SentinelOne: Exceptional Product at a Decent Valuation

Posted on January 6, 2022June 30, 2026 by io-fund

SentinelOne: Exceptional Product at a Decent Valuation

At time of writing, SentinelOne is trading very close to its IPO opening price of $46.00 when the stock opened for trading on June 30th. We outlined how this price included a large 900% premium from its last private valuation round. Now that SentinelOne has more trading history and is doubling its revenue every year, the stock is catching up to its public market premium. By posting 128% revenue growth or more, the valuation has come down quite a bit. We are in the last quarter for fiscal 2022 and for fiscal year 2023, SentinelOne is trading at 33X expected revenue for 2023. We think this is a reasonable buy zone for a company with this level of growth that is expected to continue.

I’ll review the product which was first covered here in my Forbes write-up. Below, Bradley also discusses the operating losses and other key points regarding the financials losses that are being front-loaded from customer acquisitions as it captures market share. However, he outlines in more detail below that there are signs of leverage in its model. Customer growth is especially strong with SentinelOne and the net retention rate is healthy. We also discuss SentinelOne’s products and why cloud is a key area of strength.

SentinelOne Product Overview: Fight Machine-with-Machine

SentinelOne is an AI-powered cybersecurity company at the forefront of autonomous threat detection and prevention. The company is one of the first to introduce autonomous threat detection and prevention. It has developed an AI-powered XDR platform to make cybersecurity protection truly autonomous from the endpoint and beyond. Endpoint security refers to protecting the endpoints or entry points of the end-user devices such as desktop PCs, laptops, mobile devices, and servers from being exploited. SentinelOne expands this definition (hence XDR for “extended” instead of EDR) to include more data points.

Overview of SentinelOne

The product differentiation is best summed up by the fact other vendors require data to be sent to the cloud for analysis and often have many humans monitoring the alerts to take action. Meanwhile, SentinelOne uses automation to find the threat which reduces the number of false positives. Instead of getting every piece of telemetry that requires the security team to investigate, SentinelOne’s endpoint detection and response solution eliminates the noise so that the security team is only responding to those that have the potential to be critical.

According to SentinelOne’s S1, “Cyberattacks have become the output of military-grade, highly resourced, and automated nation-state and cybercrime operations. We envisioned a revolutionary data and artificial intelligence paradigm where technology alone could autonomously prevent, detect, and respond to cyberattacks. It is time to fight machine with machine.”

They emphasize that legacy antivirus powered by human-generated signatures still remains a widely used security technology. This is in spite of the fact that they are ineffective and reactive. Human-powered endpoint detection and response, or EDR, emerged as an alternative where people became the detection and response crew.

This approach led to the “1-10-60” rule which claims the best achievable cybersecurity outcome was capped at one minute to detect an attack, 10 minutes to investigate, and 60 minutes to respond. Recent ransomware attacks have proved that it only takes milliseconds to breach an organization and cause damage.

SentinelOne: Singularity XDR Platform

SentinelOne launched the XDR solution in the first half of 2020 prior to going public in 2021. This platform offers Active EDR, which allows for more visibility and automated responses for Endpoint Detection and Response (EDR). SentinelOne has many competitors in the EDR space while XDR extends the definition of “endpoint” to not only include devices and workstations, but to also include other data points on the network, such as containers and cloud-native applications, and also across the entire stack, such as email, the network, and identity. Extended detection and response (XDR) is cross-layered detection and response. XDR collects and automatically correlates data across multiple security layers – email, server, cloud workloads, and network – so threats are detected faster and security analysts improve investigation and response times.

SentinelOne uses many data sources to create a data lake. The single pool of raw data is built across a wide range of sources, including other vendors or internal data sources. Automation works best with a lot of data and SentinelOne is compatible with AWS, Azure or Okta, Splunk, Zendesk, and Slack. What matters to customers is that every threat is detected very quickly, and SentinelOne proposes a solution that is able to do both because automation and AI is best done at the data level rather than managing thousands of user endpoints to mitigate attacks.

The company’s Singularity Platform ingests, correlates, and queries petabytes of structured and unstructured data from ever-expanding disparate external and internal sources in real-time. It builds rich context and delivers greater visibility by constructing a dynamic representation of data across an organization. As a result, the company’s AI models are highly accurate. The company’s distributed AI models run both locally on every endpoint and every cloud workload, as well as on the company’s cloud platform and the AI models predict threats in milliseconds. The behavioral AI model maps and links all behaviors on the endpoint to create Storylines. When an activity is deemed to be a threat, the system automatically takes action to kill the attack.

Although SentinelOne and the XDR Platform is listed behind Crowdstrike and Microsoft on Gartner’s Magic Quadrant, SentinelOne leads on peer reviews. This was discussed in the earnings call with 97% of reviewers saying they would recommend SentinelOne in the 2021 Gartner Voice of the Customer Report. We had also noted the company’s strength on peer reviews in our first write-up. The company also scores high on the highly respected MITRE ATT&CK evaluations with 100% visibility and zero missed detections.

Cloud is a Growth Lever for SentinelOne

Cloud is a growth lever for SentinelOne as the company leverages a microservices architecture for rapid and frequent updates. The company offers support for Kubernetes workloads with additional runtime protection and simplified deployment. Kubernetes is automation orchestration for containers and allows for scaling of a container rather than an entire application. Kubernetes was created by Google and is used by 78% of companies managing containers with this open-source system.

This was probably the most important thing said on the call: “Cloud still remains our fastest-growing module. About 10% of endpoints are covered by cloud and servers. It has been our fastest-growing module for some time. Cloud is a piece of the business, I think that we think will expand greatly in the future. We anticipate that at some point, it will be the similar size to the endpoint market.”

According to the earnings call, cloud was the fastest growing segment: “In particular, our cloud workload protection product delivered the highest growth during the quarter, a testament to the demand for our real-time run-time protection for cloud workloads and containerized environments.” This was expanded on later to say: “The vast majority of what we sold this quarter was the Complete package. I think that we’re seeing just overall standardization on the Complete platform. People are opting for our complete EDR package. I think what I can also say on top of that is just increased adoption of our cloud modules. We’re just seeing increased demand for cloud workload protection.”

In terms of cloud being a growth driver competitively speaking, the company stated the following: “And obviously, if you look at our mix today, also going into the cloud security opportunity, kind of further compounds it, and it’s something that the incumbent vendors never had to offer.”

The company stated its biggest competitor here is Palo Alto Networks and a few startups.

Last February, SentinelOne acquired Scalyr, a leading cloud-native data analytics platform that serves as a big data engine for the XDR platform. This helps SentinelOne ingest “massive amounts” of data real-time for the XDR platform by eliminating data schema requirements and also reduces index limitations. This speeds up the process and drives down costs by ingesting and correlating terabytes of data at machine speed. This also makes SentinelOne more competitive against SIEM tactics for data correlation and response.

In August, the company released SentinelOne Storyline Active Response (STAR) which is a cloud-based automation engine that allows security teams to create custom detection and response rules. STAR requires security teams to turn queries into rules for detection, and this challenges legacy providers. SentinelOne’s platform aggregates Storylines, which is essentially behavioral AI. The textbook definition of behavioral AI is to track behavior on a device to reveal insights. SentinelOne leverages behavioral AI to make a decision without relying on sending signals to the cloud or to security engineers before a decision is made. Instead, SentinelOne uses ActiveEDR to sift through alerts and anomalies and to form storylines. The machine helps to identify the threat and then automates a response. This is differentiated from other EDR products that are only used to detect rather than to respond.

Ranger for Agent Deployment and IoT

SentinelOne is able to find any device connected to a network through a ML device fingerprinting engine (FPE) by running an inventory of IP-enabled devices. This helps to identify unsecured endpoints and to close the security gap in agent deployment. This is what is meant by “limited visibility” or lacking full visibility of every device where just one unknown device can run malware or host ransomware and compromise a network. Other cases of unsecured endpoints could be a new server that doesn’t have an agent or new employees who are onboarded without protection yet installed. Ranger and Ranger Pro detect and notify IT teams of these unsecured endpoints. This is especially important for the internet of things (IoT) where the number of devices connected to the internet proliferates and is hard to track. For example, hospitals are becoming smart hospitals where there are thousands of devices connected to the internet. In this example, Ranger would notify the IT department if one device was unprotected.

In the earnings call, it was stated that Ranger grew triple-digits and that “In Q3, two of our Fortune 10 customers renewed with multiyear deals, and both expanded their use of the Singularity platform, adding modules such as Ranger and remote script orchestration.” Adding modules like Ranger help to keep net retention rate strong, which reached a record 130% in Q3.

Remote Script Orchestration (RSO)

RSO is a new product released this past quarter. The goal is to increase the speed in response to cyberattacks. This is done by executing scripts and commands remotely across thousands of endpoints. The company provides a script library to run scripts for all platforms from a console to find single endpoints or multiple endpoints that are compromised. This allows security teams to collect whatever is needed from remote machines. This allows the security team to terminate processes, remove files, delete directories and other responses very quickly. With STAR, this can also be automated and RSO is built for users of all technical abilities due to the script library.

SentinelOne also supports Zero Trust which eliminates the need for perimeter-based security for better protection in remote work scenarios.

Product Differentiation

Cybercrime will cost companies $10.5 trillion annually by 2025 with the cybersecurity market worth $345 billion-$400 billion. SentinelOne’s addressable market is expected to reach $40.2 billion in 2024 with $12 billion from endpoint security and $17 billion in analytics, intelligence and response.

According to SentinelOne, using their products can produce cost savings can be up to 353% – granted this number is a marketing department, however, the point is that any company increasing ROI in cybersecurity has a real chance of taking market share if their product improves the results. The savings quoted is achieved by reducing the amount of cybersecurity tools a company needs by standardizing endpoint security across more data types. The consolidation in this case saves up to $3 million over a three-year period and the enhanced threat detection saves $671K over three years. Due to automation, $1.2 million can be saved over three years by reducing time and employee hours across the IT team.

This breakdown is important to look at because SentinelOne’s main value proposition is actually consolidation of cybersecurity tools, and secondly, its automation/reduced hours. This is a different argument then relying only on enhanced threat detection alone, which is the main argument for many of the competitors (debate on whose product is better).

We see real evidence of this in the financials with 4 quarters of revenue acceleration. Here’s how the company compares to other high growth cybersecurity names in terms of acceleration.

The product differentiation is best summed up by the fact other vendors are on the endpoint and require data to be sent to the cloud for analysis and often have many humans monitoring the alerts to take action. Meanwhile, SentinelOne uses automation to find the threat which reduces the number of false positives by leveraging a data lake. Instead of getting every piece of telemetry that requires the security team to investigate, SentinelOne’s endpoint detection and response solution eliminates the noise so that the security team is only responding to those that have the potential to be critical. Per SentinelOne: “What enterprises need is automated security, not repackaged legacy AV and crowd-powered protection.”

SentinelOne is not breaking ground in a new market rather its goal is be a superior product to take business away from legacy vendors. Here’s a quote from management: “I think it’s safe to assume that about over 50% of it is still in the hands of the incumbents. Looking at our pipeline for Q4 and the out quarters, that doesn’t seem to change. So to us, that cycle is still ongoing. It’s a pretty big TAM that we’re serving. And obviously, if you look at our mix today, also going into the cloud security opportunity, kind of further compounds it, and it’s something that the incumbent vendors never had to offer. So that makes the entire buying cycle really more sticky, more inclusive and just overall more important for the enterprise. So it becomes part of the picture. But again, in almost every account that we go into, call it high 90s, we see an incumbent vendor. So we don’t see that tapering away anytime soon.”

Financial Overview:

By Bradley Cipriano

SentinelOne has pioneered a new approach to endpoint cybersecurity and the company is quickly capturing market share.

We can see this in recent results, as annualized recurring revenue (ARR) has accelerated for four consecutive quarters. Furthermore, the acceleration in ARR helps explain the large losses incurred by SentinelOne, as customer acquisition costs are front loaded. However, as these new customers renew their contracts, the firm’s topline will continue to grow but expenses will normalize, leading to strong profitability in the future. I outline why in more detail below.

Accelerating growth drives large losses but losses are temporary

SentinelOne has reported four consecutive quarters of accelerating ARR growth. Specifically, ARR most recently increased 131% YoY in Q3 FY2022, an acceleration from the 127%, 116% and 96% YoY increase in Q2 FY2022, Q1 FY2022 and Q4 2 FY2021, respectively. As of the most recent quarter, ARR increased $37 million QoQ to $237 million, which marked the 10th consecutive quarter of QoQ increases in ARR (there are only 10 quarters disclosed). It is noteworthy that the most recent sequential increase in SentinelOne’s ARR was as large as the firm’s entire ARR metric in Q1 FY2020.

It is also notable that the acceleration in ARR started after the October 2020 quarter. In December 2020, the high-profile SolarWinds cyberattack was identified, which had exploited key vulnerabilities in numerous service providers such as SolarWinds, Microsoft products (Office 365) and VMware. SentinelOne outperformed the competition during this period and disclosed in its S-1 that none of its customers were impacted by the SolarWinds cyberattack. This event may have been a catalyst that identified SentinelOne as a leading cybersecurity platform. Furthermore, the company launched its XDR platform in early 2020 and covid lead to a general acceleration in software and cybersecurity usage during this period, each of which likely contributed to the acceleration in ARR shown below.

The growth in ARR also flowed to the income statement, as Q3 sales increased 128% YoY to $56 million, which marked the fourth consecutive quarter of accelerating YoY growth. Growth was driven by new customers, as SentinelOne disclosed in its 10Q that new customers accounted for 46% of its topline expansion in the most recent quarter, while existing customers contributed 37% and channel partners accounted for the remaining 17%. Acquisitions provided $4 million in sales, and absent the impact of M&A, organic sales increased 113% YoY.

During the quarter, revenue from international markets grew 159% year-over-year to $19 million, and represented 33% of total revenue, up from 29% a year ago. International markets will be a key area of growth for the company going forward. Furthermore, SentinelOne’s international growth was similar to CrowdStrike’s international growth when it was a similar size as SentinelOne (~$56 million in quarterly sales in FY2019). Specifically, CrowdStrike’s international sales increased 196% YoY to 23% of sales in FY2019, highlighting the similar path that SentinelOne is following. I compare SentinelOne and CrowdStrike in more detail further below.

Gross margin improved from 58% in the year-ago quarter to 64%, which represented an all-time high (10 quarters of public information). However, despite the improvement in gross margins, operating margins remained deeply negative. For instance, Q3 operating margin was -120%, a slight improvement from the year-ago quarter of -121% and an improvement from the 10-quarter average of -141%.

