SPAC Updates: February 26th, 2021

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

There is a level of speculation to SPAC investing as the majority of these companies have little or no revenue. There is an obvious risk to speculating on young companies, which is that they will not be able to meet their future projections. This is precisely why we choose to allocate a small portion of our portfolio to SPACs, typically not more than 1-2% of our total portfolio in any one company. We are comfortable adding more to these positions as they grow and as the company begins to successfully execute on its goals. Until that point, it is important to recognize that we are making speculative investments and the stocks may be extremely volatile. Keep this in mind when sizing your own positions.

When evaluating SPACs, we prefer companies with the most upside potential in big, fast growing markets. Below are the companies we think have potential and fit our investment profile.

Lucid Motors (CCIV)

CCIV has fallen sharply since its merger confirmation with Lucid Motors and we took that opportunity to open a position. This is a company with enormous potential in the coming years. As of 2020, only 3% of global car sales were electric vehicles. The EV market is set up for exponential growth this decade and beyond as the world focuses on reducing carbon emissions.

I discussed why Lucid’s technology is a legitimate competitor to Tesla here. In Lucid’s Investor Deck, they are projecting 4% market share of the market by 2030. That number would put them as 8th on the current list of auto manufacturers. Lucid has been incorrectly characterized by some as a “Tesla Killer” or a company that must outperform Tesla to succeed. That could not be further from the truth as management is not predicting this nor modeling this.

Lucid has over 7,000 pre-orders for the Lucid Air Dream that is set to debut in the second half of 2021. The company has a working manufacturing facility in Arizona that can currently produce up to 34k units per year. The company is looking to scale that number to 365,000 annual units per year. They are currently working on building a manufacturing facility in China.

The Lucid Air Dream has been independently verified for each of its capabilities. Lucid has over 20M real-world vehicle miles driven. All OEM racing teams in the world’s premier EV racing series are powered by Lucid battery packs and software. In its investor presentation, Lucid talked about its plan to expand its technology supplier business beyond the EV racing series with potential applications in aircraft, eVTOL, military, heavy machinery, agriculture, and marine. Lucid has confirmed that 6 other car companies have contacted them about using their battery technology already.

The Lucid Air has 32 sensors including LIDAR to support Level 2 hands-free highway driving. The company’s goal is to reach Level 3 hands off and eyes-off capabilities within 3 years, which no automaker currently offers. Eugene Lee, the senior director of ADAS and autonomous driving at Lucid Motors, formerly worked on GM’s Super Cruise.

Lucid now has $4.5B in cash on its balance sheet, a number that Tesla did not accumulate until 2019. Tesla had $106M of cash on it balance sheet when it first IPOed. Fisker, another EV company that has not yet delivered any cars, has $400M of cash on its balance sheet. Lucid is also backed by Saudi Arabia’s Public Investment Fund, the country’s premier investing institution. With a strong balance sheet and heavy backers with lots of cash, Lucid is well positioned to overcome the challenges involved with mass producing cars.

Lucid management contains 8 former Tesla executives and 3 former Apple executives. Peter Rawlinson, Lucid’s CEO, was the former Chief Engineer of Tesla and helped design the original Tesla Model S. Rawlinson believes he’s taken it to a new level with the Lucid Air, beyond what he engineered with the Tesla Model S.

Lucid is projected to reach nearly $23B in revenue in 2026. If the company can reach this mark, it could reasonably trade at least 4x above its current ~$48B valuation.

Source: Lucid Investor Presentation

There are obvious hurdles for Lucid and risks involved with this investment. However, we are comfortable speculating on Lucid because of its world class technology, accomplished management team, outstanding balance sheet, and large backers.

Stem Energy (STPK)

I covered STPK in detail here. Stem has proven to be a volatile SPAC for us, but we remain bullish on the company’s long-term prospects. Stem currently has $200M of contracted backlog and over 100% of 2021 revenue locked in from contracts that have already been completed. There is potential for a big upside surprise on the $147M revenue target this year as the actual number should be closer to $200M. The company is projecting revenue to grow at an 81% CAGR through 2026.

Source: Stem Investor Presentation

Partnerships with Apple, Amazon, Google, Facebook, and Walmart represent a backlog of future business that will drive growth for years to come. Stem’s value is in reducing its client’s electric bills 10-30% without changing the way they operate. Stem’s product also helps its clients meet their corporate ESG targets, making them eligible for potential government subsidies.

Electricity production is the #2 polluter responsible for 27% of greenhouse gas emissions. Over 75 countries including the US have committed to net zero emissions by 2050. Stem management estimated that there is a projected $1.2T in new revenue opportunities for integrated storage that are expected to be deployed by 2050.

There remains a great deal of untapped potential for energy efficiency improvement through implementation of new technologies. Stem is ideally positioned to be an industry leader in the energy storage market as more companies follow the path that Apple and Amazon have already taken.

STPK also stands to benefit from increased investments in the ESG space. Money managers are facing greater pressure from investors, regulators, and activists to direct capital toward businesses that support a greener future. Assets that adhere to environmental, social, and governance criteria are projected to exceed $53T by 2025.

Proterra (ACTC)

I first covered Proterra here. Proterra continues to prove why they are the leading electric transit bus manufacturer in North America. This week, Proterra won a 16 year, $169M contract to lease 326 buses in Maryland’s Montgomery County. This contract is the largest municipal government deal of any kind for buses. The Washington DC suburb ultimately plans to replace its entire 1,422-bus fleet over the next two decades using Proterra’s electric battery technology.

It is only a matter of time until other municipalities and cities make the switch to electric transit buses. Proterra management estimates that its total addressable market in this industry exceeds $260B. Currently, the company has a market cap of under $5B despite being positioned as North America’s #1 electric transit bus OEM. Their buses have traveled 16M total miles, significantly leading all competitors. Proterra also has partnerships in place with BMW, Daimler, Con Edison, and most recently Komatsu to develop all electric construction equipment.

Proterra is projecting revenue to grow from $193M at the end of 2020 to $2.56B by the end of 2025.

