 47% with the CTV business growing 133% year-over-year. Gross profit of $14.7 million was up 31% year-overyear in the last earnings report. The company increased the full year revenue guidance to $68-$72 million, up from $66-70 million.

When comparing Telaria to other connected TV stocks on the market, the two differentiators are that it’s headquartered in Israel, which may position it better for global inventory. The opportunity for CTV ads is global, and this could be a major positive for Telaria. 

The second differentiator is that Telaria is primarily a sell-side or publisher platform – rather than a demand-side platform. For comparison purposes, The Trade Desk is a demand-side platform. More on this below.

Telaria is not a pure play but they are focused enough on connected TV to almost meet the criteria. They also sell mobile and desktop inventory, which is not as interesting to me in the current environment as these are not hyper growth categories.  

Telaria Fundamentals

The most important key metric to focus on in Telaria’s report is CPMs, or the cost per 1,000 impressions, which grew from $11.58 to $15.41 year-over-year. These are very impressive CPMs, although not entirely surprising as in my previous report, I have stressed the importance of CTV ads for brand advertisers. 

Brands who have the big advertising budgets, such as Coca-Cola, Geico, McDonalds, etcetera, are willing to pay much more for television. Compare this to Facebook’s 2018 CPMs which are driven by hordes of data and were considered “skyrocketing” when they hit $11 CPM at Facebook’s 2-billion user peak in 2017-2019.

Due to Connected TV ads and high CPMs, Telaria was able to report $2 million over the $15.5-16.5 expected at $18.2 million in the last quarter. The company reported adjusted EBITDA of $1 million with EPS of -$0.03. 

Full year guidance was raised from $66-$72 million to $68-$72 million with Q3 2019 guidance at $16-$17 million. 

Notably, there is no long-term debt on the balance sheet and the company has $58 million in cash.

Valuation is another area where Telaria checks quite a few boxes. Roku and The Trade Desk can wildly fluctuate, but at time of writing, forward price to sales is 14 for both companies while Telaria is at 4.8. 

In the recent earnings report, leadership stated, “This quarter, we also advanced our technology leadership by becoming both the first video platform to provide Nielsen verified audiences to programmatic CTV buyers and by launching our addressable audience targeting solution.”  

This is intriguing as traditional television buyers are impartial towards Nielson for measurement and verified audience purposes. The majority of the television advertising industry is tied to Nielson data. 

The company also expanded the addressable market feature, although addressable is a common offering among

ad companies these days. The more important announcement is Nielson as the brands who are buying Connected TV inventory rely on Nielson for broadcast and linear television ads. 

As you’ll see in the Risks section below, executives at Telaria come from Nielson, which is an interesting advantage for supply-side partnerships.

Sell Side Vs. Demand Side

Put simply, the sell-side works with publishers (inventory or supply). For Connected TV, the publishers are the apps where you view content: Hulu, HBO, Netflix, Vudu, ESPN, etcetera. Sell-side platforms have direct relationships with publishers. 

The demand-side works with advertisers (demand). This is companies like Expedia, Coca-Cola, Geico, McDonalds, T-Mobile, Verizon, BMW, Mercedes, and sometimes other publishers who want to advertise their services (ESPN could buy advertising on Vudu, for instance). 

Programmatic is real-time bidding that removes salespeople. Ad companies often talk up this piece, but in reality, just about all ad-tech is programmatic and offers real-time bidding these days (and has been since about 2012-2014 when ad-tech underwent this evolution for mobile and desktop ads). This is not a differentiator. It does help to facilitate more ad placements and some brands who were adamantly against mobile or desktop will use programmatic for the first time with Connected TV. 

There are strengths to the sell-side approach. The first is that switching costs are higher for publishers than for advertisers as publishers have to install software into their applications to serve the ads. They’ll typically limit the number of sell-side platforms they work with as it can create app bloat to broker with too many sell-side platforms (SSPs). 

Telaria advertisers an impressive client list, including Sling, Hulu, PlutoTV, A&E and the Discovery Channel. One thing to note: ad-tech companies can integrate via server to server rather than through software. The latter is a much stronger relationship. Telaria, and other ad-tech companies, typically don’t disclose if the client list is a direct software installation or a server-to-server integration. In the case of a server to server integration, the switching costs are not high and the relationship is similar to DSPs who have to consistently outperform in order to win the business. 