While it is concerning to see operating losses larger than sales, this is due to the rapid growth in new customers. As mentioned above, new customers accounted for the majority of topline growth, a favorable trend. Furthermore, acquiring customers front-loads expenses in the early years, but SentinelOne recognizes sales ratably, which makes losses appear outsized. As customers renew their contracts, these one-time customer acquisition expenses will decline, while the topline will expand as customers adopt more products. This trend will lead to an improvement in SentinelOne’s bottom-line going forward.

Evidence of leverage in SentinelOne’s business

What is critical for SentinelOne’s story going forward is that there are signs that its subscription service is sticky, and that customers are increasing their spending. This would provide a light at the end of the tunnel that losses will turn into profits and cashflows. While SentinelOne is still a few years out from breaking even, there are positive signs that customers are both sticky and expanding their usage of its products.

We can see this with net retention ratio (NRR), which improved to 130% in Q3, an all-time high, and was up from 115% in the year ago quarter. The improvement in NRR showcases that customers are expanding the amount of products they use each year, highlighting the success of SentinelOne’s ‘land-and-expand’ model. Furthermore, gross retention ratio, which only considers customer attrition, was 97% as of Q3, signaling that SentinelOne’s customers are sticking with the platform beyond one year.

Furthermore, SentinelOne’s customer metrics are also high quality. For instance, no single customer accounted for more than 3% of sales in the most recent quarter and the company disclosed that it has over 6,000 customers as of Q3, up 79% YoY. Furthermore, SentinelOne counts three Fortune 10 companies as customers, two of which recently renewed with multiyear deals in Q3. In its S-1, SentinelOne disclosed that it also counted 37 out of the Fortune 500 companies as customers, highlighting the large opportunity in front of it as there are still a plethora of enterprise customers yet to sign on.

Moreover, customers with ARR over $100,00 grew 141% YoY to 416, an acceleration from the 140% and 127% YoY growth rates in Q2 and Q1, respectively. SentinelOne’s success with enterprise customers suggests that the firm is rapidly capturing market share in the cybersecurity market.

Another example that highlights the leverage in SentinelOne’s model is the improvement in sales and marketing (S&M) expense. S&M expense increased just 1% QoQ in Q3, while Q3 sales increased 22% QoQ. This drove S&M margin down from 90% in Q2 to 74% in Q3, an all-time low. The improvement in S&M margin highlights that SeninelOne is spending less to attract customers, which is impressive considering that sales have been accelerating. As adoption grows, the company’s ability to expand the amount of products customers use will drive S&M margin lower, further improving its bottom-line in the future.

SentinelOne relative to CrowdStrike

SentinelOne’s metrics appear in-line when viewed relative to other cybersecurity platforms such as CrowdStrike. For instance, CrowdStrike’s S&M margin was 70% when its quarterly sales were around $56 million, This compares to SentinelOne’s S&M margin of 74% with $56 million in sales. Furthermore, SentinelOne’s sales grew 22% QoQ, which was faster than CrowdStrike’s 18% QoQ growth when its quarterly sales were $56 million. The faster growth rate helps explain the higher S&M margin.

However, SentinelOne has reported a steeper operating loss relative to Crowdstrike at $56 million in quarterly sales. This is likely due to timing, as SentinelOne went public with a rich valuation, which increases stock-based compensation expense. Expense items such as G&A expense may be inflated relative to historical periods for other tech stocks (like Crowdstrike), when tech valuations were lower. Nonetheless, we expect the outsized SBC expense to normalize going forward. This will also improve SentinelOne’s bottom-line and bring it more in-line with peers in the future.

As shown below, SentinelOne and CrowdStrike had similar S&M margins when they were the similar sizes. However, CrowdStrike’s ARR was growing faster, as was its customer base. SentinelOne’s ARR per customer grew faster and its NRR was more robust. However, SentinelOne’s operating margin was considerably lower than CrowdStrike’s was. It should be noted that CrowdStrike was not public in 2018, so unrecognized SBC was not included in operating expenses. As mentioned above, we expect that SentinelOne’s earnings will improve as SBC from its recent IPO normalizes.

Outlook and Valuation

Looking forward, management expects Q4 sales to increase 103% at the midpoint to $61 million and raised their full-year guide for sales to $200 million, which increased the implied growth rate from 103% to 115% at the midpoint. Gross margin is expected to be 62%, up from the prior guide of 59% and an improvement of 100 bps YoY from FY2021. Finally, operating margin is expected to be -81% at the mid-point in Q4, demonstrating continued leverage in SentinelOne’s business model.

Analysts expect growth to remain robust for the foreseeable future and FY2024 sales are forecasted to rise 185% from FY2022 levels to $570 million. Losses are also expected to persist throughout this time period, but are anticipated to materially improve by 2024. We are still early in SentinelOne’s growth story, but the opportunity in front of the company is large as its total addressable market was estimated to be around $30 billion in FY2021 and is expected to grow to $50 billion by 2024 (S-1).

The company’s market cap is below $12 billion and it currently trades at a 53x P/S multiple and a fwd (1-yr) P/S multiple of 33x. This is a premium relative to other cybersecurity competitors listed in its S-1, such as CRWD, which trade at a fwd P/S multiple of 22x. However, the company is clearly capturing market share from competitors, evident in its accelerating ARR metric discussed above, which warrants a premium valuation.

Furthermore, SentinelOne is unique in its growth as sales have accelerated for four consecutive quarters and the firm’s topline is growing over 100% YoY. Relative to other rapidly growing SaaS firms such as Snowflake, SentinelOne’s FY2023 fwd P/S ratio of 33x appears more in-line. There is also room for share price appreciation at this valuation. For instance, if SentinelOne’s sales grow to $570 million in FY2024 as expected and its fwd P/S multiple contracts to 30x (similar to CrowdStrike’s fwd P/S multiple when annual sales were at ~$500 million), the company’s share price will appreciate by 49% (assuming a constant share count).

Risks and Conclusions

There are some key risks going forward. SentinelOne’s approach to endpoint security is new and the market may not fully accept its approach of utilizing A.I. to combat cyber threats. Furthermore, the company has also reported large losses and these losses are expected to persist for the next few years. This may require SentinelOne to issue more shares, diluting shareholders. However, the company currently has $1.7 billion in cash on balance, which provides ample liquidity in the near term. Moreover, SentinelOne has limited financial information, which makes it difficult to thoroughly analyze the company’s financials and identify anomalies.

Despite the risks and limited financial history, SentinelOne appears to be well positioned in the cybersecurity market. ARR has accelerated for four consecutive quarters and it appears that the company is capturing market share, especially after demonstrating its success during the major SolarWinds hack in late 2020.

While losses are steep, there are signs of leverage in its business as S&M margin is improving. Furthermore, new customers are driving topline growth, which is favorable but also front loads customer acquisition costs. There is also evidence that SentinelOne’s customers are sticky, which suggests that the losses today are setting the company up well to report profits in the future. The company has a premium valuation relative to peers, which is warranted due to its elevated growth rate. Lastly, there is still room for capital appreciation even if the company’s multiple declines and mimics peers in the future. SentinelOne is early in its growth story and the market in front of it is massive, if it can continue to rapidly capture market share, it will likely reach profitability sooner than the Street currently expects.

Micron Deep Dive: Automotive, 5G, and Data Centers

Posted on December 8, 2021June 30, 2026 by io-fund

Below, the team looks at Micron – a semiconductor company the I/O Fund has owned in the past. Micron is in third place behind Samsung and SK Hynix. We analyze both product and financials to determine if Micron has what it takes to capture more market share across data centers, automotive/industrial, and 5G smartphones and edge devices. Earnings are on December 20th.December 20th.

Micron is one that we are watching closely but do not own at time of writing. Please reference Trade Notifications archived on the dashboard and the forum for updates. on the dashboard and the forum for updates.

Overview of Micron’s Products:

By Beth Kindig

When we first covered Micron, the company’s revenue was two-thirds DRAM and one-third NAND. The company’s most recent earnings report shows a heavier weight on DRAM at three-quarters revenue compared to one-quarter revenue from NAND.

NAND memory saves data even when the power is removed, such as when a cell phone is turned off. Beyond mobile devices, NAND is found in traffic lights, digital advertising panels/displays, and anything with artificial intelligence that needs to store data.

Dynamic RAM, or DRAM, stores memory when a device is on, such as PC processors and graphics cards. DRAM is also used in gaming devices and video game consoles. DRAM is 100X faster than NAND, lasts longer, and is smaller in size. However, DRAM is known as volatile memory which means when power is turned off, it does not store data. The benefit of loading the data into the RAM is that reading the data is much faster than reading it from the hard drive.

According to the CEO of Micron, AI servers will require six times more DRAM and twice the SSDs compared with standard servers. In the most recent earnings report, it was also pointed out that “DRAM and NAND stem share of the semiconductor industry has steadily grown over the last two decades, from around 10% to approximately 30% today.” Today, data centers are the largest market for memory and storage due to the growth driven by cloud.

Hyperscale data centers are growing faster than DRAM supply can keep up with. Due to higher capacities and low latencies, DRAM is being used across health care, the military, automotive, networking systems, and data centers. DRAM is being used in the Internet of Things (IoT) due to low latency with automotive using up to 80GB compared to 5.5GB in PCs and 2.5GB in handsets.

NAND is used to store pictures or music on a mobile device and is also particularly well suited for edge devices because it’s ideal for high data storage density. Although DRAM drives the majority of Micron’s revenue right now, NAND is the growth segment to watch as AI workloads move to the edge and will require NAND for the increased energy requirements, portability, and ability to store massive amounts of data.

According to FiorMarkets, Global 3D NAND Flash is expected to grow at a 32.3% CAGR from 2019 to 2025. 360 Research Reports put the CAGR at 20.6% between 2021-2026. Overall, NAND is expected to grow at 11.05% between 2021-2026. DRAM has a CAGR of 7% between 2020 and 2026.

Micron’s revenue segments

By business unit, Micron saw the most revenue growth from Embedded (EBU) at 108% year-over-year and 23% QoQ growth. This was also the largest growth in the prior year. EBU refers to memory and storage products used in automotive, consumer markets, and industrial applications. In 2019, Micron had expanded its wafer fab facility in Virginia with a $3 billion investment to manufacture 20nm/1xnm DRAM and 3D NAND for automotive infotainment, advanced driver-assistance systems (ADAS), and also industrial automation and surveillance applications. Two years later, the investment and engineering expansion appears to be paying off.

This is a key segment to watch as industry CAGR for automotive processors is expected to be 65% through 2023, according to IDC. This is driven by automation and the memory content per car will increase up to 16GB of DRAM and 1TB of NAND to run AI, supercomputer, and high-def mapping. Micron holds 48% of automotive memory market share and is the primary supplier to Nvidia and Intel.

Compute and Networking (CNBU) grew at 26% growth year-over-year and 15% quarter-over-quarter. This is the segment that serves cloud servers and PCs, plus graphics and networking markets, and this segment is the largest source of revenue and operating income for Micron. Bradley expands more on this in his write-up below.

Mobile Business Unit (MBU) focuses on mobile and smartphones and mobile saw its highest-ever mobile revenue in fiscal year 2021. This is partly driven by the uMCP5 multichip package which allows smartphones to handle data-intensive 5G workloads. Micron has also released low-power DRAM for edge devices in a promotion with MediaTek. Micron offers a combined chip for both NAND flash storage and DRAM for 5G smartphones to extend battery life and increase performance without taking up circuit board space. This segment is also one to watch as the memory in smartphones will increase exponentially with 5G due to large data volumes.

Micron has exposure to PCs. This has been a boon during the past few years yet could also weigh on Micron if consumer spending slows.

3D NAND product update

Last year, Micron released a 176-layer 3D NAND product that has a layer count 40% higher than the nearest competitor, which is Samsung. The new NAND device is 10 times denser than previous 3D NAND devices which allows smartphones and edge devices with capacity limitations removed and increased power efficiency. Cloud storage also benefits due to being data intensive.

According to Micron, this device has the “industry’s highest data transfer rate” of 1,600 megatransfers per second (MT/s). The device is the same height as the 64-layer design with a fabrication technique that removes stack height limitations to provide higher storage capacities. The company uses CMOS-under-array (CuA) to build a multi-layered cell stack for more memory to be leveraged in a smaller space while also decreasing die size.

The replacement-gate (RG) flash technology replaces the traditional floating-gate design, and according to Micron’s whitepaper, helps the device remain competitive in terms of time it takes to program and/or to limit the reduction in performance. Micron points out in the paper that extending the number of tiered stacks creates cell-to-cell capacitive coupling, which leads to lower program times. Therefore, the more tiers or layers that competitors release will not necessarily result in better performance due to design limitations. This performance becomes critical as program algorithms can add to time delays when writing the data.

In this iteration, Micron changed the design to mitigate issues of the “cell-to-cell capacitance structure,” or a reduction of electric field duration and increase in voltage threshold (VT), which results in higher endurance life span, increased power efficiency, increased storage capacity, and doubled speed of write performance. The company also changed the material from polysilicon to metal. These two improvements result in Micron’s RG 3D NAND to perform up to 2X faster than other current 3D NAND devices.

Memory and storage can be very competitive in terms of price, so we want to track incremental product improvements. According to Micron, “current 3D NAND design has begun to reach the limits of its monolithic die-level maximum capacity. It will continue to fall short of the immense system-level storage capacities demanded by future data-driven applications. Cell-to-cell capacitive coupling complications and smaller etch requirements account for many of these limitations.” If Micron is correct, then this could be an opportunity for the company to see more market share on 3D NAND.

NAND is expected to see a 30.8% increase in total bit demand and an oversupply in the second half of next year. Competition is expected to drive a decrease in average sales price (ASP). In the earnings presentation, Micron forecast calendar year 2022 growth of 30% in NAND.

DRAM product update

Moore’s Law states that the number of transistors or processing power on an integrated circuit doubles every two years while the cost is halved. This has led to shrinking the circuits to fit more transistors or memory cells in the limited space. At one point, you could see a transistor and now they are measured in nanometers, which is not visible by the human eye. This helps chips switch faster and use less energy and are cheaper to make, as well. As size decreased, memory chips moved to the Roman and Greek alphabet to name nodes which is why Micron calls their DRAM “1-alpha.’ This provides a 40% improvement over bit density compared to the 1z node and power consumption has improved by up to “20 percent.”

