Category: AR

Unity Earnings & What’s Next

Posted on by io-fund

Hope everyone had a nice weekend!

I wanted to drop a quick note about Unity as my next earnings premium blog is coming out later this week and this is probably one you should hear from me on sooner rather than later. 

You can expect more detailed analysis on Voyager Digital by Tuesday. As you can imagine, we go through many stocks before we find ones that we like, so the process can be a bit involved when recommending new momentum names.

Regarding QCOM, I’m not worried about supply issues as I continue to see this as the best way to invest in 5G along with Marvell. However, I’ll elaborate more by the end of the week in a more detailed write-up.

Next week, you’ll get my H1 2021 cloud report. This is one of my favorite reports because it can bring a lot of clarity to the space. Plus, cloud has taken a back seat so a good time to make sure we are well-positioned. 

Also, we are getting close on the new website. Definitely February for ETA and could be as soon as end of next week for the live demo. 

Here are my thoughts on Unity:

Unity was hit hard following the Q4 2020 earnings report with the stock down nearly 15%. This company is bound to polarize investors as it has a valuation on the higher side and is now guiding low for fiscal 2021 for full year revenue of $950 million to $970 million, or 23% to 26%, compared to growth of 43% in fiscal 2020.

We have a 1% allocation to Unity and are very comfortable with this allocation. Primarily, we think Unity will exit this year with the XR story out in front and we are not as concerned with any impact from the IDFA changes in the short-term. This isn’t a stock that I care to time as the company has a near monopoly on XR development across all verticals. 

So, why is Unity guiding lower? I think the company needs to sort through quite a few things and is being cautious while doing so. First, covid created a pull forward for gaming companies. Second, IDFA is taking effect in the spring. Third, the market for AR/VR development has not taken off yet (keyword yet).

Unity is in a similar position as Nvidia or AMD a few years ago – gaming is a nice foundation but the real story is that gaming has placed Unity in a unique position for the next wave of app development. 

Unity Ads must navigate changes from Apple on the IDFA – however, I don’t think they’ll have any trouble doing so. The IDFA changes from Apple are aimed at companies that essentially perform surveillance on the mobile device under the guise of behavioral ad targeting, such as Facebook and Google. 

I’ve maintained that I think the demand side will get hit harder here than the supply side as they do not own the relationship with the publisher. Unity is on the supply side and owns this relationship. Per Unity management, they will see about a $30 million hit from IDFA changes.

Gaming is primarily contextual advertising rather than behavioral targeting. By contextual, I am referring to the fact that advertisers buy gaming audiences based on the fact the gaming content is enough to target the audience. Advertisers can target adult men by certain games, adult women by certain games and children by certain games. Contextual advertising does not require IDFA. 

As far as contextual advertising goes, gaming is a leading category for this type of advertising. Finance is a good one too because advertisers can target based on content (Fidelity doesn’t need to know your behavior to target you inside of finance content – you’ve already qualified yourself as a target customer by reading stock news). This is why Unity’s exclusive focus on gaming should do well relative to their peers.

Unity has 2.7 billion monthly active users (MAU) across its platform. This is A LOT of data (the MAU rivals Facebook). They are allowed to package this data into publisher segments without violating privacy. Net retention rate is 138%.

We don’t have a larger position (2-3%) in Unity because the real thesis is not fully baked yet. I’m guessing that in the next 2-3 quarters, we will be increasing our position size as Unity will likely navigate IDFA better than its ad-tech peers and the XR development story should start to reveal itself. 

The management said they see the company being FCF positive by 2023 – so we should be fully allocated by 2022 at the latest, I would imagine. 

The lock-up for Unity expires mid-March. Unity employees have been able to sell 15% of their vested shares since the company began trading. 

I’ll send this out as a blog update to make sure everyone sees it. 

Thanks! Beth

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:

July 25th – Social App at $17

Posted on 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 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 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.

Smoke and Mirrors: How Snap and Pinterest Hide User Attrition

Posted on by io-fund

Social media companies today are using smoke and mirrors to hide an important key metric. I’m going to pick on Pinterest first because the social media company recently revealed these issues in its S-1 Filing, and meanwhile, Pinterest stock saw a 25% pop on the day of its public debut. To be fair, this 25% IPO pop pales in comparison to Snap’s 135% stock price increase from December lows.

My best guess is that investors are hoping for the next Facebook, or perhaps they aren’t reading beyond the financials, which are on page 13 of the prospectus, compared to the social media metrics located on page 70. This is one reason I recommend following an unbiased tech analyst, such as myself, to avoid reading long S-1 filings 

As important as the financials are to the value of the stock, they can be misleading when not accompanied by scrutiny of the underlying business. For example, there are a couple of terms that are important to social media growth. I italicized growth because I presume investors will demand growth at both Pinterest and Snap’s outsized valuations. The first is monthly active users (MAU) or daily active users (DAU). The second is average revenue per user (ARPU). On the surface, Pinterest has healthy MAU numbers with 265 million monthly active users in the most recent quarter. For comparison, Snapchat has about 300 million MAU and Twitter has just over 325 million as of Q4 2018.