For example, Telaria may have a direct relationship with Warner Brothers but not with Hulu (who likely uses more than one SSP).

To contrast, the demand-side is almost never loyal and almost always has low switching costs. Often, advertisers will run campaign tests across as many as twenty DSPs and will run the campaign on those who perform the best. This is the downside to programmatic and server-to-server integrations across ad exchanges. Even when the SSP is a server-to-server integration, they are not as aggressive as advertisers in switching. 

It requires very little time or energy to run these tests. Some advertisers will repeat this process frequently before every campaign, going with only the DSP who is performing well in that month. DSPs will differentiate among themselves with features such as omni-channel advertising to become a one-stop shop for campaigns across multiple mediums and device types. 

Of course, as the world is well aware at this point, data is king. The publisher will be paid more if the advertiser can target the audience with more precision. Therefore, the sell-side has an advantage because the direct relationship with the publisher provides the best data. To illustrate, Roku is a publisher of the Roku Channel and a platform owner, as well. There is a lot of data here from these sources, and therefore, the average revenue per user is very attractive at the $20 ARPU. 

Demand-side platforms, such as The Trade Desk, rely on the identifier for advertisers (IDFA) from Apple and their own Universal Ad ID. This helps to track the user for omni-channel advertising and retargeting, such as when a person switches from watching OTT apps to browsing on mobile. However, the playing field is equal for IDFA across all advertisers while The Trade Desk is attempting to have an advantage with their own proprietary Ad ID. 

When comparing apples to apples, the sell-side is better positioned as they hold the data and the inventory in a space that is more limited in inventory than in advertisers. The relationship that is created by installing software holds more weight than the relationship that is dependent on monthly pricing. 

You can see evidence of the value of SSPs historically in the mobile ecosystem. The larger players acquired sellside platforms, such as Google’s acquisition of AdMob for $750 million and Twitter’s acquisition of MoPub for $350 million. These ad companies have little reason to acquire a DSP as this is where they already excel and is easy enough to build, if you have the data. Similarly, Facebook acquired LiveRail for $500 million for its premium video publishers. 

Risks

As noted in the supply-side discussion, ad-tech companies don’t disclose if their client list is a direct software installation or a server-to-server integration. The impressive client list that Telaria discloses, including Sling, Hulu, PlutoTV, A&E and the Discovery Channel, may be brokered to Telaria through server-to-server integrations rather than directly served through ad software. This is a risk because another SSP can easily establish a serverto-server relationship through a web of ad exchanges. Direct software is a more protected relationship.

A primary risk is that Telaria does not have a straight path behind ownership and management. We do not have a passionate-founder type like Anthony Wood or Jeff Green at the helm. I’ll outline what I’ve been able to gather and add some information as to my experience with ad-tech companies during that era. 

Founded in 2012, Telaria’s former company, Taptica, was a mobile user acquisition company. Interesting enough, Neilson EVP Itzhak Fisher was an early investor, which may be why we see Nielson recently partnering with the company on audience measurement. By April of 2014, Taptica wasn’t doing well and sold a purchase option for a $1.5 million line of credit. By October 2014, Marimedia purchased Taptica for $13.6 million. 

By May of 2015, the company issued a profit warning and Marimedia changed its name to Taptica. The company then went through a series of acquisitions, including Tremor Video’s demand-side platform for $50 million. There were mergers in 2018 and 2019, resulting in Taptica renaming itself to Tremor International.

Notably, Hagai Tal, the CEO had to step down due to concealing material facts during a sale in 2011. The former CEO of Matomy Media, Ofer Druker, then took over as CEO of Taptic and Termor International. Mark Zagorski has been CEO of Taptica since 2017, and has connects to Nielson, having served as CEO of a Nielson company named eXelate, and EVP of Nielson’s Marketing Cloud.

Needless to say, the history is complicated. Taptica and Telaria have decent client lists, which helps. This was an era which was particularly hard on ad companies. Part of the anti-trust issues we see with Google and Facebook is that they forced many ad-tech companies out of business. 

There is always a lot of risk when investing in an ad-tech company, and I pointed this out with my analysis on The Trade Desk. There is endless competition as there is no intellectual property to speak of. Advertisers are looking for the best addressable media at the best price, and publishers are looking for the highest returns. Whoever is capable of climbing to the top of the pile (of the 2,000 ad-tech companies on the market) usually isn’t there for very long (1-3 years) The only exceptions are if you have proprietary first-party data or other direct relationships.  