Source: Proterra Investor Presentation

Eventually, every form of transportation will need to be electrified. Proterra has a commanding lead in North America’s electric transit bus industry and the inside track on future contracts. Jennifer Granholm, the United States Secretary of Energy, formerly held $1M in Proterra stock options and sat on the company’s board prior to being forced to shed any potentially conflicting investments.

Battery-electricity technology is the future of bus transportation. We are in the very beginning of a transition to zero-emission electric buses across the country. Proterra is the industry leader and proved it by winning the nation’s largest municipal government deal for buses. They are ideally positioned to win more contracts in the future as more cities transition to electric bus transportation.

Why SPACs are (Sometimes) Better than IPOs

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

SPACs offer retail investors the ability to invest early in a company’s life cycle. In the case of Snowflake, a company that went public via a traditional IPO, retail investors did not have this opportunity. By the time Snowflake debuted on the public markets, the share price had soared over 200% from its indicated opening price.

Many pundits and analysts have claimed that the IPO process is broken due to examples like Snowflake and AirBnb. Wall Street institutions and a select group of their top clients can buy shares at discounted prices before they hit the open market.

SPACs allow investors the ability to buy equity in companies going public before the initial price surge. This allows retail investors to participate in some of the same opportunities that have traditionally gone to institutional investors and preferred brokerage clients.

Why would a company want to go public via a SPAC? One of the main reasons is that SPACs provide companies with fast cash and the ability to bypass the regulatory hurdles of a traditional IPO. SPACs allow companies to get to the public markets a lot quicker. Many of the SPACs we are currently seeing are still pre-revenue or have very little revenue and are mostly unprofitable. SPACs are ideal for companies that want to get to the public markets as quickly as possible and not have to deal with a long, drawn-out traditional IPO process.

This also happens to be one of the main risks as these are mostly newer, unprofitable companies with not a lot of revenue. The SPAC method of going public may entice companies in need of fast cash because their financial situation is not fit for a traditional IPO.

SPACs had a bad reputation in the past because the industry was not as regulated and therefore open to more fraud. In the 1990’s, SPACs would take small companies that were destined to fail public for a large fee. The SEC, however, has cracked down on it, and the regulation on SPACs has undoubtedly ramped up. Many more companies are now exploring alternative methods to going public and SPACs have been a key beneficiary.

Source: Bank of America

The SPAC route gained notable popularity among companies in the 2nd half of 2020 and has continued its torrid pace into 2021. We are currently on pace to see over $200B in US SPAC capital raised in 2021, representing well over 100% growth year-over-year.

What are SPACs?

SPACs are special purpose acquisition companies, sometimes called blank check companies, formed to raise capital to acquire an existing company and bring them public. They are traditionally formed by investors with expertise in a certain industry, who are looking to pursue deals in that industry. The SPAC management team can be a value add for the target company over traditional IPOs as they can partner with an experienced leadership team for guidance.

After a SPAC raises money for its potential acquisition, the funds are placed in an interest-bearing trust account. The SPAC company then enters a timeline where they look to make a deal. Once that deal is complete and approved, the SPAC combines with the business they are merging with and starts trading publicly under a new ticker. If the SPAC fails to acquire a business by the closing date, and the shareholders do not grant an extension, the shares are redeemed for a portion of the cash in the trust account and returned to the shareholders.

In the IPO, a SPAC typically offers units to investors for $10.00 per unit. These IPOs usually take place at a net asset value of $10.00, although there are some exceptions.

The bottom line for investors is that SPACs are an increasingly popular method for companies to reach the public markets. SPACs do not come without risks, but they represent an area of the market that growth investors can no longer ignore. In some cases, there are notable opportunities for investors to buy equity in promising young companies.

Tech Growth Earnings Review for Q3 2020 – Part 3

Posted on December 14, 2020June 30, 2026 by io-fund

In the 3rd part of my Q3 earnings analysis, I review reports from Zoom Video, Okta, Snowflake, Crowdstrike, ZScaler and Elastic.

Zoom Video

Zoom Video provided a nearly flawless earnings report for the first full quarter that followed initial work-from-home orders. The blend of Zoom Video having virality across consumers from its freemium model combined with enterprise is the company’s strength strategically as the competitors do not have the virality component. In Q3, customers with more than 10 employees represented 62% of revenue with net dollar expansion rate of 130%. Globally, Zoom exhibits strong growth, as well, with revenue from APAC and EMEA growing 629% year-over-year.

However, gross margins were a weakness in the report at 68.2% compared to 82.9% last year and 72.3% last quarter. The company is providing the service for free to many users including K-12 schools during the pandemic. From my perspective, the temporary margin hit in exchange for virality and establishing consumer behavior is a good trade-off.

Okta

According to most standards, Okta’s earnings report was solid and resulted in an uptick in the stock price. However, the growth has been flat for most of this year.

Revenue rose 42% to $217.4 million ahead of estimates for $202.7 million. Bookings (remaining performance obligations) are growing faster than revenue at 53% to $1.58 billion. Calculated billings were up 44% year-over-year. This was a re-acceleration of calculated billings from the previous quarters in FY2021 where the pandemic weighed on budgets.

The company is profitable on an adjusted basis with EPS of $0.04 and free cash flow of $41.6 million, up from $9 million a year ago. Highlights include a growing number of customers in the financial services sector and government.

Snowflake

Snowflake grew 119% year-over-year to $159.6 million with remaining performance obligations of $927.9 million, or 240% year-over-year growth. Product revenue grew 115% year-over-year. The net revenue retention rate of 162% is impressive although other companies have exceeded this in their 6th year (Snowflake was founded in 2012 but was in stealth mode until 2014 when it began to work with customers).

Gross margins are between 58% to 63%, which it’s normal for a cloud company to be lower than a SaaS company on margins. However, operating margins were negative (30%) with FCF margins of negative (23%). Probably the biggest issue that Snowflake faces are the sales and marketing costs. In the previous two quarters, they were near or exceeded total revenue and in this quarter they were about 90% of revenue at $134 million compared to the $159 million in revenue.