These chips are manufactured without EUV, or Extreme Ultraviolet Lithography. This manufacturing method uses smaller 13.5nm wavelengths of ultraviolet light to etch wafers as opposed to lasers from Deep Ultraviolet Lithography (DUV). You could argue that EUV is a point of weakness for Micron as Samsung is using this manufacturing method while Micron is delayed until 2024.

DDR5 is the company’s increased bandwidth product that will increase core count resulting in up to 85% increase in bandwidth. The double date rate (DDR) product has been primarily focused on more bandwidth while previous generations focused on reducing power consumption to serve the needs of mobile applications and data centers. The performance increase is between 1.36X and 1.87X. This has not been released yet but is expected to be released soon.

DRAM is expected to see a decrease in average sales price (ASP) next year while DRAM bit demand will increase by 17%. This will lead to an oversupply in the second half of the year. Micron is forecasting DRAM revenue to be in the mid-to-high teens.

Being U.S. based, plus MU, lowered exposure to China

It’s very helpful that Micron is the only U.S. based manufacturer of memory during a time when suppliers are relocating to the United States. Micron announced that it intends to invest $150 billion globally over the next decade in “leading-edge memory manufacturing and research and development (R&D) including potential U.S. fab expansion.” The U.S. Senate passed the U.S. Innovation and Competition Act (USICA) which includes $52 billion in federal investments for the domestic semiconductor research, design and manufacturing provisions in the CHIPS Act. Congress is also considering legislation called the FABS Act that would establish a semiconductor investment tax credit. Policy could strategically help Micron compete with Samsung.

The next hurdle for semis long-term is relying on China sales. Micron changed how they report geographic information from ship-to location to customers headquarters. Micron also lost Huawei revenue during the same time period which Keybanc estimates was 7-9% of Micron’s revenue.

Here's a snapshot from fiscal Q4 2018 where “ship-to location” was heavily weighted to China.

If we go on customer headquarters then we see that Micron has about 18% exposure in FY2021 if we include China and Hong Kong.

Competitors

Micron was the first to build and ship a 176-layer NAND last year and SK Hynix was close behind. In early 2020, Kioxia and Western Digital released a 112-layer device and are expected to move to 160-layer soon based on split-gate architecture by stacking two 80-layer structures. By splitting the gates, the cell size is reduced in half and this increase the capacity. YMTC was a new competitor from China that released a 128-layer very quickly by skipping the 96-layer generation. The company uses an expensive copper hybrid bonding technique that enables higher bit density. YMTC is likely to take market share in China across all memory and storage competitors.

According to TrendForce, SK Hynix saw the largest increase QoQ on NAND flash sales with a 25% QoQ increase and Kioxia reported 3D NAND sales of 20.8% QoQ compared to Micron’s 8% increase QoQ. In terms of DRAM, TrendForce reported that Samsung grew it’s lead with 11% growth QoQ while Micron also grew it’s lead with 12% growth QoQ compared to SK Hynix at 8% QoQ.

Micron is Becoming Less Cyclical

By Bradley Cipriano

Micron has reported strong results over the last few years and this continued into 2021. Micron is a key player in the memory market, which is going through a structural change. Demand is no longer dependent on PCs, rather memory demand is now being driven by much stronger tailwinds such as datacenter server growth and the rollout of 5G. This structural change is making Micron less cyclical.

Looking forward, Micron expects these structural tailwinds to continue to drive growth at the company. CEO Sanjay Mehrotra explained it well during the Q4 FY2021 Conference Call when he said that “Industry trends like the broad integration of artificial intelligence into all computing, proliferation of the intelligent edge, continued data center growth, and deployments of 5G networks create new and expanding opportunities for Micron.”

The rise of cloud data centers has led to a structural increase in demand for semiconductor components such as DRAM and NAND memory, which helps smooth out the boom and busts cycles that Micron was historically exposed to. Micron explained the new market dynamic in its 10K when it stated that “data is today’s new business currency, and memory and storage are a critical foundation for the data economy”.

The IDC estimates data creation will explode going forward (pictured below), driven by the rise of cloud computing. Furthermore, the IDC estimates that less than 2% of data is saved today, and that data creation is far outpacing data storage capacities.

Furthermore, the ramp of the metaverse also requires massive scaling. During Marvel’s (MRVL) Q3 Conference Call, the company stated that the metaverse “will significantly accelerate a number of key trends, which are already occurring in the cloud today, including the need to store huge amounts of data”. With Meta (aka Facebook) guiding for $34 billion in capex in 2022 to develop the metaverse, the demand for data storage will likely be strong for the foreseeable future.

We can see the structural change underway by looking at results over the last four years. For instance, aggregate gross margin over the last four years was 44%, well above historical (cyclical) periods, and aggregate operating cashflow margin was ~50% over the same time period. In response to the structural change underway in the memory market, management recently initiated a quarterly dividend ($0.10 per share), which highlights management’s contention that the memory market is becoming less cyclical. I discuss Micron’s recent financial results in more detail below.

New memory technologies keep pace with cloud innovation

To address the issue of exploding data creation, Micron has innovated on some key new technologies that will enable datacenters to capture and retain much more data. Two of these key new technologies are 176-layer NAND and 1-alpha DRAM, which Micron began shipping in volume this year.

Micron stated that the introduction of “176-layer NAND and 1α (1-alpha) DRAM represent major technology breakthroughs for our company and the first time in our history that we have achieved industry leadership across these two flagship technologies”. 176-layer NAND is an extension of 3D NAND, and as the name implies, has 176 layers of cells that dramatically increase memory capacity. Previously, NAND was on a 2D plane with just one layer, and Micron has significantly increased capacity by expanding beyond a single layer of memory. Furthermore, the 1α DRAM memory node was introduced in 2021 and materially improves the performance of DRAM memory (20% to 30% higher yields), which is critical for cloud servers that rely on low latency and high performance.

With the continued development of AI, cloud servers require significantly higher quantities of DRAM, as the number and capabilities of these intelligent edge devices increases, more data is stored, processed and accessed in the cloud. The demand for storage in the cloud environment is growing exponentially and Micron’s industry leading 1α DRAM nodes should be able to capture market share in this fast growing segment in FY2022. We can see the strength in cloud computing by looking at Micron’s Compute and Networking segment (CNBU) sales, which increased 34% YoY to $12.3 billion during FY2021 and rebounded from an 8% YoY decline in the prior year.

CNBU is Micron’s largest segment (44% of sales) and continued strength here will be rewarded by the market. With that said, there was a deceleration in this segment between fiscal Q3 and fiscal Q4 both YoY and QoQ from 49% down to 26% YoY growth and down from 25% to 15% on QoQ growth.

In Q2 FY2021, Micron also began shipping 1α DRAM nodes for mobile, which improved power efficiency in mobile phones, and allows for memory intense use cases like smart photography. Management explained on the Q4 call that 5G phones have 50% more DRAM than 4G phones, meaning that the continued adoption of 5G phones should be a significant tailwind for Micron going forward.

Micron also began volume shipments of 176-layer NAND for mobile in 2021. On the Q4 call, CEO Mehrotra explained that “176-layer NAND-based mobile product went from just introduction to 1-million-unit shipments in a record time. Fastest RAM in the history of the Company”. The ramp in 176-layer NAND helps put into perspective how much demand there is for Micron’s new technologies. Following this strong demand, Mobile (MBU) segment sales increased 26% YoY to $7.2 billion in FY2021, a record high. The continued roll-out of 5G phones will likely be a tailwind for Micron going forward.

The roll out of these new technologies is just now beginning to ramp. To accelerate the roll out of these new technologies, Micron expects to increase its annual capex by 20% YoY to $12 billion, which follows a 22% YoY rise in capex in FY2021. Micron explained that capex will be driven by its continued transition to 176-NAND, as well as infrastructure support for the introduction of new technologies such as EUV lithography. While increased capex spend does not guarantee increased sales, there are also signs in Micron’s balance sheet that point to heightened demand in the near term, which I discuss in more detail next.

Micron’s financials

Following the roll out of new technologies during the year, Micron reported strong results to end its fiscal year. Specifically, Micron’s Q4 FY2021 sales increased 37% YoY to $8 billion, an acceleration from the 36%, 30%, and 12% YoY increase in Q3, Q2, Q1 respectively. Gross margin increased 1,300 bps YoY to 47%, the highest level since Q3 FY2019. On a rolling four-year basis, gross margin was 44%, highlighting the strong success Micron has experienced in recent years. As shown below, the sustained improvement in four-year rolling gross margin suggests that Micron’s business is becoming less cyclical.

The strong gross margin flowed down into operating margin, which increased 1,600 bps YoY to 36%. On an annual basis, operating margin improved from 14% in FY2020 to 23% in FY2021, while non-GAAP operating margin was 28%, up 1,200 bps YoY. The strong margin performance was driven by pricing increases across DRAM and NAND products and ongoing product transformation. Looking forward, management guided that gross margin would remain strong at 47% +/- 100 bps in Q1 FY2022, as the company continues to benefit from the new product releases (discussed in more detail above).

Continuing down the income statement, GAAP EPS increased 175% YoY to $2.39 and on an annual basis GAAP EPS increased 117% YoY to $5.14. In the last five years, Micron has reported an aggregate $28.94 in GAAP EPS, or nearly five times as much as it had earned in aggregate earnings over the prior 33 years (dating back to 1984). As discussed above, Micron had historically been a cyclical company dependent on PC demand for memory, but tailwinds from datacenter and mobile have structurally changed the demand environment for memory and have made Micron’s business less cyclical and more profitable. Below, we look at the 4-year rolling gross margin to discuss the continued strength in the company.

We can also see this outperformance in cashflows. Micron’s annual cashflow margin was robust at 45%, and FCF margin was also strong at 9%. Annual FCF margin has been positive in all but one year since 2012 and has been positive for five consecutive years. As a result of the strong cashflow performance over the last few years, management initiated a quarterly $0.10 dividend.

CFO Dave Zinsner stated on the Q4 call that “the initiation of a dividend is an important milestone that reflects the structural transformation Micron has undergone over the last several years, and it shows our confidence in the sustainability of our cash flow generation”. He added that Micron expects to return more than 50% of FCF to shareholders through dividends and buybacks going forward. If the memory business is becoming less cyclical, then shareholder returns could be substantial going forward given Micron’s robust profitability and cashflow generation.

Finally, inventory trends also highlight the strong demand for Micron’s products. Inventory declined 17% YoY despite the 37% YoY growth in sales, as Micron has struggled to replenish lean inventory levels in response to strong customer demand. Typically, in cyclical industries, elevated inventory levels can be a sign of concern, so the drawdown in inventory highlights the strong demand for memory in the current environment.

Inventory composition is also bullish, as raw material inventory increased to 11% of total inventory, a three-year seasonal high, while finished goods inventory declined from 19% of inventory to 11% in Q4, a five-year low. The drawdown in finished goods highlights that Micron is shipping its product faster than it can be replaced, highlighting the strong demand it is experiencing. A rise in raw materials and decline in finished goods means that management is quickly selling its product and anticipates that this demand will continue.

Outlook and valuation

However, a risk with the low inventory levels is that Micron will not be able to fulfill the strong demand in the near term. There are also supply chain issues outside of Micron’s control that may impact demand in the near term. CEO Mehrotra explained on the Q4 call that some PC customers are adjusting memory purchases in the near term due to non-memory component shortages. He added that supply chain constraints for IC components will limit some large shipments in the near term.

This commentary helps explain Micron’s Q1 FY2022 forward guide miss. Micron guided Q1 sales to be $7.65 billion at the mid-point, 10% below the Street’s initial estimate at $8.5 billion. Micron also guided Q1 EPS to be $2.10 at the midpoint, or 15% below initial expectations of $2.48. CEO Mehrotra explained that while there are near term supply chain issues, “shipping growth will resume in the second half of the fiscal year, and we're planning to deliver record revenue with solid profitability in fiscal 2022”. While Micron only quantified its Q1 guide, CEO Mehrotra’s statements suggest that growth will rebound in the second half of the year as supply chain issues and low inventory levels normalize.

Looking forward, Micron is expected to report Q1 earnings on December 20th. Q1 sales are expected to increase 33% YoY to $7.65 billion and non-GAAP EPS is expected to rise 169% YoY to $2.10. For the year, Micron is expected to grow sales 16% YoY to $2 billion and to report $9.01 in non-GAAP EPS, which gives it a 9.2x fwd EPS multiple. This is slightly below Intel’s fwd P/E multiple of 9.7 but above Western Digital’s fwd P/E of 6.7x. Furthermore, Micron’s fwd P/E of 9.2x is below the 15.8x level it reached earlier in the year, which highlights that there is room for multiple expansion going forward.

Micron also trades at a slight premium based on trailing earnings. Its TTM P/E multiple of 16x is 45% higher than the peer median of 11x (peers include Samsung, SK Hynix, Intel, and Western Digital). Micron is likely being awarded a premium over its peers due to its current technological lead in key technologies discussed above.

Conclusion

Micron’s sales grew 29% YoY in FY2021 and management expects this growth to continue into FY2022 as demand for memory remains robust. The memory market is becoming less cyclical due to numerous tailwinds that have expanded demand for memory beyond PCs and into more memory intensive markets such as data centers and mobile. Micron is ramping capex to keep pace with outsized demand and has innovated new technologies to keep pace with the cloud environment.

Management also issued a quarterly $0.10 dividend, which further highlights management’s contention that its market is becoming less cyclical. Micron currently trades at 9x fwd P/E, which is near Intel’s and above Western Digital’s multiple. If the company can prove to the market that its business is less cyclical and that its 40% gross margin and 50% cashflow margins are sustainable, then its multiple will likely expand going forward.

I/O Fund Discusses Winning Stock Picks with Charles Payne of Fox Business News

Posted on December 3, 2021June 30, 2026 by io-fund

In November, Beth Kindig discussed winning tech stock picks on the Fox Business News show ‘”Making Money With Charles Payne.” Below are video previews of her discussion and an overview of what the two of them discussed.

Despite the current tech rout, we still believe that Roku has the top operating system, is priced reasonably and fits well with smart TVs. Another advantage for Roku is that it has the first-mover advantage in the advertising-based video on demand (AVOD). Roku not only benefits from the cord-cutters but also the brand advertisers. When Beth wrote her initial thesis in 2018, she used to hear questions, “What about Google, Amazon, Netflix, etc.?” Now, the stock has been a multi-bagger for her readers.