Technical Analysis

By Knox Ridley

Telaria (TLRA) has had a rather complex structure ever since it began trading in 2013 under Taptica/Tremor. In fact, its all-time high occurred on its IPO around $11.09. Since then, its structure has been a complex, overlapping, corrective (A,B,C) structure up until today. 

In other words, it bottomed in early 2016 at $1.29, and though it’s been in an uptrend, that uptrend has been characterized by a series of 3-wave corrective moves. This would put us in the final C-Wave push of this uptrend. So, after a massive move from $1.29 to $10.66, the structure of this uptrend seems to be part of a larger degree corrective structure, which is highlighted by the blue A,B,C. 

That being said, the structure of TLRA is not as reliable as the current trend currently in place. Time and time again when I’ve seen these larger-degree, corrective moves up, over time, and with some additional momentum, morph into a larger degree 5-wave structure, which I never want to miss out on. 

Or, I’ve seen them morph into an even more complex structure or extend to much higher levels. This can be especially true when analyzing the charts of small to micro-cap stocks that are thinly traded. In short, seeing a complex corrective structure in a small cap stock, I take this as the market not really sure what to think of TLRA at the moment.

As you can see in the chart, TLRA reached the 100% extension of the A wave (A=C in blue), and then turned down hard. It found support at the 23.6% retrace level, which coincides with the 200-day moving average. I outlined this region in yellow, and would place a stop just below $5.75. Below this region and the likelihood of closing the massive gap around $3.70 becomes elevated. This will provide entry with a rather tight stop – low risk with high reward.

Furthermore, the MACD has found a base, and is now turning up, while we go into earnings.This is a sign that momentum is shifting back to the upside. Also, note the volume has elevated to new heights, which is signaling increased interest, which has been heavily tilted to the long side. With volume lowering into this pullback, and the stock resting over the 200-day, it appears that TLRA is in a wait and see mode with their earnings on deck.

Governments won’t be able to stop Facebook and Google from abusive tracking on smartphones — but Apple could

Posted on by io-fund

Another day, another headline saying Alphabet’s Google and Facebook are being investigated for allegedly breaking privacy laws and engaging in anti-trust behavior.

Google GOOG, +0.95% GOOGL, +0.98%  has been the subject of three antitrust investigations conducted by the European Union, resulting in more than $8 billion in fines.

Now the company, which controls 31% of global digital ad dollars, will face the U.S. on anti-trust matters. A big question is if governments will be effective, as they may not understand how social-media and internet businesses operate.

In April 2018, Congress tried to piece together how Facebook’s FB, +2.74%  platform works. It ended up being a disaster. Anyone who works in the mobile-ad industry knows that the mobile device, notorious for its massive data leakage, could be used to collect thousands of data points daily to reveal personal thoughts, behaviors and political preferences.

When Facebook CEO Mark Zuckerberg answered a question on how Facebook makes money — “We sell ads, senator” — he wasn’t fooling the ad industry. It’s well aware that Facebook sells audiences and identities, as the company’s ads would be worthless without extracting data points from the mobile device and aggregating them for targeting.

This isn’t your typical targeting of pizza (or beer) ads during football games. This targeting knows you better than you know yourself, as it monitors your actions with data science and look-alike modeling.

The only force that can stand up to the complex tracking methods used by Google and Facebook will be an opposite, yet equal, force. It will not come from governments, which think that paying for search results is the problem. Rather, the problem is the pervasive code and software that continually tracks people, which no competitor can compete with.

Turns out, there is an opposite and equal force in magnitude that has chipped away at the anti-competitive tracking that occurs in the browser with Intelligent Tracking Prevention (ITP). Yet it has not done so on the leakiest device of all: mobile. And that would be Apple AAPL, +0.85%.

Pervasive tracking is anti-competitive

Facebook and Google aren’t the only companies that track users on mobile and browsers. They simply have software and code in more places. For instance, Facebook’s software is in 32% of the top 500 app market — and up to 800,000 applications. They track billions of non-Facebook users with software that can track you whether you have navigated one of their digital properties or not.

There is no way to opt out of Facebook or Google from tracking you, as their tracking is simply everywhere. In fact, security experts, including Bruce Schneier of the Berkman Center for Internet and Society at Harvard, call such tracking outright surveillance.