CrowdStrike

CrowdStrike beat consensus estimates on both the top and bottom lines and raised Q4 guidance. Revenue grew 86% YoY, representing an 8% beat above Wall Street estimates. Subscription revenue increased 87% YoY while annual recurring revenue advanced 81% compared to a year ago. The company also achieved its most impressive quarter ever in terms of profitability, earning $0.08 per share on the bottom line. This was CrowdStrike’s third consecutive quarter of positive EPS and its highest total yet. Free-cash-flow margin increased to 33% and gross margin improved to 76%.

In the quarter, CrowdStrike added 1,186 net new subscription customers, representing growth of 85% YoY. CrowdStrike also continues to drive new module adoption in existing customers, as 44% of the company’s subscription customers have adopted five or more modules versus 39% in the previous quarter.

Zscaler

ZScaler announced Fiscal Q1 2021 results that easily cleared analysts’ expectations. Revenue growth accelerated to 52% YoY, which represents the company’s third consecutive quarter of growth acceleration.

Adjusted billings growth increased 64% YoY, far surpassing the consensus expectation calling for 39% growth. This beat was driven in part by a record quarter of seven-figure deals. The company’s net retention rate of 122% advanced from 120% last quarter and 119% the quarter before. Non-GAAP EPS of $0.14 was 8 cents better than expectations while the company also announced an impressive 30% FCF margin. Non-GAAP operating margin of 14% far exceeds the consensus of 2.9%.

Elastic

Elastic announced strong FQ2 earnings on 12/2. Total revenue increased 43% YoY, representing an 11% beat above consensus. Total billings grew 42% YoY while SaaS revenue increased 81% versus the same period a year ago. The company’s losses also improved significantly, with non-GAAP EPS of -$0.03 coming in 17 cents better than expected. Non-GAAP operating loss improved to -$1.9 million, representing a -1% operating margin versus -10% projected. Gross margins also came in better than expected with 77% versus a consensus of 75%. FCF margin was -13% for the quarter.

Subscription revenue totaled 93% of Elastic’s total revenue in the quarter, with 45% of total revenue coming from outside the US. Management views this geographical distribution as a strength in the company’s business model. Elastic’s net retention rate ticked down several points from last quarter but still remained modestly above 130%. Elastic now has a total of 12,900 subscription customers with 650 of those (5%) having annual contract values exceeding $100K.

Read the Full Article at Forbes

Tech Growth Earnings Review for Q3 2020 – Part 2

Posted on November 17, 2020June 30, 2026 by io-fund

In the second part of my Q3 2020 tech earnings review series, I covered Roku, Square, The Trade Desk, Datadog and JFrog.

Roku

Roku reported Q3 earnings on November 5th. The 73% year-over-year revenue growth the company announced was 23% above consensus expectations. Gross profit rose 81% YoY while gross margin rose 216 basis points in total to 47.6%.

Roku added 2.9M active accounts in the quarter (+43% YoY). Total streaming hours increased by 0.2 billion hours over the last quarter to 14.8B (+54% YoY), while ARPU grew 20% YoY to $27.

Roku was a beneficiary of the rebound in ad spend, as the company saw Q3 monetized video ad impressions grow 90% YoY vs. 50% YoY growth last quarter. Roku is anticipating that Q4 revenue growth will likely be in the mid-40% range, similar to the growth rate seen in the last few holiday seasons. Per the earnings call, the company is being cautious about holiday spending with this forecasted guidance.

Square

Square announced blowout Q3 results with huge beats on both the top and bottom lines. Non-GAAP EPS of $0.34 beat consensus expectations by $0.18. The company saw revenue grow 140% YoY to $3.03B, beating the consensus estimate by $950M or 46%.

Gross payment volume of $31.7B was 6% above expectations. In total, Square saw gross profit rise 59% YoY, while Cash App gross profit soared 212% YoY.

In the quarter, the number of average daily transacting Cash App customers nearly doubled from the same period last year. Square did not provide guidance for Q4, but noted in its shareholder letter that the trends they observed in Q3 remained strong through October.

Square’s Seller Ecosystem revenue grew 5% YoY as regions began to reopen. More impressive was the growth of Square’s Cash App Ecosystem, which saw an increase of 23% in daily active users and 574% YoY growth in revenue.

The Trade Desk

The Trade Desk announced Q3 results that easily cleared analysts’ expectations. Revenue grew 32% YoY, beating consensus estimates by 19%. Non-GAAP EPS of $1.27 was a big beat on the consensus bottom-line expectation of $0.45. The company noted that it saw Connected TV grow over 100%, Mobile video spend grow 70% and Audio spend grow 70%.

Management issued an upbeat outlook for Q4, expecting $289M in revenue at the midpoint vs. expectations of $255.1M. At the midpoint of this estimate, The Trade Desk is expecting roughly 34% YoY revenue growth in Q4. TTD shares traded over $700 for the first time immediately following the announcement of these results.

Datadog

In Q3, Datadog recorded its 13th consecutive quarter with a dollar-based net retention rate exceeding 130%. Operating margin improved to 9% in the quarter versus expectations of 0.6%, while gross margin improved 3% to 79%.

Q4 guidance was issued for $163M in revenue at the midpoint (+43% YoY) which was 5% above the consensus outlook. Datadog shares initially sold off as much as 14% on these results, but the stock pared its losses to close trade on Wednesday. The stock rebounded Thursday and is now up over 11% off Wednesday’s lows.

In its Q3 earnings call, Datadog’s CEO Olivier Pomel commented on the recovery in usage trends the company observed after a weak Q2. “Throughout the quarter, usage growth of existing customers was robust which was a return to more normalized levels after slower usage expansion in Q2…the pace of usage growth in Q3 was broadly in line with pre-COVID historical levels.”

JFrog

JFrog announced earnings for Q3 in its first quarter as a public company. The company grew revenue 40% YoY, beating consensus expectations by 3%. JFrog also announced Non-GAAP EPS of $0.05, beating expectations by 5 cents.