In regards to ARPU, a company with a healthy metric would be Twitter, for example, which has an average revenue per user (ARPU) of $9.48 and the revenue is split roughly 50/50 between international users and domestic users in the United States. For instance, in the most recent quarter Q1 2019, Twitter generated $317 million globally and $363 million in the United States. Contrast this with Pinterest and Snap with ARPU in the $2-$3 range. Investors in both Pinterest and Snap are speculating these social sites can increase ARPU significantly – meanwhile, there are issues of attrition in Pinterest’s and Snap’s user base.

(See more on Snap below, which reports earnings today.)

PINTEREST – CAN’T MONETIZE GLOBALLY

One issue with looking at ARPU holistically is that not all regions are created equal. This is especially true for monetizing on mobile. The United States spends a lot of money on social media compared to other regions, while Europe spends a reasonable amount of money. Other regions, such as India, spend very little money and can actually cause a social media company to lose money as providing a free service to users who do not monetize well – by advertising or purchases – creates low to negative operating margins. (You may be able to tell that I am foreshadowing here.)

Pinterest has monetized the United States beautifully. The 80 million or so users in the United States generate $9 average revenue per user. We see evidence this is saturated, however, as the user growth has been stagnant for many quarters.

Venture capitalists like to see 10% month-over-month growth with mobile application users or website users. (Actually, the prefer to see 30% month-over-month growth). Pinterest has struggled to achieve 10% year-over-year growth in the United States with some declining quarters.

However, Pinterest has achieved a 10% QoQ benchmark globally – and this graph looks much better. But there’s a catch …

Here’s the problem. The international audience doesn’t monetize. The regions where Pinterest is growing are only monetizing at 25 cents per user annually, which is not enough for a profit margin let alone an operating margin.  Compare this to the $9 average revenue per user in the United States, and you can see why the average ARPU for Pinterest drops significantly to $2-$3 annually.

To put it simply: the high average revenue per user regions have flat to declining growth (United States) of 80 million to sometimes 75 million, while the regions with adequate growth are not contributing to profits. If you are invested in Pinterest, you are either:

  1. Betting the United States will monetize higher than $9 per user – which is possible as Facebook is peaking at $26-$28 per user but all other social media platforms have hit a ceiling at $9 per user. (Facebook also uses data in questionable ways, which I’ve covered extensively from an ad-tech level, and California has numbered those days by passing laws for 2020).
  2. Betting the global audience will monetize higher

In the last quarter, the global audience contributed $17 million to revenue compared to $273 million from the United States audience. Annually, this puts the global audience at $41 million in revenue and the United States at $715 million in revenue.

Takeaway on Pinterest: On one hand, you could congratulate Pinterest on monetizing the United States users very effectively – although I am not certain how much more they can squeeze out of this audience as the user growth has stalled. I like to keep things fairly simple – if the numbers don’t add up, then I don’t invest. In this situation, the average revenue per user (ARPU) of the growing audience (global) is too low to turn a profit at 25 cents ARPU and the audience that is monetizing (United States) is stalled.

SNAP – FLAT TO DECLINING USER BASE

My thoughts on $SNAP:

Snap is priced to perfection as the “largest U.S. company to have more than doubled in 2019” with a rise totaling 135% in the last six months from a low of $4.99 on December 21stto $11.75 going into earnings. The speculation around this stock is in sharp contrast to the declining user base from previous quarters in 2018.

You’ll see below that the user base has struggled to break out over 191 million daily active users and has declined to flat for three straight quarters. Meanwhile, the stock has outperformed the S&P 500 10x in the last three months. It bears mentioning the business of social media is virality and engagement, and therefore, the user base is a paramount metric.

On April 4th, Snap announced a programmatic offering called Audience Network, which copies Facebook’s strategy of selling user data for third-party ads across multiple applications (Snap even copied the name – that should be interesting for trademark attorneys). Snap’s Audience Network could revive revenue in future quarters, however, the user base will continue to be a problem as there is a competitor from China, TikTok, that is taking market share of the Millennial audience. For specific months last year, such as September 2018, TikTok beat Facebook, Instagram and YouTube as the number one downloaded app.

Keep in mind, Snap’s user base is more transparent for analysis purposes than Pinterest, as the latter hides their stagnant domestic growth with 25-cent global growth. Overall, attrition in the regions driving revenue typically doesn’t make for a good investment in mobile or internet companies where audience is everything.

Regarding Snap’s earnings today, I’d keep a close eye on the declining to flat user base – regardless if they beat or miss on revenue. In the future, Snap’s Audience Network may help revenue quite a bit, but it will be short lived as California passed the California Consumer Privacy Act that go into effect in 2020 – more on this later.

Update: On April 23rd, 2019, Snap reported 190 million DAU which is a 1 million user decline from year-ago quarter of 191 million DAU.