Asana is another excellent example of our stock-picking strategy. In this article, you can review how I/O Fund used to blend both fundamental and technical analysis to make gains on this cloud stock. You can also view the webinar from our portfolio manager Knox Ridley where he explains the patterns. Our premium subscribers receive regular trade notifications, trade setups, and market updates from Knox, which helps them to navigate the uncertainties in the markets. The I/O Fund went onto recently closed ASAN for a 285% gain in less than 10 months.

We have been building our positions with one or two strong picks in a year. For example, we have a position in Nvidia since 2018. We had rightly predicted that Nvidia would be a major player in Data Center and Artificial Intelligence. The market questioned our thesis back then. However, we have been firm and increased our position in the stock. Rather than rest on our laurels with long-ago entries from 2018, we continually buy and release our entries. For example, we were able to buy back into NVDA multiple times in this range, which led to 57% returns in less than 2 months. On 9/28 we stated in our service “If we see price move between $200 – $196 starting today and into Friday, that's a strong buy.”

Sign up for I/O Fund's free newsletter with gains of up to 1100% – Click hereSign up for I/O Fund's free newsletter with gains of up to 1100% – Click hereClick here

As you notice in the recent results, the company’s data center revenue accelerated by 55% YoY to $2.94B. Since we entered the stock very early, we have had big gains in Nvidia. Nvidia is also forefront in the Metaverse. We have covered earlier this year and we continue to be bullish on Nvidia.

Source: YCharts

We always like to start with small positions in a company and then build large positions. Our portfolio manager Knox Ridley guides us to entry and exit positions since he is an expert in technical analysis. Knox also tracks the broader market which helps us to develop a good risk management strategy.

Zoom is another cloud winner, which we started coverage well before the Covid-19. Beth has been bullish on the company due to the great product fit. In her own words, “Product-market fit is what led me to call Zoom Video the best IPO of the year in 2019, why I encouraged investors to know their winners during the cloud selloff, and why we reiterated a buy signal on my research site when Zoom Video was at $65.”

I/O Fund was also one of the early investors of Bitcoin. We started to build positions in Bitcoin in 2019. You can view our sample entries and exits here plus our press release on how Bitcoin contributed to our gains this year.

Short selling of ARKK

There are reports that investors are betting against ARKK Fund and the short interest in the ARKK has been increasing. Tuttle Capital Short Innovation ETF was launched to give an inverse return of ARKK. We believe that the investors are betting against the fund due to the macro environment shifting towards heightened inflation/slowing growth. High beta, low quality, and heightened risk assets tend to underperform in these environments, and ARKK has express no interest in pivoting their portfolio for this macro picture. However, we have a diversified risk management strategy in place. We recently have begun to book gains in high fliers and cut losers that would continue to struggle in a low growth environment. Since the secular bull market began in March of 2009, we have seen 3 slow down periods, which culminated in deep corrections. Each time the FED was forced to reflate the economy, and thus shifting risk-on assets back in the driver seat. We believe that we are entering one of these environments now. Regardless of the noise, and expected volatility, the bull market is not over yet. We always root for Ark and also for innovation so the I/O Fund (respectfully) hopes the shorts get burned!

I/O Fund is comprised of a team of analysts who share their research publicly as they build a portfolio of 30 stocks. Our team has record results for a retail Fund and we also have four-digit gains on some of our free newsletter coverage. You can learn more about our premium service by clicking here or sign up for our free newsletter here. clicking here or sign up for our free newsletter here.

Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.

UiPath Fiscal Q2 Update: Decelerating Revenue Doesn’t Tell the Whole Story

Posted on September 17, 2021June 30, 2026 by io-fund

UiPath’s core product is UI-based automation and they’ve recently acquired Cloud Elements to add API-based automation. The software robots are able to work across programs in the background, build applications, send emails and interact with chatbots. Although making AI/ML actionable is UiPath’s sweet spot, the trend towards low code/no code is also a tailwind for UiPath. We know the AI-bellwether Nvidia has led the market this year, which helps us gauge where we are in the AI cycle as semis must move first. Therefore, Nvidia helps provide evidence that we are early to UiPath (unlikely automation moves exactly in sync with GPUs) and the goal will be to remain invested through the ups/downs as the story unfolds.

I had posted on the forum my thoughts on the decelerating revenue and why the unique business model and change in billing terms is causing the top line to look weaker than the company actually is. Management emphasizes to focus on ARR and we break down why that’s important. Although a change in billing terms can be seen as a weakness, we don’t think this is the case as the change in terms could open up the company to more customers who aren’t willing or able to pay up front. We had outlined in our original analysis that UiPath is an expensive product with a customer concentration at the enterprise level. Customer growth above $1 million was up 100%, therefore, UiPath is showing strength in its core customer base. However, UiPath is now ready to invest at the citizen developer level in the Studio X product.

Earnings Overview

This section posted on the forum Thursday, September 16th:This section posted on the forum Thursday, September 16th:posted on the forum Thursday, September 16th:

UiPath beat and raised guidance, so there was no issue here. Rather the issue is the company’s growth is decelerating and this is raising some question marks as to how long the deceleration will continue. The market is forward looking, and in this case, the market is pricing in lower growth. The guidance does not fully illustrate the deceleration in licensing and deferred revenue. We break this down for you below.

First, I want to talk about UiPath’s unique business model which is to license software robots and then charge for support and maintenance. Here is the difference as outlined in the S-1 filing:

Licenses:

We sell term licenses which provide customers the right to use software for a specified period of time. From time to time, we also sell perpetual licenses that provide customers the right to use software for an indefinite period of time. For each respective type of license, revenue is recognized at the point-in-time when the customer is able to use and benefit from the software, which is generally upon delivery to the customer or upon the commencement of the renewal term.

Maintenance and Support:

We generate maintenance and support revenue through technical support and the provision of unspecified updates and upgrades on a when-and-if-available basis for both term and perpetual license arrangements. Maintenance and support for perpetual licenses is renewable, generally on an annual basis, at the option of the customer. Maintenance and support represents stand-ready obligations for which revenue is recognized ratably over the term of the arrangement.

The reason the company emphasizes ARR as the key metric to focus on is because it accounts for UiPath’s upgrade-heavy business model and it shows the strength from retention. Expansion revenue is essentially what drives UiPath rather than yearly subscriptions alone (revenue). Once a company licenses software robots from UiPath, they are more likely to license more software robots over time and to need more maintenance and support. This upgrade cycle is unique from other cloud companies that have only specific cohorts they can upgrade and are more focused on yearly subscriptions (i.e., Pro Plan to Enterprise Plan, etc.).

Management at UiPath is communicating that the ARR forecast is more important than the revenue forecast as it accounts for the upgrades they are expecting. The dollar based net retention rate for the company is very high at 144%. Evidence of the expansion revenue model is also seen in the company’s lifetime value which is 233X for the top 25 customers and 62X for the top 100 customers. UiPath’s customers are enterprise customers with large budgets, which is why we saw the $1 million+ ARR cohort up 100% this quarter and those accounting for $100,000+ ARR up 59% this quarter.

Why UiPath Sold Off Despite a Beat:

Given what analysts know about Q3 guidance, the current projections for fiscal year 2022 is at 44%, which is down from 81% in the last fiscal year. We’ve included the analyst projections for the following year, which right now are at 34% growth to $1.17 billion.

However, the ARR hints towards stronger revenue growth in the future. For fiscal year 2021, revenue of $608,000 exceeded ARR of $580,400. This year, we are seeing ARR slightly outpace revenue if we based revenue projections on analyst consensus. While revenue is forecast to grow 44% this fiscal year, ARR is forecast to grow at 51%. Historically, UiPath’s revenue exceeded ARR.

Another explanation for why we are seeing the lapse between ARR and revenue is that the CFO mentioned a change in terms of how the company bills. In the past, the company billed multi-year deals all at once, and instead, they are shifting towards billing annually. The management stated the reason is that it allows more upgrades as their customers’ needs change and it results in less up front from their customers. In the example provided, instead of buying 10,000 robots at once, they would buy 1,000 and then 5,000 and then 10,000 with the new billing structure with the revenue realized across three years rather than realized in one year.

Here is the quote about the difference between revenue guidance and ARR: “So when I talk about an annual ramping contract, one of the things that is really positive for us is digital transformation is a long-term trend. And what has happened with the strength of UiPath’s platform is automation is a staple for the long-term requirements for customers to transform the way they work in digital transformation. So what that means is instead of buying simple annual contracts, what we see a larger demand for is getting larger term commitments from some of our customers. But the way they look at that is instead of buying 10,000 robots today, they may buy 1,000 robots today, 5,000 next year, 10,000 in year three. And those – the license deliveries would happen into those years as we go down.
And so, one of the things that we look at is that we like that because that is better ROI for our customers. And I – when we think about the impact on financial metrics, two things. One is remember, we – and I repeat this, we really drive our company to ARR. From an ARR perspective, there is no impact that is there. Based on the way the contracts are structured, if license delivery happens in the out years, then that does have – that creates variability in revenue because we only can recognize the revenue upon delivery of the license. And so that is kind of the way that I think about it from a modeling perspective on revenue. But again, I stress ARR really, there is no impact, and that’s how we drive the business.”Based on the way the contracts are structured, if license delivery happens in the out years, then that does have – that creates variability in revenue because we only can recognize the revenue upon delivery of the license. And so that is kind of the way that I think about it from a modeling perspective on revenue. But again, I stress ARR really, there is no impact, and that’s how we drive the business.”

This change in how customers are billed likely led to lower licensing revenue in the current quarter of 20% growth compared to 72% growth from the fiscal year (not apples-to-apples comparing Quarterly to Fiscal Year but helps provide color). This is down from 57% last fiscal quarter ending in April. We see evidence that those licenses will be recognized in future quarters not only in ARR but also in support and maintenance growth, which is recognized ratably and grew 74% year-over-year compared to 79% in the quarter ending in April. In other words, customers aren’t falling off or downgrading rather they are paying for licenses across many years rather than pre-paying.

Expanding on Earnings:

UiPath reported revenue of $195.5 million compared to the consensus for $184.3 million. This represents 40% growth year-over-year compared to 65% growth in the prior quarter. EPS also beat at $0.01 compared to a consensus of ($0.05) EPS. UiPath has a total of 9,100 customers with 600 added in the recent quarter. The company also has 4,700 partners after adding 400 in the most recent quarter. The Partner Network is part of our thesis on UiPath and we think this number carries significance in terms of a defensible position. This quarter, the company highlighted its partnerships with Alteryx and Smartsheet.

The company’s adjusted gross margins are at 86% in the most recent quarter with adjusted free cash flow at a loss of $3.5 million. As stated, licensing revenue slowed down with the revenue mix being $95.5 million in licenses compared to $79.5 million in the year-ago quarter. Maintenance and other Support was at $90.3 million compared to $51.9 million in the year-ago quarter.

We believe the management is correct in focusing on ARR. As stated above, revenue typically exceeds ARR. Therefore, if we draw conclusions based on the historic performance of the company, the revenue growth would be above 60% in this quarter and above 51% in future quarters. In addition, net new ARR was up 33%. We will need to see how long it takes before the company absorbs the change in billing terms, but due to where we are in the AI cycle, we prefer to be patient. If this was cloud software, which is moving towards consolidation, we would be more concerned. Hopefully, the above section explains why we are not concerned at this time.

Guidance came in higher than expected at revenue of $208 million at the midpoint compared to consensus of $206 million. The guide in ARR was at 54% next quarter and at 51% growth for the fiscal year. When asked if the raised guidance was from a demand signal, the company pointed towards their Net Retention Rate, which remained robust at 144%, indicating that demand for their products has remained strong.

From my perspective, UiPath has very few comparables on the market but we can lump the company in with cloud software with the understanding that cloud software’s growth reflects a mature market while UiPath’s does not. Forward fiscal year P/S is at 32 based on $874 million consensus estimates for this year and 1-year forward is at 24 if based on consensus estimates of 1.17 billion. We think this is a reasonable valuation for a company that is at the forefront of automation, which is one of the least-hyped yet most practical commercial uses for AI and ML. However, the full lockup is next month and we had stated in our initial coverage on UiPath and reiterated across other analysis that even the most quality companies come under pressure from insiders and early investors needing an exit.

Of the companies pictured above, ZS, TEAM and NET have similar forward revenue growth and we can see they are fetching much higher valuations. It will be interesting to see how this unfolds if UiPath’s revenue does indeed catch up to ARR and enterprise customer growth.

Product Catalysts:

The focus of this update has been primarily on the financials as we’ve written a deep dive on the product, which you can find here.

UiPath has a few catalysts this fall, including releasing attended robots for the Linux operating system and also for Mac users. Mac OS users make up roughly 17% compared to Windows, there is a higher concentration of Mac users among citizen developers and also in enterprises in the tech industry. Linux makes up a very tiny portion of overall operating system market share at less than 2% yet dominates cloud infrastructure at 90% penetration. In 2021, 100% of the world’s top 500 supercomputers ran Linux. Here are the releases the company has planned including a web-based version of StudioX:

Now, we continue to invest in StudioX as a major tool to foster the community of citizen developers. We are going to extend it also to be available multi-platform. So, you will expect quite a bit of investment from us in the coming few quarters. It’s – right now, we are doing really a major advance into multi-cloud and multi-platform. And we are launching Linux-based robots. We just announced yesterday the public review available. We are launching Mac support. We are going to launch early next year, the web-based StudioX that will make it even easier to adopt. But overall, we really believe that it’s important to have a suite of tools that cater to a large array of options from professional developers to citizen developers and to all business users.

Conclusions:

The lockup for UiPath happened in tranches after the first fiscal quarter results and also following the second fiscal quarter results, per the S-1 filing, with some restrictions. The full lockup with no restrictions occurs on October 18th. This is likely weighing on shares more than anything in the current ER as some shares were up for lockup expiration at the time of fiscal Q2. Participating in IPOs rarely works out in the first few months of the listing unless you’re actively trading, which we stated clearly in the original write-up on UiPath. However, we decided to add this to LTBH to show our seriousness in building AI positions.

With that said, we will likely hold off on Confluent until post-lockup. You’ll get this analysis soon to set the stage for why we are building MDB, ESTC and eventually CFLT as a package as we think there’s an important trend bubbling beneath the surface. Keep an eye for this deep dive end of next week.

The Key To Unlocking The Metaverse Is Nvidia’s Omniverse

Posted on September 8, 2021June 30, 2026 by io-fund

This article was originally published on Forbes on Sep 2, 2021, 06:43 pm EDT.Forbes on Sep 2, 2021, 06:43 pm EDT.