Gross margins came in at an impressive 83% while FCF margin improved to 25% in Q3. For Q4, JFrog expects $41.4M in revenue at the midpoint vs. consensus of $40.52M. The stock has initially sold off up to 10% on the results, as the 40% revenue growth represents a deceleration from the 46% growth recorded last quarter. Even after today’s sell-off, FROG still trades at approximately 30x 2021 revenue, which remains among the highest valuations in the software industry.

Read the Full Article on Forbes

Q3 2020: Tech Growth Earnings Review – Pinterest, Snap, Microsoft And More

Posted on November 4, 2020June 30, 2026 by io-fund

This article was originally published on Forbes on Oct 29, 2020,11:49pm EDT

Before breaking out the earnings reports from the high-growth universe, here are the results from Big Tech earnings today. Each company beat on both the top and bottom lines. Other than Alphabet, they are all trading down after-hours following these results as the market digests the magnitude of the beats, and in Apple's case, the lack of guidance.

BETH.TECHNOLOGY

Snap:

Snap reported Q3 results on October 20th, beating both the top and bottom lines. The ongoing recovery of advertising budgets helped to boost Snap's revenue growth to 52% YoY in Q3, which now sits just below the 58% pre-COVID growth rate the company recorded during Q1.

Notably, the reacceleration that Snapchat reported is the highest Q3 growth rates since 2017. According to management, some of the user growth highlights from this quarter include Lens Studio, which saw creative applications to use AR as a way to try-on products from brands including Sally Hansen for nail polish and Champs for sneakers.

Other product features released contributing to this quarter's beat include Brand Profiles, Minis, Places on the Map, Dynamic Ads, Bidded AR Lenses, Dynamic Lenses, Camera Kit, Snap ML Lenses including the Anime Lense.

The company also attributes the growth to linear TV and sports being featured on the social media platform at a time when content is seeing a surge.

Here is what the company said about Dynamic Ads and AR Ads on the earnings call:

For example, last quarter we launched Dynamic Ads globally, which combine product catalogs with our optimization capabilities to reward advertisers who invest in our platform with ROI at scale, and we are already seeing strong adoption rates from Retail, CPG, Restaurant, and Gaming verticals, among others.

While Dynamic Ads recommend items to Snapchatters based on their interests, AR try-on takes this a step further and allows Snapchatters to visualize the item in real life. For example, Clearly, an eyewear retailer, leveraged our sponsored AR Lenses to enable our community to try on different pairs of glasses, which resulted in 33 seconds of average playtime and a 5.3% share rate. Clearly was able to drive a full-funnel impact for their brand, achieving a 7-point lift in brand awareness and a 5-point lift in brand consideration while also driving a 46% lift in unique page viewers on their site and a 3.3% lift in purchases.

Daily active users rose 18% to 249M, topping the consensus of 243M. For user base demographics, Snapchat reaches over 90% of Gen Z and 75% of Gen Z and Millennials in the United States, the UK and France. This is one reason the company believes its augmented reality platform is seeing early success with brands as this demographic is more likely to engage with AR advertisements. Snapchat also has a gaming platform with new releases every quarter.

The majority of Snap’s growth came from the Rest of World category, at 43% growth. North America grew 7% and Europe by 10%. Meanwhile, North America and Europe carried the majority of the revenue growth at 56% year-over-year and 49% year-over-year, respectively.

Snap also recorded its most successful quarter ever in terms of monetizing its user base with a global ARPU of $2.73, coming in well ahead of the $2.23 consensus estimate.

Even though the company did not offer guidance for Q4 due to COVID uncertainties, SNAP stock surged over 20% following the results. Kids being schooled virtually, especially college-aged, is likely contributing to the company’s record Q3 usage and monetization.

Pinterest:

Pinterest rose with Snap following Q3 results as investors anticipated a similar recovery in ad spend for the social media company. The company delivered outstanding Q3 results that easily cleared consensus expectations.

Total revenue rose 58% YoY in Q3 with 49% growth in the US and 145% growth internationally. Monthly active users jumped 37% overall to 442M and ARPU rose 15% (US +31% and international +66%) to $1.03.

Perhaps most impressive was management’s 60% YoY growth guidance for Q4:

Additionally, we expect our business to maintain its momentum in Q4, with revenue growing around 60% year-over-year.

And then finally, this brand safety concept, especially post-July and the boycotts that we saw, I would imagine that we're seeing a sustained benefit just due to the election season. But I think it's a secular trend where advertisers want to be around positivity as they build their brands, and that that's contributing to our growth as well. That's what we're hearing.

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Management did state there is a level of uncertainty with this guidance due to Covid and tailwinds the company saw from being “brand safe” during the election (i.e. attracting ad spend typically given to Facebook).

Here is what the company said when asked if the beat came from factors inherent to the product or due to the macro conditions of ad spend being thin in Q2.

Yes, I mean, Ross, it's really hard to parse. I mean, I would love to be able to disaggregate that and say, we're getting X amounts from the technology investments we've made. We're getting Y amounts on demand returning from a macro perspective, or insights give us a certain amount and the brand safety equates to the remainder, in reality, it's the combination of all the above. Ads are working. I think we went through this a little bit on Brian's question, but making it easier for especially medium-sized advertisers to on-board and automate spending their budgets effectively against their desired online conversion and sales objectives has been a big driver for us …. [some parts omitted here for brevity]

So it's a mix of product and technology, macro recovery, the insights that we're able to deliver, and the brand safety and positivity that Pinterest uniquely brings and the world of social media.

Twilio:

Twilio pre-announced Q3 revenue would come in ahead of previously issued guidance from the company of $401 million to $406 million, with analyst consensus at $404M. Expectations were already high going into the earnings report and Twilio went on to beat revenue estimates by 10% for revenue of $448 million and growth of 52% year-over-year. This was the largest beat by dollar in Twilio’s history, as referenced by analyst Khozema on the earnings call.

Twilio also handily beat on earnings at $0.04 EPS compared to analyst consensus of -$0.03 EPS.