The incredible depth of information those giant companies have on mobile and internet users is the “moat” that generates unprecedented cash flow in advertising. Both ad-dollar machines have inertia from the data being collected, and it doesn’t appear that the EU’s General Data Protection Regulation (GDPR), anti-trust lawsuits in Europe and the U.S., or the Cambridge Analytica scandal is going to slow those companies.

The flow of data is provided by tracking code across websites. Those include the Facebook “like” button and sign-in. It’s also done through software development kits (SDKs), such as Facebook Audience Network, which is installed in 32% of the top 500 apps on the market. Google simply acquired Android to have tracking across the majority of mobile, and then went further, acquiring AdMob in 2009. That ad network was especially popular on the Apple iPhone.

The moat that Google and Facebook have enjoyed comes from having first-party relationships with nearly every user who has a smartphone. This is called first-party data and is a loophole used to collect data even after a user is on another property where there is no relationship. For instance, Facebook uses first-party data to power ads on streaming service Hulu, but at this point, the first-party relationship does not exist with Facebook’s social network once someone is on Hulu, and this is done without explicit consent (by both Facebook and Hulu). Easy-to-navigate opt-ins are not offered, as it’s unlikely Hulu viewers, who pay for the app, would want Facebook accessing their viewing data if they had to opt-in.

Privacy issues aside, there is no way for another ad company to compete when Google and Facebook collect that much data. Other companies are copying their approach by tracking users with universal ad IDs, including leveraging Apple’s Identification for Advertisers (IDFA).

Apple’s ITP prevents browser tracking

To understand how technology can neutralize tracking, it’s important to look at Apple’s Intelligent Tracking Prevention measures, which were launched in 2017. Apple’s ITP placed a limit on how long cookies are available for third-party contexts by removing third-party cookies after 24 hours.

At first, ITP did not have an effect on Google, as users of its search service and other properties visit those sites daily and, therefore, are not considered third-parties. Some critics say ITP strengthened Google as one of few remaining options to target niche audiences.

In 2018, Apple continued to battle data collection on the Safari browser by shutting down finger printing, a method of triangulating a user’s identity through fonts, screen dimensions and plug-ins.

In March 2019, Apple announced ITP 2.1, which limited first-party cookie storage to seven days. To put that in perspective, a Google Analytics cookie, in theory, would last for up to two years. Safari can now delete it within a week.

Finally, in May 2019, Apple limited tracking to 24 hours, including Google and Facebook.

We’ve seen statistics from publishers where they get half the CPM value — cost per thousand impressions — as a result of ITP’s impact. If they can’t have good targeting, some of their sites become less worthwhile for their advertisers.

Google and Facebook are the companies most affected by ITP 2.2, which was released in May 2019. Still, the companies reported record second-quarter ad revenue — $16 billion for Facebook and $38 billion for Google.

That may be due to Apple’s Safari and Mozilla having a small share of browser activity, or it could be because Facebook and Google have daily first-party relationships with users. A third possibility is that it’s too soon to understand the effects of ITP.

Keep in mind, the browser is not nearly as powerful as the mobile device.

Also Read: Apple’s Stock Price is at Inflection Point

More on Apple’s IDFA

At the Advertising Week conference in New York last week, there was a presentation by Gadi Eliashiv of Singular titled “A World Without IDFA: The Implications for Marketers.” I caught up with him after the presentation to get more background on Apple’s Identifier for Advertisers, or IDFA, and the possibility of Apple restricting the identifier. Unlike cookies on the web, where there is a tag on the browser, mobile identifiers have much stronger tracking capabilities. The identifier belongs to the device and works across applications and devices.

Eliashiv pointed out that attribution, or the tracking of advertising’s effectiveness, will always be a reality as it’s important for advertisers to track return on investment (ROI), and this ultimately supports the mobile ecosystem for the development of new apps and features. He also thought the recent iOS 13 upgrade, which offers users the option to sign into apps via an email address that Apple generates, is a way of logging into apps and getting personalized experiences without having to give up personally identifiable information.

As Eliashiv said, if it were an easy decision, then Apple would have already made it.

Apple’s chance to make a statement

As of now, Apple has no plans to remove the IDFA, although for a company that insists it is a protector of privacy, at the very least, there should be better opt-ins. The changes made with ITP on the browser may not have had a big effect. However, the implications of Apple restricting IDFAs on iOS becomes more serious with the iPhone having a global penetration of up to 20% of smartphone sales.