Last week, I wrote that Nvidia could surpass Apple in five years as the artificial intelligence economy will be nearly four times larger than the mobile economy that drove Apple. To get an understanding of how big the AI economy will be, we pointed towards estimates of AI adding $15 trillion in GDP once it reaches maturation in 2030 compared to mobile adding $4.4 trillion to GDP in the current year.

The analysis discussed some of the underlying product strength Nvidia has with its GPUs and its new software suite that allows accelerated AI computing on virtual machines rather than bare metal servers. We also revisited my original thesis around the GPU-powered cloud and developer adoption of CUDA, both of which are still intact three years later.

There are numerous forward-looking catalysts for Nvidia as enterprises will seek to lower costs and increase production with AI. In fact, while I wrote the AI economy would be four times larger, Jensen Huang predicts that “Omniverse or the Metaverse is going to be a new economy this is larger than our current economy.”

Well then, so much for correlating the AI economy to the mobile economy as Huang predicts an entirely separate revenue segment will surpass our current GDP of $84.7 trillion.

Let’s Start with Metaverse Basics:

The dry definition of the Metaverse is a shared virtual 3D world that is interactive, immersive, and collaborative. The word “Metaphrase” was first coined by American writer Neal Stephenson in his science fiction Snow Crash in the year 1992. However, the word meta dates back to the Greek era, which means “after” or “beyond.”

There are many other articles online that describe the Metaverse in detail, like this one in Forbes by Cathy Hackl. She points out that the Metaverse is described as “digital realities where people work, play and socialize.” In some ways, social media and gaming are the stepping stones to these virtual realities. How many of us have friends and acquaintances on social media that we have never met, such as on Twitter or on Fortnite, or people we haven’t seen in decade yet feel close to, such as on Facebook or LinkedIn?

If you experience moments where your virtual life online feels as real as your physical life, then you’ve dipped your toe into the idea of a Metaverse.

The idea of a virtual economy already exists in many games where you can trade virtual goods and where players are paid for creating content. The idea of crypto mining is also an example of where real-world work is exchanged for virtual currency (and value). Now that Bitcoin at $1 trillion and rivaling the market cap of FAAMG stocks, we have already seen some evidence of a virtual world translating to the real world.

This new economy will be a combined effort of many companies and users. As mentioned, the term Metaverse is not new and has been used by tech companies over the past few years. Microsoft Xbox head, Phil Spencer made this point four years ago that he is a believer in the Metaverse. In addition to the various gaming and AR/VR tools that the company offers, it also purchased Minecraft maker Mojang Studios. Minecraft could be one of the pioneers of Metaverse in the future due to the digital world games and its large user base.

Roblox is another company that was early to this concept. On average more than 36 million young people come to Roblox to play, learn, and interact in a 3D virtual space. Neil Rimer, co-founder of Index Ventures which is an early investor in Roblox, rightly said in an interview with CNBC that “No single company can build a metaverse. It has to be a community.”

It’s important to point out that there are false starts and early spinouts in technology. I had written at length about why autonomous vehicles were an impossibility by 2020 when the financial news had generated a hornet’s nest worth of buzz. Three years later, and we do not have robotaxis or anything of the sort driving commercially on roads. Similarly, The Metaverse will take time to build.

Where Will the Metaverse Be Built?

Nvidia’s Omniverse is the simulation and collaboration platform that will be partly used to build the Metaverse. More than 50,000 individual creators have downloaded Omniverse since it opened Beta in December 2020 compared to 2 million that have registered with the CUDA platform. The number of creators is now opened up due to integrations with Blender and Adobe, where it can potentially reach millions of additional users.

In the words of CEO Jensen Huang, “We are thrilled to have launched NVIDIA Omniverse, a simulation platform nearly five years in the making that runs physically realistic virtual worlds and connects to other digital platforms. We imagine engineers, designers and even autonomous machines connecting to Omniverse to create digital twins and industrial metaverses.”

It makes sense that Nvidia is early to this market as the company has worked ten years on the ray tracing technology used in the RTX Turing GPUs. The RTX platform was invented by Nvidia to “physically simulate light behavior in the world” and combines RT cores for ray tracing with Tensor Cores for AI. This drives Nvidia’s professional visualization revenue segment, which was up 156% year-over-year and up 40% sequentially.

The company also invented the ability to simulate physics and create architectures in the cloud to build “connectors.” This led to the development of USD, or Universal Scene Description, which allows for a portal into virtual worlds. These virtual worlds are then used to train robots or to create concerts and theme parks.

This year’s Nvidia’s GPU Technology Conference event slides were made from the company’s own Omniverse platform to make the presentation more interactive. The main highlight of GTC 2021 was a perfect virtual replica of Jensen Huang’s kitchen and with a digital clone of the CEO himself. The details given in the video of The Making of the GTC Keynote shows the combined work of NVIDIA’s deep learning and graphics research teams with several engineering teams and the company’s in-house creative team.

To create the virtual keynote, the teams had to take several photos of the kitchen and Jensen to create the 3D model that could mimic his gestures. The keynote raised debates as to which parts were rendered and which parts were real. A TechRadar article had said that the entire presentation was not real. However, Nvidia reached out to the company to note that while “Jensen's corporeal form may have been rendered during portions of the keynote, it was Jensen Huang himself who was speaking at the presentation.”

The company’s post on the making of GTC made sure it was clarified. To be sure, you can’t have a keynote without a flesh and blood person at the center. Through all but 14 seconds of the hour and 48 minute presentation — from 1:02:41 to 1:02:55 — Huang himself spoke in the keynote.

Omniverse Use Cases

NVIDIA Omniverse Enterprise has made it possible for 3D production teams to work seamlessly together on complex projects. Rather than requiring in-person meetings or exchanging and iterating on massive files, design teams can work simultaneously in a virtual world from anywhere.

NVIDIA is working with various industry leaders using the company’s Omniverse platform in real-time situations. Omniverse enterprise software is in the early access stage and might be available later this year from NVIDIA’s partners, including Dell, HP, and others. Over 500 companies are evaluating Omniverse Enterprise, including BMW, Volvo, Lockheed Martin, Ericsson, and Bentley Systems.

Nvidia pointed out on the earnings call that there is a “Factory of the Future” that was developed on the Omniverse platform and that companies like BMW are using RTX and USD to simulate factories: “We've got a shared GTC Factory of the Future that is designed completely in Omniverse, robots trading Omniverse with goods and materials that are its original CAD data put into the battery. The logistics plan, like an ERP system, except this an ERP system of physical grids and physical simulation simulated through this Omniverse world, and you could plan the entire factory in Omniverse.

This will help BMW to increase the speed in decision-making and improve efficiency. The new approach will help to view their entire factory in simulation mode with photorealistic detail. Another advantage is that data is available immediately and any changes can be made in the planning stage itself, which saves time and money.

Bentley Software is an infrastructure engineering software company that builds complex infrastructure projects. The Bentley iTwin platform allows engineering firms to create and analyze digital twins of infrastructure assets. The result is millimeter-accurate digital content that even allows users to explore and even walk through infrastructure in real time. The digital twins are explored across multiple devices including AR/VR headsets. Foster + Partners, the architectural design and engineering firm that built Apple’s headquarters, is also testing Omniverse to help them render virtual sets in real-time.

Beyond the Omniverse:

As stated in the introduction, Jensen Huang said in the earnings call, “I'm fairly sure at this point that Omniverse or the Metaverse is going to be a new economy that is larger than our current economy.” If that’s true, then many companies will be winners in the space. Facebook is certainly trying as CEO Mark Zuckerberg said, “I expect people will transition from seeing us primarily as a social media company to seeing us as a metaverse company”.

My personal opinion is that Facebook has too many privacy issues and (frankly) a poor reputation to find much uptake in new markets. We’ve seen the company fail many times at attempts to move into stable coins, dating, Facebook gifts, Parse, among others. Not to mention the Cambridge Analytica data scandal, with its only success outside of the social network being accomplished through acquisitions. Regardless, the company is likely to get the kind of headlines that investors tend to rely on.

Unity, Epic Games and Roblox have arguably the best audience as they’ll target gamers for the Metaverse. The trick will be recruiting non-gaming audiences to produce a bigger market than what is currently being monetized through gaming.

For a list of investable Metaverse companies, check out the Roundhill Ball Metaverse ETF META provides exposure to companies that are involved in Metaverse. NVIDIA is currently its largest holding followed by Microsoft, Roblox, Tencent, Unity and Autodesk.

Conclusion:

If the Metaverse economy surpasses the real-world economy, as Huang predicts, then one day we may look back at Jensen Huang’s keynote in a fully rendered kitchen and memorialize this moment similar to Steve Jobs keynote in 2007.

However, the beauty of a company like Nvidia is that I don’t have to time the Metaverse in order to see real gains. If the Metaverse thesis takes longer than expected to materialize, I am still bullish on the company due to its AI and GPU-cloud capabilities that is driving many industries. In fact, I am so bullish on Nvidia for AI that I believe the company can outpace even Apple, which I covered here.

Here’s Why Nvidia Will Surpass Apple’s Valuation In 5 Years

Posted on September 2, 2021June 30, 2026 by io-fund

This article was originally published on Forbes on Aug 27, 2021,12:24am EDTForbes on Aug 27, 2021,12:24am EDT

Nvidia has a market cap of roughly $550 billion compared to Apple’s nearly $2.5 trillion. We believe Nvidia can surpass Apple by capitalizing on the artificial intelligence economy, which will add an estimated $15 trillion to GDP. This is compared to the mobile economy that brought us the majority of the gains in Apple, Google and Facebook, and contributes $4.4 trillion to GDP. For comparison purposes, AI contributes $2 trillion to GDP as of 2018.

While mobile was primarily consumer, and some enterprise with bring-your-own-device, artificial intelligence will touch every aspect of both industry and commerce, including consumer, enterprise, and small-to-medium sized businesses, and will do so by disrupting every vertical similar to cloud. To be more specific, AI will be similar to cloud by blazing a path that is defined by lowering costs and increasing productivity.

I have an impeccable record on Nvidia including when I stated the sell-off in 2018 was overblown and missing the bigger picture as Nvidia has two impenetrable moats: developer adoption and the GPU-powered cloud. This was when headlines were focused exclusively on Nvidia’s gaming segment and GPU sales for crypto mining.

Although Nvidia’s stock is doing very well this year, this has been a fairly contrarian stance in the past. Not only was Nvidia wearing the dunce hat in 2018, but in August of 2019, the GPU data center revenue was flat to declining sequentially for three quarters, and in fiscal Q3 2020, also declined YoY (calendar Q4 2019). We established and defended our thesis on the data center as Nvidia clawed its way back in price through China tensions, supply shortages, threats of custom silicon from Big Tech, cyclical capex spending, and on whether the Arm acquisition will be approved.

Suffice to say, three years later and Nvidia is no longer a contrarian stock as it once was during the crypto bust. Yet, the long-term durability is still being debated —- it’s a semiconductor company after all —- best to stick with software, right? Right? Not to mention, some institutions are still holding out for Intel. Imagine being the tech analyst at those funds (if they’re still employed!).

Before we review what will drive Nvidia’s revenue in the near-term, it bears repeating the thesis we published in November of 2018:

Nvidia is already the universal platform for development, but this won’t become obvious until innovation in artificial intelligence matures. Developers are programming the future of artificial intelligence applications on Nvidia because GPUs are easier and more flexible than customized TPU chips from Google or FGPA chips used by Microsoft [from Xilinx]. Meanwhile, Intel’s CPU chips will struggle to compete as artificial intelligence applications and machine learning inferencing move to the cloud. Intel is trying to catch-up but Nvidia continues to release more powerful GPUs – and cloud providers such as Amazon, Microsoft and Google cannot risk losing the competitive advantage that comes with Nvidia’s technology.from Xilinx]. Meanwhile, Intel’s CPU chips will struggle to compete as artificial intelligence applications and machine learning inferencing move to the cloud. Intel is trying to catch-up but Nvidia continues to release more powerful GPUs – and cloud providers such as Amazon, Microsoft and Google cannot risk losing the competitive advantage that comes with Nvidia’s technology.

The Turing T4 GPU from Nvidia should start to show up in earnings soon, and the real-time ray-tracing RTX chips will keep gaming revenue strong when there is more adoption in 6-12 months. Nvidia is a company that has reported big earnings beats, with average upside potential of 33.35 percent to estimates in the last four quarters. Data center revenue stands at 24% and is rapidly growing. When artificial intelligence matures, you can expect data center revenue to be Nvidia’s top revenue segment. Despite the corrections we’ve seen in the technology sector, and with Nvidia stock specifically, investors who remain patient will have a sizeable return in the future.”When artificial intelligence matures, you can expect data center revenue to be Nvidia’s top revenue segment. Despite the corrections we’ve seen in the technology sector, and with Nvidia stock specifically, investors who remain patient will have a sizeable return in the future.”

Notably, the stock is up 335% since my thesis was first published – a notable amount for a mega cap stock and nearly 2-3X more returns than any FAAMG in the same period. This is important because I expect this to trend to continue until Nvidia has surpassed all FAAMG valuations.

I/O Fund

Below, we discuss the Ampere architecture and A100 GPUs, the Enterprise AI Suite and an update on the Arm acquisition. These are some of the near-term stepping stones that will help sustain Nvidia’s price in the coming year. We are also bullish on the Metaverse with Nvidia specifically but will leave that for a separate analysis in the coming month.

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Nvidia Not Standing Still with Ampere Architecture and A100 GPU

“Nvidia’s acceleration may happen one or two years earlier as they are the core piece in the stack that is required for the computing power for the front-runners referenced in the graph above. There is a chance Nvidia reflects data center growth as soon as 2020-2021.” -published August 2019, Premium I/O Fund

Last year, Nvidia released the Ampere architecture and A100 GPU as an upgrade from the Volta architecture. The A100 GPUs are able to unify training and inference on a single chip, whereas in the past Nvidia’s GPUs were mainly used for training. This allows Nvidia a competitive advantage by offering both training and inferencing. The result is a 20x performance boost from a multi-instance GPU that allows many GPUs to look like one GPU. The A100 offers the largest leap in performance to date over the past 8 generations.

At the onset, the A100 was deployed by the world’s leading cloud service providers and system builders, including Alibaba cloud, Amazon Web Services, Baidu Cloud, Dell Technologies, Google Cloud platform, HPE and Microsoft Azure, among others. It is also getting adopted by several supercomputing centers, including the National Energy Research Scientific Computing Center and the Jülich Supercomputing Centre in Germany and Argonne National Laboratory.