For Q4, Twilio expects revenue of $450M-$455M (37% YoY growth) vs. consensus of $432.1M. The net retention rate came in at 137% for TWLO in Q3. The guidance the company provided for earnings next quarter did not match expectations with an operating loss ranging between $10 to $15 million.

Twilio is on an expansion streak fueled by acquisitions. The company completed the acquisition of SendGrid in early 2019, launched the Flex platform, and has now acquired Segment to “enable developers and companies to unify customer data from every touchpoint.” The guidance provided does not include Segment which is expected to close in the current quarter and will modestly impact the top and bottom line.

On the earnings call, the company highlighted the importance of health care with Twilio’s products:

In healthcare, the innovative solutions that have been built on top of Twilio to address the COVID-19 crisis, provide an opportunity for the industry to advance the use of technology to better deliver outcomes for patients and create tools that fit seamlessly within a physician's workflow. This has always been the vision, but the coronavirus crisis highlighted the urgency, immediacy, and magnitude of that need.

Most importantly, CEO Jeff Lawson and the management does not see these trends slowing down with a vaccine or return-to-normal and specifically addressed this:

The other thing I would just point out, though, is that some of the acceleration that we've seen, for example, in healthcare and education, e-commerce, but we also think that those use cases are going to be pretty resilient. I don't think they're going to be ephemeral at all. In fact, I think we see a lot more opportunity in some of those industries. And so I think that's going to provide ongoing tailwind over the medium-term as well.

You can access the Investors Day presentation here where the company guided for 30% growth over the next 4 years.

Shopify:

Shopify announced outstanding Q3 results, with revenue growth of 96% year-over-year and Gross Merchandise Volume growth of 109%. The revenue number came in 18% above consensus estimates while GMV was 13% above forecasts.

The company announced subscription revenue grew 48% during the quarter, merchant revenue rose 132%, and monthly recurring revenue grew 47%. Non-GAAP EPS of $1.13 came in well ahead of estimates calling for $0.50, and operating margin increased to 17.6% vs. an 8.7% consensus. This compares to an adjusted loss of $0.29 EPS.

EMARKETER

Shopify gave away a 90-day free trial with this cohort transitioning from a free trial to paid merchants in Q3, which had a “double cohort effect” on merchant revenue growth of 132%. The company does not expect the Q4 demand for subscriptions on a year-over-year MRR growth rate to match Q3. This note was addressed by Amy Shapero, CFO, in the earnings call:

So, I want to just highlight that we did have a record quarter in Q3 for merchant growth due to the double cohort effect that I talked about in my opening remarks. But I think it's really important to emphasize that even excluding the 90-day free trial as who converted in Q3, we still would have seen an acceleration in our merchant growth over pre-COVID levels, which tells you that more merchants are coming to the platform with this shift to online commerce and COVID.

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The free trial was addressed again here as to how the key metrics compare to the 14-day trial with lower conversions but higher retention:

So, the new store creations in Q2 were the new stores coming on the platform associated with the 90-day free trial. So, we were not able to count them as merchants in Q2. We saw many of them convert to paying merchants in Q3. The conversion rates that we've seen on the 90-day free trials is slightly lower than cohorts historically on 14 day free trials, but we think that's okay, because they're more intentional when they convert because they've had a longer time period. The data that we have in the three months in some of the earliest 90-day free trial cohorts and converted suggests that those merchants that have a higher retention than 14-day free trial. As we know, many of them coming online in Q2 were established businesses looking for a multi-channel platform. And so we believe that those 90-day free trials will be more sticky than the 14-day free trials cohorts historically.The conversion rates that we've seen on the 90-day free trials is slightly lower than cohorts historically on 14 day free trials, but we think that's okay, because they're more intentional when they convert because they've had a longer time period. The data that we have in the three months in some of the earliest 90-day free trial cohorts and converted suggests that those merchants that have a higher retention than 14-day free trial. As we know, many of them coming online in Q2 were established businesses looking for a multi-channel platform. And so we believe that those 90-day free trials will be more sticky than the 14-day free trials cohorts historically.

Notably, Shopify incredible B2B brand power with philanthropic efforts to support Black entrepreneurship with $130 million dedicated to supporting businesses with diverse ownership. The company also launched a Tiktok channel that allows merchants to market their products using TikTok for Business. The collaboration allows for in-feed video ads to expand their paid and organic reach.

You can view Shopify’s earnings presentation here.

Microsoft:

Microsoft announced FQ1 2021 results on October 27th, outperforming on headline metrics led by strong Commercial Cloud and Azure growth. EPS of $1.82 came in ahead of estimates of $1.54 EPS while 12.4% YoY revenue growth represents a 4% beat above consensus.

Intelligent Cloud revenue of $12.99B was well ahead of the $12.73B consensus, while the 48% YoY growth in Azure was better than the expected 44% growth. Management issued a somewhat tepid outlook for FQ2, expecting weaker Consumer PC growth and intelligent cloud revenue in line with forecasts, along with stronger Processes and Business Productivity revenue.

The reason for the lower-than-expected guidance is due to softer business demand that will cut into Windows licensing revenue. We also saw commercial PCs crater 22% after support for Windows 7 ended and the coronavirus pandemic forced more people to work from home.

However, these are not the segments that would cause an investor to choose Microsoft as a portfolio holding. For the most part, the bull thesis centers around Azure and the line of horizontal products under the Azure infrastructure and PaaS umbrella: Azure Arc, Azure Synapse, Azure SQL Edge, Azure Machine Learning, Azure Space and Microsoft Cloud for Healthcare. Azure saw a slight acceleration of 1% this quarter. Gross margins on Commercial Cloud are an impressive 71% when including an accounting change on server equipment from two to four years.

Notably, when asked about the effects a decline in on-premise and transactional revenue could have on Microsoft, CEO Satya Nadella answered that the strategy for Microsoft is distributed computing with the public cloud and edge (and presumably these will make up for any decline seen from transitioning on-premise).