Even companies that have fancier IDs, such as Trade Desk TTD, +3.04%, with its Unified ID, relies on IDFA to some extent, and any changes to IDFA would limit the ability to collect and stitch together fragments about the user.

That said, perhaps Apple should have addressed those issues before hyping its privacy efforts. As of now, Apple is enabling a lot of tracking with the IDFA, and this may not be an appropriate compromise for attribution as users are completely unaware their activity can be tracked across the entire device.

Furthermore, users don’t have any method for approving the software development kits, from Facebook’s Audience Network or Google’s AdMob.

Even with anti-trust regulations, this level of tracking will continue. That is, unless Apple steps in.

Also Read: Apple is Not a Growth Company Anymore

Roku Technical Analysis Update

Posted on by io-fund

Momentum swings in both directions. Last week, we woke up to Roku at a 20% drawdown in a single trading day. In fact, within 2 weeks, Roku’s price has fallen 39% from its all-time highs. If you are new to Roku, it would be easy to panic. However, for those that have been involved with Roku from its IPO didn’t even flinch. Within 2 years of trading, Roku has had 3 drawdowns of around 50% from peak to trough. The largest drawdown has been 64.47%, and without a strong conviction, there’s no way an investor could sleep while holding Roku for the long haul. 

Whenever we see the market get it wrong, again, on Roku, and the technical break significant support, as a Roku investor, I don’t get afraid, I get excited.  It’s times like these that I look to add to my Roku position as I have personally outlasted every Roku drawdown since it went IPO. The point of this report is to gauge the probability of Roku’s current drawdown, which can act as a reasonable point of entry.

Elliott Wave

Roku’s impulsive chart pattern is unfolding nicely. My primary count has us completing a blow-off top 3rdwave, highlighted in the blue numbers, where the explosive 3rdwave, with peak technical momentum, pierced the upper range of the trend line.  We are currently starting the 4thwave down and when we zoom into the 1-day waterfall event, we can see a clear 5-wave pattern down, insinuating a 5-3-5 correction is underway. I estimate this correction will take us to the 50% – 61.8% retrace level ($96-$77), after we get a corrective bounce. 

These levels not only coincide with the trendlines developing, but they also coincide with the 100% extension and the 78.6% extension. I see this area as a strong region to expect the pullback to find support, and depending on the broad market, could be an excellent place to add to, or begin building a position.

Basic Technical Analysis

Some of my favorite gauges for market health and actionable decision making is based on basic trendline/momentum data. 

First off, I anchored a Volume Weighted Moving Average (AVWAP) to the December low, which is the momentum line highlighted in pink. This moving average clearly shows that, even with a near 40% drawdown, the bulls are still in control. This moving average lines up perfectly with the 200-Day moving average, highlighted in blue. These 2 levels will act as major support as they move into the targeted support ranges, strengthening the support within this region.

Moving onto the broken support regions, you’ll will notice the 3 separate tops (one of which we are currently experiencing). Below these tops you’ll notice the line in the sand support region, highlighted in dotted black. Roku has definitively broken through the current support, after breaking a significant trend line, also highlighted in black. Notice the red arrows. There are 3, all lining up with the exact moment the RSI, MACD and price broke their respective trend lines from the December low. 

I would urge you to be cautious trying to buy the dip too soon in Roku.  I do believe we will see a corrective bounce from over sold levels, but I expect it to be corrective before we see the final drop into the 50% – 61.8% retrace zones.  You’ll notice the histogram in the MACD, dropping to levels we have never seen with Roku. When we see such a sharp drop in the MACD, more times than not, it’s an indication of too soon, too fast, which leads to the very least a bounce.  Also, you’ll notice that the RSI is right on the 30 line, indicating oversold levels as well.

However, while we are looking at the RSI, I want you to notice how many times the RSI broke the 40 line, which in a bull market the RSI will usually not break, and then dropped to the 30 line. Three times this occurred, and 2 of those time lead at least a 50% drawdown.  I use this as further evidence to hold off on adding to Roku at these levels. 

In conclusion, I believe the $96 level will be the next support region that Roku will react to. It’s due for a bounce, I’m expecting at minimum to the $115-$120 region, but this bounce should be corrective before we drop to the 61.6% region. I will look to add to my position around this price cluster.