One year later and the Ampere architecture is becoming one of the best-selling GPU architectures in the company’s history. This quarter, Microsoft Azure recently announced the availability of Azure ND A100 v4 Cloud GPU which is powered by NVIDIA A100 Tensor Core GPUs. The company claims it to be the fastest public cloud supercomputer. The news follows the launch by Amazon Web Services and Google Cloud general availability in prior quarters. The company has been extending its leadership in supercomputing. The latest top 500 list shows that Nvidia power 342 of the world’s top 500 supercomputers, including 70 percent of all new systems and eight of the top 10. This is a remarkable update from the company.

Ampere architecture-powered laptop demand has also been solid as OEM’s adopted Ampere Architecture GPUs in a record number of designs. It also features the third-generation Max-Q power optimization technology enabling ultrathin designs. The Ampere architecture product cycle for gaming has also been robust, driven by RTX’s real-time ray tracing.

In the area of GPU acceleration, Nvidia is working with Apache Spark to release Spark 3.0 run on Databricks. Apache Spark is the industry’s largest open source data analytics platform. The results are a 7x performance improvement and 90 percent cost savings in an initial test. Databricks and Google Cloud Dataproc are the first to offer Spark with GPU acceleration, which also opens up Nvidia for data analytics.

The demand has been strong for the company’s products which have exceeded supply. In the earnings call, Jensen Huang mentioned “And so I would expect that we will see a supply-constrained environment for the vast majority of next year is my guess at the moment.” However, he assured that they have secured enough supplies to meet the growth plans for the second half of this year when he said, “We expect to be able to achieve our Company's growth plans for next year.”

Virtual Machines for AI Workloads

Virtualization allows companies to use software to expand the capabilities of physical servers onto a virtual system. VMWare is popular with IT departments as the platform allows companies to run many virtual machines on one server and networks can be virtualized to allow applications to function independently from hardware or to share data between computers. The storage, network and compute offered through full-scale virtual machines and Kubernetes instances for cloud-hosted applications comes with third-party support, making VMWare an unbeatable solution for enterprises.

Therefore, it makes sense Nvidia would choose VMWare’s VSphere as a partner on the Enterprise AI Suite, which is a cloud native suite that plugs into VMWare’s existing footprint to help scale AI applications and workloads. As pointed out by the write-up by IDC, many IT organizations struggle to support AI workloads as they do not scale as deep learning training and AI inferencing is very data hungry and requires more memory bandwidth than what standard infrastructures are capable of. CPUs are also not as efficient as GPUs, which have parallel processing. Although developers and data scientists can leverage the public cloud for the more performance demanding instances, there are latency issues with where the data repositories are stored (typically on-premise).

The result is that IT organizations and developers can deploy virtual machines with accelerated AI computing where previously this was only done with bare metal servers. This allows for departments to scale and pay only for workloads that are accelerated with Nvidia capitalizing on licensing and support costs. Nvidia’s AI Enterprise targets customers who are starting out with new enterprise applications or deploying more enterprise applications and require a GPU. As enterprise customers of the Enterprise AI Suite mature and require larger training workloads, it’s likely they will upgrade to the GPU-powered cloud.

Subscription licenses start at $2,000 per CPU socket for one year and it includes standard business support five days a week. The software will also be supported with a perpetual license of $3,595, but support is extra. You also have the option to have get 24×7 support with additional charges. According to IDC, companies are on track to spend a combined nearly $342 billion on AI software, hardware, and services like AI Enterprise in 2021. So, the market is huge and Nvidia is expecting a significant business.

Nvidia also announced Base Command, which is a development hub to move AI projects from prototype to production. Fleet Command is a managed edge AI software SaaS offering that allows companies to deploy AI applications from a central location with real-time processing at the edge. Companies like Everseen use these products to help retailers manage inventory and for supply chain automation.

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Fiscal Q2 Earnings and More on the Arm Acquisition:

Over the past year, there have been some quarters where data center revenue exceeded gaming, while in the most recent quarter, the two segments are inching closer with gaming revenue at $3.06 billion, up 85 percent year-over-year, and data center revenue at $2.37 billion, up 35 percent year-over-year.

It was good timing for Jensen Huang to appear in a fully rendered kitchen for the GTC keynote as professional visualization segment was up 156% year-over-year and 40% quarter-over-quarter. Not surprisingly, automotive was down 1% sequentially although up 37% year-over-year.

Gross margins were 64.8% when compared to 58.8% for the same period last year, which per management “reflected the absence of certain Mellanox acquisition-related costs.” Adjusted gross margins were 66.7%, up 70 basis points, and net income increased 282% YoY to $2.4 billion or $0.94 per share compared to $0.25 for the same period last year.

Adjusted net income increased by 92% YoY to $2.6 billion or $1.04 per share compared to $0.55 for the same period last year.

The company had a record cash flow from operation of $2.7 billion and ended the quarter with cash and marketable securities of $19.7 billion and $12 billion in debt. It returned $100 million to the shareholders in the form of dividends. It also completed the announced four-for-one split of its common stock.

The company is guiding for third quarter fiscal revenue of $6.8 billion with adjusted margins of 67%. This represents growth of 44% and with the “lion’s share” of sequential growth driven by the data center.

We’ve covered the Arm acquisition extensively with in a full-length analysis you can find here on Why the Nvidia-Arm acquisition Should Be Approved. In the analysis, we point towards why we are positive on the deal, as despite Arm’s extremely valuable IP, the company makes very little revenue for powering 90% of the world’s mobile processors/smartphones (therefore, it needs to be a strategic target). We also argue that the idea of Arm being neutral in a competitive industry is idealistic, and to block innovation at its most crucial point would be counterproductive for the governments reviewing the deal. We also discuss how the Arm acquisition will help facilitate Nvidia’s move towards edge devices.

In the recent earnings call, CFO Colette Kress reiterated that the Arm deal is a positive for both the companies and its customers as Nvidia can help expand Arm’s IP into new markets like the Data Center and IoT. Specifically, the CFO stated, “We are confident in the deal and that regulators should recognize the benefits of the acquisition to Arm, its licensees, and the industry.”

Conclusion:

The conclusion to my analysis is the same as the introduction, which is that I believe Nvidia is capable of out-performing all five FAAMG stocks and will surpass even Apple’s valuation in the next five years.

Here’s Why Nvidia Will Surpass Apple’s Valuation In 5 Years

Posted on September 2, 2021June 30, 2026 by io-fund

Aug 27, 2021, 12:24am EDT (Originally published on Forbes)

Before we review what will drive Nvidia’s revenue in the near-term, it bears repeating the thesis we published in November of 2018:

Nvidia Not Standing Still with Ampere Architecture and A100 GPU

The demand has been strong for the company’s products which have exceeded supply. In the earnings call, Jensen Huang mentioned, “And so I would expect that we will see a supply-constrained environment for the vast majority of next year is my guess at the moment.” However, he assured that they have secured enough supplies to meet the growth plans for the second half of this year when he said, “We expect to be able to achieve our Company's growth plans for next year.”

Virtual Machines for AI Workloads

Fiscal Q2 Earnings and More on the Arm Acquisition:

Adjusted net income increased by 92% YoY to $2.6 billion or $1.04 per share compared to $0.55 for the same period last year.

Conclusion:

UiPath: Robotics Process Automation

Posted on May 27, 2021June 30, 2026 by io-fund

c15d441a-5b32-4147-8bb9-d78d991e3263_UiPath+Robotics+Process+Automation+Premium+Analysis.pdf

I’m genuinely curious as to whether UiPath will be the first in the tech universe to hold its opening IPO price. There’s a chance it does and I will attempt to communicate why this company could be one of the strongest performers the public markets have seen from my industry.

UiPath is becoming a darling within tech circles. That’s maybe the most critical thing to understand as the Partner Network for UiPath could potentially form a moat. The high switching costs most certainly help the company to become defensible. UiPath makes the choice very clear on what company to choose for RPA, no matter what your organization’s needs are, and from there they give enterprises no reason to switch by continually iterating a cutting-edge approach to RPA.

The last time I was this excited about an IPO was two years ago with Zoom Video. We held off to buy the stock post-lockup. That decision will be yours to make. What distinguishes UiPath for me is that AI stocks have a way of sneaking upward in price. We saw this with Nvidia during the tech rout as Nvidia (the AI bellwether) has performed well this year compared to other leading tech stocks with strong earnings.

Pictured above: Nvidia, the AI bellwether, has outperformed other leading tech companies this year. Little does the market know, that AMD is also becoming a force in AI with the Xilinx acquisition.

What is RPA – Macro Overview

Robotics process automation has many supporting macro statistics because its essentially machines replacing humans. The ROI is astounding when you have an error-free employee who works 24/7 and does not tire or need bathroom breaks. To illustrate, a few automations can save 20 minutes of work per person daily and enabling 10K employees with a software robot could save more than $30 million a year (based on an average salary of $35/hour).

There are many fears that RPA will eliminate jobs to the detriment of society. Proponents say this isn’t exactly true, rather RPA will eliminate menial and low satisfactory tasks. According to analysts like Forrester, 14.9 million jobs will be created by 2027 to work alongside robots. It’s not clear though how many jobs robots will replace and if the 15 million is actually a deficit.

According to McKinsey, $3.6 trillion of work can be automated. The piece of the pie that UiPath is after is the automation of applications for enterprises. The number of applications deployed by enterprises has increased by “approximately 70% over the past four years,” according to Wall Street Journal.

The 10,000-foot view of what RPA solves is that interoperability of applications is cumbersome with “a compounding effect on the complexity of business processes” and work done by IT departments.

According to McAfee, the average enterprise has deployed 464 custom applications and deploys an additional 37 new applications in a 12-month time span. Companies with fewer than 1,000 employees run 22 custom applications while companies with over 500,000 run 788 custom applications, on average. The majority of these applications (58%) are used internally while 36.2% are used by customers, partners and suppliers. These larger enterprises – with the 788 applications on average — are the companies that UiPath is targeting.

Source: McAfee, 2017

In the United States, real output per hour grew 31% during the decade ending December 2009 while it grew 13% in the subsequent decade through 2019. UiPath believes this decline in output is due to the overwhelming number of applications and software within enterprises.

This is partly because applications are specialized and are not able to address the end-to-end processes that enterprises require. The concept that UiPath proposes is to automate those steps and have a human review the exceptions rather than every detail of every order.

Product Overview:

It’s important to start with product for a company like UiPath – and most companies in tech, really – because without knowing what the special sauce is, companies can get lost in the noise. UiPath is a platform that allows companies to run software bots that process automations. What separates UiPath is the use of AI computer vision to read information, hence having the acronym “UI” in the name, which stands for user interface. The company also leverages machine learning to think and process the information and robotics process automation (RPA) to interact with applications.

The combination of computer vision and machine learning is UiPath’s special sauce. The AI-based computer vision increases the reliability of automation. The AI-based computer vision is able to adapt and interpret varied document types and user interfaces. This is the missing piece in automation that other forms of orchestration or choreography do not have.

The key sentence in the S-1 filing is this: “Our platform enables the reusability and reliability of UI elements by capturing them as objects in a repository.” This means that the AI computer vision is able to dynamically recognize and interact with variables and dynamic objects or applications. In plain terms, it means UiPath can emulate a human by responding to variables the way that humans can. (Anyone working on autonomous vehicles will tell you, the issue with full autonomy is the variables, not the mechanics of driving).

UiPath’s architecture is UI-based orchestration. This increases the reliability of the automation as it’s able to adapt and interpret varied document types and UIs. As stated, the platform captures UI elements as objects in a repository.

To compare, here are other ways automation and/or integrations are handled:

· Integration orchestration: When on-prem wants to integrate with SaaS platforms, companies like MuleSoft and Webmethods offer third-party connectors. This is called Integration Platform as a Service (iPaaS)

· Business process orchestration: Offers business processes a central process, yet requires human intervention.

· API based orchestration: Lacks a central component and is event driven

· Event driven architecture: Event driven to where the events are autonomous through choreography rather than orchestration (the difference being that orchestration requires a composer while choreography establishes a pattern that does not require supervision).

Source: Solace, Microservices

UiPath recently acquired Cloud Elements to add API-based automation to its core offering of UI-based automation. This is the first time the combination will be offered in a single platform. This places UiPath on the same playing field as the orchestration methods listed above, yet with the combination of computer vision/UI-based orchestration. This acquisition takes aim at that market share by providing the best of both worlds. The acquisition brings 200 new native integrations to UiPath

Why is UiPath Better?

The next question to answer is why is computer vision/UI method better? The first is that UI-based automation is not confined to specific APIs. The result of using computer vision (and the other components that I review below – but let’s keep the focus on computer vision for now) is that UiPath is an end-to-end solution rather than a point solution. The goal is to automate the process, not the API, and other orchestrations lack the ability to automate across many applications and link AI capabilities to execute. Without computer vision, the end result will not be human emulation.

The company points out in the S-1 filing that the typical AI/ML environments are developed by data scientists yet need to be used by other departments that carry the processes out (billing or customer service, for example). My takeaway on this is that the other methods for integration and automation do not necessarily cut down on the number of people required and/or does not reduce the technical abilities required to work with the automations. By requiring data scientists to be the central and only hub, end-to-end automation is not possible.

The modular setup is also an advantage. Solutions can be integrated into new, third-party technologies for future development.

When we talk about robots, we are talking about software robots that are on a desktop computer, can work across programs in the background, are able to build applications, send emails, and interact with chatbots. This is achieved with this build:

· AI computer vision can dynamically recognize and interact with variables and dynamic objects and applications

· AI-enabled platform helps identify which processes should be automated including interoperability with 75 AI technology partners

· Document Understanding leverages optical character recognition (OCR) and natural language processing (NLP) and ML to handle processes with humans handling only the exceptions

· Low-code Development drag-and-drop tools to serve a range of technical skills

· Governance and Security ensures compliance

Product Specifics:

UiPath is an expensive product and this is reflected in its customer concentration at the enterprise level. There is a Community Edition that is free, which is a smart way to onboard more developers at the student level.

Studio is UiPath’s integrated development environment (IDE) that allows access to the Automation Cloud. There are three variations: Studio, Studio Pro and StudioX. The difference is what technical level the user has with StudioX requiring very little skills (i.e. “low code”) with drag-and-drop while StudioPro requires Advanced skills.

Automation Hub:

Automation hub allows for central management of the automation pipeline. It’s a command center to see and control the end-to-end system. It also allows the administrator to visualize automation complexity and understand the impact and ROI.