One is, the approach we have always taken is that distributed computing will remain distributed. So, the cloud and the edge is what will be the distributor fabric for applications. So, if you look at where our growth is coming from for the all-up number in Intelligent Cloud, it's coming from the infrastructure layer, the flexibility that we have around hybrid deployment, things like Azure Arc, a very differentiated. The same thing with data, that's one of the big future innovations, even in the last quarter was the ability to deploy, for example, Azure data in any cloud, including the edge.

The more interesting note came at the end of the earnings call by Brent Bracelin of Piper Sandler, who pointed out Azure had grown to 17% of revenue — larger than Windows – and up from 45% just three years ago, according to his model.

I wanted to follow up on Azure. This is a segment that’s grown now to 17% of revenue. I think, that’s up from 4% just three years ago. You talked about the number of petabyte-scale applications doubling. And from a size standpoint, it looks like in my model, Azure is bigger than the Windows business for the first time ever. My question really is around where are we at in the journey around Azure? How important is this to the Microsoft model? And ultimately, how big could it be looking out over the next three to five years?

This provided an important glimpse into Azure’s ongoing importance and the evolution of Microsoft.

Momentum List: September 2020

Posted on September 23, 2020June 30, 2026 by io-fund

By David Marlin

This is the inaugural momentum list report written by David Marlin. We will release this report on a monthly basis.

Process Overview:

Identifying stocks that have superior momentum is a proven way to outperform the market. The key is evaluating which stocks show the fundamental and technical trends to sustain the type of momentum that will outperform the broader market.

In this report, I use a combination of fundamental, technical, and industry analysis to determine the top momentum stocks in the tech space. Please note, we’ve included one featured stock in this report: Sea Limited.

For evaluating the strength of a stock’s performance, I use a few time frames: YTD performance, performance from key market lows (in our case, the March lows), and short-term momentum.

For short term, I often look at stocks on a quarterly basis as it is very common to see a stock post big gains after earnings and continue that momentum for the rest of the quarter. With the current sell off in the market, I am also closely looking at how stocks have performed during the market decline as technical strength is best revealed during pullbacks.

On a technical basis, I like to use a few moving averages to help determine trends – the 8ema & 21ema for short terms trends, the 50 MA for medium term, and the 200 MA for long term. In the current market environment, many previous leaders are now trading under their 50-day moving averages. This is a key indicator that there has been a momentum change in these stocks and their previous uptrend has slowed considerably. Many stock trading legends, including William O’Neil, recommend avoiding stocks trading under their 50-day MA’s all together.

The strongest stocks tend to be in the strongest industries. Identifying growing and evolving industries is a key to finding big gainers. Companies with large addressable markets that are ideally positioned to capitalize on emerging trends are the focus of this list.

High growth stocks obviously trade at a premium valuation, so this is not the most important factor in the creation of this list. However, valuation cannot not be ignored, even for high growth stocks. For this list, I analyzed historical valuations and valuation in comparison to peers.

The criteria in the creation and maintenance of this portfolio moving forward is outlined below. Note that I only focus on stocks in the tech space with large addressable markets and market caps exceeding $3B.

Momentum List Criteria:

Financial Performance & Momentum
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Technical Strength & Momentum
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Industry Analysis
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Valuation
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David’s Top Stocks List:

The top momentum stocks list is listed in order of highest to lowest revenue growth last quarter:

1. Sea Limited (SE)

Rev Growth: 102%
YTD Return: 271%
Proj 1yr Fwd Rev Growth: 39%
EV/Fwd Rev: 13.9x

Summary: Sea Limited is one of the top growth stocks to own based off its strong growth and leadership position in a rapidly growing market that remains underpenetrated. See the attached PDF for the full report on Sea Limited.

2. CrowdStrike Inc (CRWD)

Rev Growth: 84%
YTD Return: 158%
Proj 1yr Fwd Rev Growth: 36%
EV/Fwd Rev: 33.7x

Summary: CrowdStrike continues to prove it is a secular winner in the cybersecurity industry, displacing the existing participants and gaining significant market share. The fundamental performance in Q2 confirms this company is a best-in-class business worth owning as security software continues to be the top priority for organizations around the world.

3. Fiverr International (FVRR)

Rev Growth: 82%
YTD Return: 426%
Proj 1yr Fwd Rev Growth: 37%
EV/Fwd Rev: 23.8x

Summary: Fiverr has seen a surge in consumer demand related to COVID, and the company has now seen 4 consecutive quarter of accelerating YoY revenue growth. I believe Fiverr is ideally positioned to become a sustained beneficiary of the digital transformation long after the economy reopens and see a tremendous runway for growth ahead of them. At a roughly $4B valuation, Fiverr is in the early innings of its lifecycle, as management estimates that its TAM is north of $100B.

4. Square Inc (SQ)

Rev Growth: 64%
YTD Return: 133%
Proj 1yr Fwd Rev Growth: 22%
EV/Fwd Rev: 8.7x

Summary: Square has built a platform around digital payments and commerce, positioning itself to benefit from the transition to a cashless society. Square is ideally situated for sustained growth with the ongoing shift towards digital payments, both on the B2C and P2P side with its Seller and Cash App ecosystems.

5. Fastly Inc (FSLY)

Rev Growth: 62%
YTD Return: 311%
Proj 1yr Fwd Rev Growth: 33%
EV/Fwd Rev: 28.0x

Summary: Fastly has proven itself as a disruptive and innovative company focused on creating cutting-edge technology for developers and DevOps teams. Fastly is one of the main beneficiaries of the digital transformation, as the subsequent increased internet usage in its clientele has led to accelerating revenue growth and net retention rates for the company.

6. MercadoLibre Inc (MELI)

Rev Growth: 61%
YTD Return: 71%
Proj 1yr Fwd Rev Growth: 32%
EV/Fwd Rev: 13.6x

Summary: MercadoLibre is the leader in the Latin American e-commerce market, and is poised to continue to benefit from the increasing shift to online shopping in those underdeveloped nations. The company received a massive boost from COVID across all its businesses, including tremendous growth in MercadoPago, the company’s digital payments segment. MercadoLibre has a long runway for growth ahead of it as the top e-commerce and fintech company in a developing region.

7. Pinterest Inc (PINS)

Rev Growth: 4%
YTD Return: 96%
Proj 1yr Fwd Rev Growth: 33%
EV/Fwd Rev: 13.9x

Summary: Pinterest stock soared after its Q2 earnings report, as management predicted a return to +30% YoY growth levels. Pinterest has a golden opportunity to accelerate its growth by increasing monetization per-user, particularly internationally. As advertisers around the globe gradually ramp up their spending again, Pinterest is positioned to be one of the main beneficiaries.

8. Tesla Inc (TSLA)

Rev Growth: -5%
YTD Return: 406%
Proj 1yr Fwd Rev Growth: 42%
EV/Fwd Rev: 13.4x

Summary: A list of the top momentum stocks would not be complete without Tesla. Tesla is a company with massive potential for growth ahead of it as it attempts to revolutionize the future of the transportation industry. The top auto companies in the world are all chasing Tesla to catch up to its EV leadership status and the company continues to widen its lead with its proprietary innovation.

9. Penn National Gaming Inc (PENN)

Rev Growth: -77%
YTD Return: 186%
Proj 1yr Fwd Rev Growth: 39%
EV/Fwd Rev: 3.3x

Summary: Penn Gaming has a tremendous opportunity to become a dominant player in the rapidly growing sports betting industry. Newly acquired Barstool Sports will be the main driver of this growth, as the company’s social media following allows Penn to digitally reach millions of potential customers. In its launch last Friday (9/18), the Barstool Sportsbook app was the most downloaded sports app in the US, even as the app is only available for use in 1 state (PA). I expect Penn will continue to leverage the Barstool brand to acquire a dominant position in the industry, making it significantly undervalued in comparison to its peers.

Outside Looking In: ETSY, NET, ZS, SNAP

We are starting out with 9 stocks to include in this portfolio, a number that may change based off conviction and new opportunities. There will be a new tab for monitoring the Momentum Portfolio next to the Active Portfolio moving forward.

I will be covering the list of the top momentum stocks in depth and releasing an updated report each month. Businesses and industries are always changing and new opportunities emerge — my goal is to identify them and bring these to your attention.

The portfolio may change at any time due to a change in fundamentals, technical strength, new opportunities for inclusion on the list, etc. In the coming weeks, I will be releasing in depth reports on each stock included in the momentum portfolio.

Knox and I will also be working together to provide entries/exits in the names included. Please find me on the forum for any questions or comments on this report.

Featured Stock: Sea Limited

By Knox Ridley and David Marlin

This week, we initiated a position in Sea Limited at $150.10. We believe Sea is positioned for significant future growth because of its leadership status in e-commerce and gaming in Southeast Asia. This region is among the fastest growing in terms of internet usage in the world. With Sea establishing itself as the region’s dominant internet company and extending its lead over competition, we have been looking for a proper entry in the stock.

Since the March 23rd lows, SE has been a leader among tech stocks. After climbing over 350% over the last trailing 1-year period, SE is currently down just 10% from its 52-week high, while the NASDAQ is down about 13%. Also, it’s worth noting that SE has, so far, bottomed on Sept. 8, making a series of higher highs and higher lows since. This is compared to the NASDAQ, which found its lowest level of Sept. 22, and is still in a downtrend posture. This is notable strength that we look for during pullbacks.

With a deeper look into the chart, we can see that SE appears to be setting up for a move higher. Note the base that the stock has built, which is outlined in blue, with the breakout spot being around $50.50 – $51. This is accompanied by decreasing volume, with more green bars than red. This is signaling that the sellers appear to be drying up.

Usually I wait for confirmation of a breakout before I move; however, the internals had me anticipate one instead. For one, we are seeing the 50-line hold in the RSI during this selloff, meaning that the momentum is still positive to flat, while the NASDAQ is clearly losing momentum. Recently, the RSI is starting to trend up.

This is coupled with positive divergence in the CCI and the MACD in a classic coiling pattern. Furthermore, the Accumulation/Distribution line is indicating that smart money is buying into this dip. When this indicator makes a new high before price, it’s a good sign that price will soon follow.

There is additional risk within the broad market right now; however, we like the setup forming in SE. We placed a stop about 10% below our entry, which is just below the base SE built. If this stop is hit, we will exit and regroup for the next move up. With momentum, the key is to have hard stops and exit when the momentum is still up.

IPO Round Up

Posted on September 16, 2020June 30, 2026 by io-fund

IPO Report card:

As of late, the underlying goal of IPOs appears to be how to get retailers to pay as much as possible until the lock-up expires. It doesn’t matter if Berkshire invests unless you get a chance to buy at the same price. Your shares could lose 50% and Berkshire would break even. That’s not a public offering by any stretch of the word. Please keep in mind, that many winners in tech retrace well below their opening price (up to 50% below opening price in the case of Crowdstrike).

Prior to Snowflake raising its opening price (for the fourth time), I had cautioned that: “the biggest risk of all is how much alpha will be left in the first year of trading by the time retailers are offered the crumbs.” When I wrote that, I did not imagine we’d see the opening price of $245. It was, in a word, astounding.

Like Warren Buffet says, the best part of investing is you don’t have to hit every ball. On that note, I can confidently say Berkshire would not be hitting the ball at 98X NTM revenue – but they sure hope you do.

Snowflake went public with an IPO price of $120. It opened at a 105% premium of $245, and closed on its first day of trading just under $254. Based on its opening price, this gave the stock a valuation of 98x NTM revenue if generously calculating 121% growth across all four quarters.

Keep in mind, in the chart below, companies over 40x NTM revenue are profitable.

Regarding their business, Snowflake reported 121% revenue growth YoY with a net retention rate of 158%. As stated, the company is not profitable. In the six months ending in July, they spent roughly $190.5 million on marketing while making $149 million in gross profit.