Process Mining:

Process mining taps into a data source from enterprise applications and makes use of this event data. The goal is to streamline processes to become more efficient. For instance, if your goal is to improve customer retention rate, then you can track how long customer service responses take, delivery rates, and what is causing delivery problems so you can address the situation. Process mining also helps you identify bottlenecks that can benefit from automation.

Process mining changes all this by tapping into a data source that already exists. This is done through the ETL “extract, transform, load” process. Most of your enterprise applications (like SAP and Salesforce) record every activity and transaction that happens within each stage of a process. This is called event data.

Business processes suitable for process mining include accounts receivable, claims and accounts payable. In financial services, it can be used for loan approval, risk and investment management or fraud. In health care, process mining can be used to reduce paperwork and streamline processes like the spike in demand for testing we saw during Covid.

Task Mining and Task Capture:

Task capture allows for the mapping of business workflows. Employees can record the process they want to automate and Task Capture will gather data for each step. The software generates a process map into a file for the development team to use to create automations.

Task mining will have its public launch in 2021 and will allow enterprises to record work performed by users across a list of applications.

Business Model and Automation Flywheel:

UiPath benefits from a flywheel effect. The reason that a flywheel effect occurs is because when companies use UiPath to add robots, they see a substantial return on investment, and then deploy more robots.

The company is built and ready to scale with flywheel effects as UiPath can be customized for every need of the enterprise. The robots are designed to work in any environment (cloud, hybrid, on-premise), for any level of technical ability (low code to advanced code), is licensed through subscriptions annually or multi-year, and can work alongside a human or be fully automated, is additive, and can be used as a unified solution or individually (that’s a mouthful).

The point is that UiPath is prepared to offer a solution for any customer need and to scale as the needs of the enterprise changes.

If a picture is worth a thousand words, then perhaps this helps illustrate the flywheel effect:

The graph above shows that the 2016 cohort of customers have increased their ARR from $395,368 to $22.7 million in a five-year time span. This is a multiple of 57X. The company’s top 50 customers have grown ARR by 81X. This is measured by the ARR generated in each customer’s first month as a customer.

There are some examples in the S-1 filing that show up to 69X increase in customer ARR within one year. That’s an outlier with others increasing 32X, 6X and 4X in one year. Even the lowest number here is impressive, and is driven by cross-department sales, increase of robots per employee, increased adoption across products, and expanded use cases.

Partner Program and Developer Ecosystem:

Partner programs are especially important for a company like UiPath as it can help to extend business models and also help to scale a product very quickly. It’s also important for global growth across various regions. UiPath is the automation back bone to many other products that you’re familiar with: Microsoft, Google, Amazon Web Services are integrated with UiPath so their cloud computing customers can utilize cloud-based AI capabilities. Other integrations include Adobe, Alteryx, Oracle, Salesforce, SAP, ServiceNow and Workday.

UiPath is unique in that it’s tailored to citizen developers who prefer low code and also advanced developers. Right now, the company counts 750,000 registered developer accounts. There is a marketplace with 1,200 vetted and pre-built automation activities that can be used for enterprise workflows. UiPath says there are 10,000 downloads per month in the Marketplace.

Market Size and Valuation:

I expect that UiPath will trade at a high valuation into the foreseeable future. This is because of the specific trend the company is capturing. I think individual investors can get lost in the noise of popular stocks, but I don’t think institutions fall prey to this as easily. You’ll notice the companies that are favorites among retailers are not favorites among institutions. That’s one reason we run this site, is to bring to your attention to companies that you won’t want to miss out on.

What about sector rotations, like we just had? Even still, companies like Snowflake retained their position of highest valuation, comparatively speaking. It went from a jaw-dropping 80 forward P/S in February to about 50 forward P/S – yet this company still led the pack of cloud software valuations.

We typically don’t buy above 40 forward P/S (you can reference when I discussed this during heightened exuberance in this Motley Fool video). We don’t know UiPath’s forward valuation until we see more analyst consensus numbers come out. The earnings report on June 8th will help quite a bit. However, if we adjust the revenue growth to a reasonable 65% forward, then we see UiPath trading at 41X.

Please note, this is calculated on 65% revenue growth next year, which is an educated guess. We will know more about UiPath’s forward estimates in the coming weeks.

If we take the LTM valuations, we see UiPath stretching the upper limits again. LTM is important here since UiPath’s forward is not available yet.

The I/O Fund does not give financial advice and highly valued tech companies require an appetite for risk. We simply tell you what we are doing with our own money. We bought UiPath starting last week after the blog notification went out and we will be watching it closely near the lock-up expiration as to whether we need to exit and enter again. This extra work is worth the long-term trajectory that robotics offers us as tech investors.

The reason UiPath is unique from the others on this list is because the opportunity for RPA is fully in front of the company, whereas many of the others are centered in a trend that is in motion.

I also think UiPath will continue to take more market share relative to the RPA market, and the key metrics around increased ARR help prove this as they are a bit mind-blowing. Other than ARR, I can’t quantify exactly why I think UiPath will take more market share other than it has a solid reputation and there is a buzz around the company that is hard to communicate. People are pleased with UiPath, they’re upgrading and buying more, and it’s becoming the company that everyone (who is anyone) needs to partner with.

Market Size:

There are a range of estimates on the size of the Robotics Process Automation market.

According to the S-1 filing, IDC places a $17 billion value for 2020 to reach $30 billion by 2024. Meanwhile, UiPath states in the S-1 that the “fully automated” enterprise is a market of $60 billion. There is also a reference in the S-1 to an estimate from Bain & Company placing the market for automation software at $65 billion.

Forrester states there are 1.69 billion knowledge workers globally. So, that’s helpful to picture TAM.

Third-party analysts are more conservative – no surprise there as S-1 filings usually publish the highest numbers available. According to Statista, the market will be worth $10 billion by 2023.

Global Market Insights places the market at $23 billion by 2026. Grand View Research states the market will reach $13.74 billion by 2028 at a CAGR of 32.8%.

That’s quite the range and is tough to extract a real market size from these numbers. However, there is agreement across the third-party sources that the robotics process automation market (specifically, RPA only) was $2 billion in 2020. This means UiPath owned about 30% of this specific market at $600 million in revenue. If we take the $10 billion Statista is putting out there, then UiPath can see a path to $2 to $3 billion in revenue by 2023 in RPA specifically. I always give room in these market growth estimates, by the way, so 2023 should be considered 2024 by Statista. It’s hard to nail down market growth with adoption in tech products.

Financials:

Please note, UiPath’s fiscal year ends January 31st.

We covered the financials here in a short write-up.

The good news about UiPath is that as the top line improves, the bottom line is also improving. Revenue growth from $336 million to $608 million, represents 81% growth for fiscal 2021. As mentioned in the valuation section, we won’t have a complete picture on forward growth until the upcoming earnings report on June 8th. Right now, I’m assuming we will see growth this year in the 60-percentile range. This is a guess so I will update you when we get real numbers from the earnings and analyst consensus reports.

In the past, operating margins have been an issue for the company with an operating margin that was triple digits in the red (154%) in 2019. The company’s current operating margin is (18%). Adjusted operating margins were (113%) and (4%), respectively.

The net losses have also improved from ($520) million in 2020 to ($92) million in the current year. The fiscal year 2020 losses were at (155%) of revenue compared to (15%) of revenue in the current fiscal year.

The bottom-line losses were partly driven by sales and marketing costs which were at 144% of revenue in fiscal year 2020. Surprisingly, R&D is low at 39% of revenue in 2020 and 18% of revenue in 2021.

The current gross margins of UiPath are at 89% which is among the highest in the software industry. This has been consistent with 82% margins in fiscal 2020. Free cash flow is at 4% of revenue, or $30 million in fiscal 2021.

The company is an enterprise-focused company and is well utilized. As of last year, the company counted 80% of the Fortune 10 and 61% of the Fortune Global 500 as customers. This grew to 63% of the Fortune Global 500.

As stated, the main business model is to increase spend per customer as enterprises will deploy more robots across more departments, increase number of products used, and expand use cases for automation. That’s important to repeat because typically this high of penetration could actually be a headwind for growth.

The dollar-based net retention rate for the company was 153% in 2020 and 145% in 2021. After subtracting churn, the gross retention rate is 96% and 97%. With that said, this metric is becoming less meaningful the more cloud and subscription-based companies come on the market. We have many in the 130 to 160 range and it’s similar to checking vitals – we want to know the company is healthy but it doesn’t tell us much about the nuances of longevity.

The company has a NPS rating of 71, helping to illustrate a high level of customer satisfaction. Despite serving large enterprises, including 8 of the Fortune 10, UiPath does not have any customer making up more than 10% of revenue.

Conclusion:

We finally have the AI pureplay we’ve been waiting for in the software category. This company is likely to be valued high into the foreseeable future due to the attractiveness of the trend (robotics). We feel institutions will want to participate in this trend with this risk/reward ratio that UiPath offers, which to reiterate, is lower risk on execution due to the excellent end-to-end platform, strong partner program, leading market share and ability to scale quickly across enterprises, with the differentiation of computer vision.

Please look for Knox’s trade notifications as he patiently builds this to become a core position of ours. If you made me choose, (and we do have to choose as we disclose allocations to you), I would place UiPath above Snowflake on conviction. Post-IPO lockup, and pending Knox’s excellent skills in finding the right entry, you can expect to see UiPath in our top 10 by year-end or shortly thereafter. Note that we aren’t rushing into a position at this valuation, rather keeping our toe in the water, and navigating as we see what the market does.

UiPath: LTBH Position – Report Coming Soon

Posted on May 16, 2021June 30, 2026 by io-fund

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UiPath: Robotics Process Automation (RPA)

When I think of artificial intelligence, one of the first things that comes to mind is robotics process automation (RPA). To be clear, these two are not the same – but together, advanced AI skills can be integrated into robots to understand documents including structured and semi-structured data, visualizing screens, and comprehending speech. You can think of RPA as the last-mile delivery for artificial intelligence. In other words, what do you do with AI, ML and NLP – what’s the outcome? A popular choice will be to automate processes with robotics.

I’ll go into greater detail in the upcoming PDF report but the main takeaways from the S-1 Filing are:

· Revenue growth of 81% to $608 million

· Dollar-based net retention rate of 145%, ranking it in the top 5 among public SaaS stocks who disclose this metric

· Gross margins of 89% which are among the highest in the software industry

As the top line increases, the bottom line is improving.

Over its last 12 months, UiPath has a free cash flow margin of 4% to go along with a -18% operating margin. The -18% operating margin is a significant improvement from the -154% operating margin the company recorded in 2019.

UiPath logged a $92M net loss in its last fiscal year, an improvement from the $520M net loss the company announced the year prior.

At the time of its S-1, UiPath had a total of 7,968 customers, exceeding a 70% CAGR in customer growth over the last 2 years. Customers with over $100K+ ARR totaled 1,002. UiPath automates millions of repetitive tasks for an impressive list of customers that includes 63% of the Fortune 500 and 8 of the Fortune 10.

UiPath has an EV/NTM Revenue valuation of 35.9x using its 81% YoY growth run rate. Below is a comparison of UiPath to some other high growth software stocks. PATH currently ranks 3rd among the highest valuations in the software industry.

Caution: IPO lockup periods usually see a decline in price

We’ve stated many times in the past that IPOs are tricky and we tend to not participate. We patiently waited for Snowflake, for example. We did the same on Zoom as we were prepared to find our lowest entry post-IPO.

The reason a lock-up period is followed by a lower stock price, even when the company is fundamentally strong and will go on to make bigger gains, is because some investors need to exit and go find their next big win. These are seed round and Series A investors who made plenty in the public offering and prefer to go find new portfolio companies.

Therefore, if we enter UiPath, we could exit again prior to the lock-up period expiring. This isn’t because we don’t want a position in the company, rather it’s that we need to compete on performance, and to also be transparent so our subscribers are fully aware of how we navigate volatile tech growth.

Maybe UiPath will be the first to hold its opening price after lock-up. In the meantime, I want to give you a heads up in case the I/O Fund initiates before we release the deep dive research.

Update on LTBH Portfolio: SHOP, SNAP, TDOC and ATOM

Posted on May 4, 2021June 30, 2026 by io-fund

Shopify: Increasing LTBH Position

We made a point to cover Shopify last December to emphasize that we did not believe the company was covid-dependent. We spelled out exactly why we were writing a second LTBH PDF on the company during a time of doubt for “covid stocks” (and during the exuberance for small caps).

Most importantly, the trends we outlined in December were recently confirmed in the most recent earnings report. This is what we want to see – analysis that gets in front of results so that we can confirm our ongoing conviction and increase our position (transparently with real-time trades).

The reason we want to increase our position in Shopify throughout the year is fairly straight forward – Shopify is now reaching billions of consumers through social media. The distribution potential of these partnerships reminds me of an avalanche trigger as Shopify will reach billions with Facebook and Tik Tok and hundreds of millions with Pinterest. Now, they only need to build out the Fulfillment Center and focus on improving their own app; although borrowing these mega size audiences is probably the fastest path to growth for our purposes.

I don’t believe Facebook will let Shopify dominate its platform, so keep an eye out for attempts to strengthen Facebook Marketplace. I’m not too worried because Shopify has merchant relationships and it’ll be hard for Facebook to replicate their business model although they may certainly try.

Here are some highlights regarding Social Commerce from the call:

· “The number of shops actively selling on Facebook Shops has more than quadrupled since Q1 a year ago, as well as the GMV through Facebook. While still small, the launch of Facebook Shops in May of last year is clearly starting to make a difference here.”

· “In Q1, we expanded our marketing partnership with TikTok internationally to an additional 14 countries in North America, EMEA and APAC. So far, we've seen good traction in the adoption of TikTok in the U.S. since we launched the integration last October. And we've recently expanded our Pinterest channel into 27 additional markets, opening discoverability and sales opportunities worldwide.”

There are many exciting things going on at Shopify, which we’ve covered at length in the past, including the Fulfillment Center and Shop Pay. Most importantly, we covered exactly why Shopify had taken market share from Amazon and eBay shortly after we launched our premium site. Access October 2019 analysis here.

We also covered Shopify’s positioning in terms of taking over eBay here when we re-iterated our LTBH conviction back in December of 2020. We had been discussing why this was important leading up to the report, and why moving from third position to second position was key for investors during a time of doubt for Shopify.

We also discussed in the LTBH PDF in December of 2020 that “e-Commerce is eating retail” and the various demographics that a company like Shopify can target when partnering with social media apps. The younger demographics is key for social commerce.

To summarize, there are a few reasons that Shopify is set to continue its winning streak and why we plan to increase our position:

1. New distribution channels will reach billions of customers via social media

2. Product-market fit to be achieved in 2021-2023 (we covered this in 2019)

3. Social media spending on ads will increase 18% this year as covered in our free newsletter

4. Second place and has overtaken eBay (we covered this in December)

5. Behavioral ad targeting coming under pressure with Apple’s IDFA – look for an increase in social commerce to offset the shift towards potentially lower CPMs.

Underlying key metrics on Shopify were strong and covered by CNBC here. Shopify’s Q1 2021 Results can be found here.

Snap: Increasing LTBH Position

We were the first to talk about Snap as an AR/VR stock. The story is moving faster than we previously predicted and we hope you remember the site that brought you this trend first. J

One day, every person on Twitter will say “Snap was clearly a AR/VR story from the beginning” but nobody is talking about this right now. In fact, it’s buried under Facebook’s beat, Pinterest’s DAU concerns and Twitter’s nose dive.

Our job is to talk to you about future trends, and to also silence the noise during periods of extreme sentiment or even around earnings (lots and lots of noise around earnings). We wouldn’t want to add to that noise and assume you read the highlights of any companies you own from the dozen or so sources who cover them.

What’s not being spoken about is that Snap owns the perfect audience for AR/VR. Facebook is in a dilemma here as their subscribership skews older and are less likely to adopt a visually stimulating technology. We will see as time goes on but our money is on Snap. What is the 18-35 year old demographic and also the under 18 demographic really worth? We have yet to find out. Where most tech companies must aggressively take market share or compete at a high level, Snap has to simply keep doing what it’s doing.

Here is the more important take-aways and why are looking to increase our position:

· The company is positive free cash flow for the first time and has strong forward EPS growth this year and next year

· Off-platform AR opportunities such as Camera Kit plus partnerships with companies like Samsung and expanding Android base to reach audiences outside the United States

· Ability to surface premium content through Spotlight and Snap originals and augment these with AR; i.e., Snap is moving beyond social media into original content

· Increased monetization opportunities with AR merging with e-commerce. An example of a successful campaign can drive 30%-40% lift in incremental sales

· Although DAU growth is slow in the United States, it’s strong internationally at 57% this past quarter for Rest of World. Forward growth of 22% on DAU next quarter is impressive considering tough covid comps

· United States ARPU is on a tear at 66% growth leading to 75% revenue growth in this region. Rest of World ARPU is also healthy at 46% growth YoY. Strong guidance on revenue of 85%

Probably the most important statistic from the ER is of the countries that comprise over half of the world’s digital ad spend, Snapchat reaches 70% of 13 to 34-year olds. We want to be AR/VR investors and this is the correct demographic for this trend. Plus, this is important for targeting purposes assuming we do see the IDFA changes from Apple.

Telehealth: We remain in Teladoc …but also still like Amwell

If you want to know what it feels like to invest in the early stages of a trend, telehealth is the perfect example. Remember when I said Nvidia would be an AI leader and dominate the data center, and then there was negative growth in this segment for the first two quarters after my analysis? Seems preposterous that the data center was a low-yielding segment for Nvidia and had negative growth YoY with barely a blip being reported from AI only two years ago.

However, Nvidia/data centers is not an apples-to-apples example for Teladoc because this company faces a much bigger challenge … and nobody knows how it’ll turn out.

I’m not talking about the need for the health insurance companies to reimburse telemedicine permanently (rather than a temporary covid provision). I’d consider this a hurdle and one that I think telemedicine will clear over time.

The big challenge I am talking about is the incredible amount of competition that Teladoc faces. There are many startups receiving funding in the private markets. Zocdoc, a professional booking platform for doctors, launched video consultations last May with the help of Twilio. The company raised $150 million in its last round. Kry is a company popular in Europe that has helped over 3 million patients see a doctor, nurse or psychologist. The company recently closed a $312 million Series D round after its telehealth tools grew 100% year-over-year. Epic Systems, a medical records software company that is used by 54% of patients in the United States, also tapped Twilio for telehealth video conferencing at the start of covid.

Last year, health-tech funding broke records in 2020 with $15.3 billion in funding in the private markets, up from $10.6 billion in 2019. For the first time, healthcare surpassed biopharma with 614 total deals.

Health insurance companies are also in the space, such as United Health Care, with a motivating drive to offset reimbursement costs. This many players commoditizes telemedicine and puts pressure on pricing. This isn’t reflected in the current earnings right now, and in fact, Teladoc is able to increase revenue per user. However, the market is growing nervous because key metrics are flat and there is uncertainty as to how telemedicine will perform in a post-covid world.

Telehealth Trend Overview:

Prior to 2020, telehealth was projected to grow at a CAGR of 25.2% with the global market growing from $61.4 billion in 2019 to reach $559 billion by 2027. The global market is especially important to ensure healthcare is available in remote areas of underdeveloped countries. Internet access remains a barrier for telehealth in remote regions, such as rural India for instance, which has a 20.2% high-speed internet penetration.

In the United States, telehealth was a $26 billion market in 2019.

According to the Centers for Medicare and Medicaid Services, the U.S. spent 17.7% of GDP, or 3.6 trillion on health care in 2018, partly due to an increase in mental and chronic health conditions. The study also highlights that patient monitoring is popular with the elderly with 1 million remote cardiac monitors being used in America.

There is no denying that telehealth had a breakthrough year in 2020. Despite the many breakthroughs ushered in by covid, such as remote work (Zoom, Teams), gym workouts at home (Peloton) and online shopping (Etsy, Overstock), telehealth showed the most rapid growth by far of nearly 4,000% growth across key metrics. Therefore, it’s understandable that the market is attempting to weigh what the growth in telehealth will look like after the one-time event of 2020.

In addition to the market and management attempting to predict what a normal rate of growth will be, the telehealth trend is dependent on federal and state legislation dictating how private payers reimburse telehealth. Full reimbursement is called “payment parity.”

There are 43 states that have some state telehealth statute for commercial payers, yet only 22 states maintain laws that address telehealth reimbursement with a mere 14 states that offer payment parity for telehealth. This is up from 16 and 10 states in 2019.

In the meantime, temporary waivers were offered during covid. We’ve covered in the past how the federal government has passed telehealth bills for Medicare under the CARES Act and other covid legislation. As of now, many of the temporary waivers and emergency legislation is set to expire 90 days after covid’s emergency status is removed.

According to Blue Cross Blue Shield of Massachusetts, the insurance company will continue to support and cover telehealth. However, states like New Hampshire are discussing a bill that would eliminate payment parity as the bill asserts that in-patient care should be paid at a higher rate than telehealth. Opponents point towards mental health and substance abuse as primary reasons the bill should be struck down.

Teladoc ER Overview – Big Revenue Growth but Flat Key Metrics

Teladoc beat on revenue of $453 million, representing 151% growth. The company raised guidance for the year to $2 billion at the mid-point for FY2021 for an increase of $20 million. Revenue in the United States was up 175% and international up 29%.

Despite a strong report on revenue, Teladoc reported a net loss of $1.31 per share – missing expectations by $0.71 for a net loss of about $200 million. This partly contributed to the stock selling off nearly 12% since the report. According to management, “the larger net loss was primarily attributable to increase stock-based compensation, amortization of acquired intangibles, and income tax adjustments primarily related to the merger at Livongo.”

Gross margins increased to 67% up from 59.2% in the year-ago quarter. The adjusted gross margin was 67.8% compared to 60% in the year-ago quarter.

Total visits were up 56% to 3.2 million with the number of consumers enrolled in more than one chronic care program “tripling year-over-year.” The United States made up the bulk of this growth at 69% with international growth at 8%.

Forward revenue guidance is quite strong for Teladoc in the next quarter with $500 million at the mid-point on revenue and positive adjusted EBITDA of $61 million to $64 million up from $56 million adjusted EBITDA in the current quarter.

The management points towards increased revenue per customer as to one reason they are able to sustain this level of revenue growth. Average per member per month (PMPM) was $2.24 in the first quarter, up from $1.76 in the prior quarter. According to management, of the $0.48, half was driven by an extra month of Livongo revenue in the first quarter.

The key metric that showed lower growth (and was most alarming) was 20% growth in paid memberships from 43 million to 51.5 million and 15% growth in U.S. Visit Fee Only access from 19.2 million to 22 million. Forward guidance on this important key metric is expected to be in the range of 52 million to 53 million – in other words, flat sequentially.

For full year, the guidance isn’t much better for this metric with paid membership in the 52 million to 54 million range. Visit fee access is also flat per guidance at 22 to 23 million for FY 2021.

Pictured above: Teladoc US Paid Members are to remain flat year-over-year (YoY)

Total visits are re-accelerating, however, from a plateau in Q2-Q3 2020 where the company stagnated at 2.3 million and 2.4 million, or growth of about 100K visits. Teladoc grew to 200K visits in the last two quarters and is guiding for growth of 400K to 600K visits between Q1 and Q2 2021.

The utilization rate is also climbing, which is important to note. Telemedicine utilization is equal to the number of consults divided by the number of covered employees. Industry averages were between 1-10% prior to covid, yet we see strength in this number sequentially even after many doctor offices have opened up. Besides showing the penetration of telemedicine, the number is important because it affects the cost savings to employers.

Data points from Livongo are also growing nicely and actually accelerated in the most recent quarter compared to when Livongo was a standalone company in Q1-Q2 2020.

Teladoc has strategically added debt over the past several years as the company focuses on growth at all costs. TDOC ended Q1 with $1.35B in long term debt and $723 million in cash.

While debt has increased notably over the past year, Teladoc’s balance sheet still appears to be in very good health. Teladoc’s Debt to Equity Ratio currently stands at 0.086, which is near its 5 year low. A low debt to equity ratio indicates lower risk, because debt holders have less claims on the company's assets.

A Debt to Equity Ratio under 1.0 is ideal because it indicates that for every $1 of equity, the company has less than $1 of debt. In the case of TDOC, we are seeing a strong Debt to Equity ratio of 0.086 that has improved over time, even as the company has taken on more long-term debt.

Teladoc also has a strong Debt to Assets ratio, which is a ratio used to determine how much debt a company has on its balance sheet relative to total assets.

A Debt to Assets ratio under 100% is ideal because it indicates that the company owns more assets than debt. The lower the Debt to Assets Ratio, the less risk the company is carrying on its balance sheet.

Teladoc’s Debt to Assets Ratio is currently standing at a healthy 7.7% and near a 5-year low. Teladoc’s Debt to Assets Ratio means the company is backed by 7.7% of debt, which is a significant improvement from 2020.

While Teladoc’s debt has increased over time, it is much more a factor of a company that is in hypergrowth mode than a company that is struggling financially. This becomes evident when we compare Teladoc’s long-term debt to its equity and assets. Management appears content to strategically use debt in order to fuel growth. This is not uncommon for a company in hypergrowth mode and it is evident in analyzing Teladoc’s balance sheet that the company’s debt is at sensible levels and not a major risk to the business.

Valuation

Teladoc is now valued at 13.58x forward revenue after peaking above 25x at the end of 2020.

In comparison to some others in the space, TDOC looks attractively valued with forward growth expected to eclipse 80% in 2021. The other three stocks we listed for comparison (VEEV, GDRX, AMWL) are not projected to eclipse 40% YoY revenue growth in 2021.

In Q1, legacy Teladoc grew roughly 69% YoY and 9% QoQ. Below is a breakdown of Teladoc’s revenue mix in Q1 from Credit Suisse:

Credit Suisse notes that it is not an apples-to-apples comparison as if Livongo were still a standalone company due to the realization of deferred revenue following the acquisition of Livongo. We are still seeing strong growth from Livongo and legacy Teladoc with 9% and 10% QoQ growth rates, respectively.

It should also be noted that InTouch is now part of TDOC’s single Hospital & Health System business. In Q1, TDOC’s Hospital & Health System business grew YoY as well as QoQ.

There is some investor concern about TDOC missing on EPS two quarters in row, with both misses being caused by expenses related to M&A.

While some Teladoc’s M&A has been more expensive than originally thought in the short-term, this does not affect the long-term thesis. Teladoc is built to be able to incur short term losses and focus primarily on top line revenue growth.

Amwell:

We closed our Amwell position after the company provided low revenue guidance for FY2021 and analyst estimates also showed low revenue guidance for 2022. We simply can’t force timing on a trend even though we continue to keep Amwell on our radar. Notably, Knox trimmed Teladoc in the high-$200s as his technical were also telling us we were too early to the trend.

After Teladoc’s earnings report, there were a few press releases that telehealth has become commoditized. If we were talking strictly about the ability to have a video call with a doctor, then this would be true. But obviously, the goal is how to provide multiple data touchpoints for virtual care. Teladoc has moved into remote monitoring while Amwell is gearing up for AI assistants/carts.

What is intriguing about Amwell is the Google backing, which we covered in the Amwell PDF last year. Google has $100 million of stock in the company with plans to merge AI with health care, including digital waiting rooms, language translations, offloading tasks from the provider to conversational AI and to help manage chronic conditions. Anthem is a large client of Amwell’s and accounts for about 25% of revenue.

The company’s customers often deploy telemedicine through a variety of proprietary Carepoints, which are medical carts and kiosks designed for various clinical and community settings. The company also offers software development kits (SDKs) and APIs to integrate telehealth digitally and to embed into workflows. This includes web and mobile apps, 24-hour nurse and customer support, and electronic health record (EHR) software.

On the same day as Teladoc’s earnings report, Amwell released an announcement on their new telehealth platform that will allow developers to host and deploy telehealth applications. The platform offers a single code base to build a unified care experience to develop apps that utilize Google Cloud’s AI and NLP technologies, TytoCare’s handheld exam kit, connections to clinic physicians (looks like the beta version will be in Cleveland), and Biobeat’s patient monitoring devices. I assume the list of integrations will grow over time.

The new platform may not change Amwell’s revenue trajectory in the short-term but it’s certainly something we are keeping our eye on.

To be frank, we don’t with who the winner is between TDOC and AMWL as long as we get to participate. Therefore, the I/O Fund is remaining flexible between these two and will be looking for signs of strength to determine what position(s) we hold and our allocation as time goes on. Notably, there is a lot of deal flow in the private markets because this a big market to crack for the company who does it.

Atomera:

You can read my update regarding Atomera on the forum here: https://community.beth.technology/post/atomera-update-608b8644ea42db67cf9b54b4