I discussed Snowflake’s product strength in detail in my previous analysis, stating it demonstrated: “triple-digit growth, clear product differentiation, key metrics that prove product-market fit and gravity-defying management.” However, the price of the stock has become untethered from reality. As stated in the Forbes article, there is little alpha left over the next year and that is the primary risk.

JFrog

JFrog opened trading at a $71.20, which is 62% above its offering price. This gave the stock a valuation of 40x NTM revenue, which was the highest forward multiple in enterprise software at time of IPO until SNOW started trading about an hour later. The company provides DevOps software to organizations globally, enabling those businesses to build and release software faster and more securely.

JFROG posted an impressive 50% growth rate in its latest quarter with 81% gross margins and positive 11% FCF margin, which is why they commanded such a high premium. However, the company faces a bevy of competition including Google Cloud, Amazon Web Services, and Microsoft Azure. JFROG is a pure play, which I tend to favor; however, this IPO valuation is over its skis.

Sumo Logic

Sumo Logic began trading September 17th with an initial offering price of $22 a share. The first trade was 21% above the premium at $26.50 and closed at $26.88. Regarding key metrics, Sumo Logic stated that its dollar-based net retention rate has fluctuated between approximately 120% and 135% for each of the past nine quarters, which is notable. Their forward price/sales based on their opening price gives the stock a valuation of 8.3x NTM revenue.

Sumo Logic’s biggest risk is their competition. Companies such as Splunk, Elastic, Datadog, Dynatrace, Microsoft and Google all have bigger budgets, greater name recognition and a larger customer base.

Amwell

Amwell (AMWL) is a mobile and teleheath platform that connects patients with doctors over video. The stock went public on September 17th with an IPO price of $18. It began trading with 42% premium at $25.51, and closed the day at $23.95.

Amwell’s YoY revenue growth accelerated from 31% year-over-year in 2019 to 77% year-over-year in H1 2020. Based on their opening price, this gave the stock a valuation of 8.4x NTM revenue.

Unity

Unity (U) is set to open trading September 18th at an expected price range of $44-$48. This would value the company in the range of $11.6B-$12.6B. At the high end of the proposed range, Unity would trade at 14.2x NTM revenue.

Unity grew revenue 39% YoY in the first half of 2020 and increased its net-retention rate to 142%, a strong indication of increased spending within its existing customer base. With 93 of the top 100 gaming studios already Unity customers, it is crucial for the company to continue to drive higher spending among existing customers.

Here’s how the string of tech IPOs stack up this week:

May Convictions: Blog Update

Posted on May 6, 2020June 30, 2026 by io-fund

The May spreadsheet will be out soon. The spreadsheet will reflect the information in this blog update.

In September, when many cloud software stocks sold off in the so-called value rotation, I wrote the following: How to pick long-term stock winners in cloud computing

“My prediction is this may be one of the last cycles when tech is considered less safe than value stocks. As the market will find out (the hard way), cloud software is actually very safe. It is insulated from trade wars and overseas manufacturing issues. It reduces costs for enterprises, which is ideal for a recession. Lastly, cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech — such as mobile, e-commerce and advertising — which are reaching saturation, are finding themselves in the cross hairs of anti-trust and are susceptible to consumer spending changes.

The best companies in the category of “cloud software” will continue to post rapid growth regardless of economic conditions, and the investors who run from this sector will suffer bigger losses from missed opportunities than investors who know their winners.”

The reason that cloud is more insulated is that it reduces costs and improves efficiency. Basically, things happen quicker for businesses and are cheaper to run when workloads are in the cloud. Therefore, the idea there would be a value rotation away from cloud didn’t make much sense to me as it was my prediction cloud would perform/grow like value stocks during a time of uncertainty. (Valuations are another matter which I plan to cover this month at a detailed level for my premium readers.)

The main thesis of the article quoted above is that you should know your winners because the market is telling you it does not know who the winners are when it goes through phases of indiscriminate selling. You can also say this is the case when the market goes through indiscriminate buying. To me, the market has been playing the game pickle; rushing in and out of cloud. My goal is to position you with the winners for 2020 but also in any beat-up stocks that will soar in 2021 (and beyond) once the economy resumes.

Most of you know that I don’t trend follow or trade on prices. Meaning, I don’t recommend stocks based on their price movements. This is the major advantage to this website because the gains are much higher if you can get in before the quants are turned onto a stock. I’d say the majority of my recommendations (80-90%) on the premium site are written while the stock price is near a low. It also helps to keep a steadfastness when the market panics and sells out of a promising company.

After solidifying my convictions with you in May, and getting you set up to weather the storm that has become 2020, I am going to turn towards emerging technologies again in the second half of the year. This is 5G, artificial intelligence, blockchain and various small cap stocks. I had only just begun to do this before covid-19 broke out and we very quickly had a top performing stock in our coverage (INSG) plus some nice returns on (WIFI) and (TLRA) if you followed Knox’s entries/exits.

For anyone joining us recently, here is our plan and an introduction to how we enter/exit stocks:

We have core holdings that will not be traded or sold under any conditions. These are MSFT, ROKU, NVDA, ZM, WORK, BABA, DDOG, DT, BTCUSD.
Up until the market sell-off in March, we held the stocks listed on the spreadsheet until we stopped out with gains. You can access the prior spreadsheets here and here.
For any stocks we stopped out of, we plan to build more core holdings this year with buy and hold entries that we believe we will see at some point in 2020. These are on the March and April spreadsheet.
We will buy at the upper end of these price ranges for any data center stocks (see below) and in the mid to lower region for stocks that may see headwinds from the current economic situation.
In an effort to stay open to all possibilities, including that the market may go up before it goes down (and to buy insurance against all scenarios), we will continue to look for entries and trade stocks. This also helps us to serve various styles on the site. Please note that we only recommend stocks that make great buy and holds. We don’t trade into stocks that we wouldn’t want to own long-term.
Although we believe valuations will eventually settle down from 2019 and 2020 pricing, we still look for break outs with stops where we can participate in momentum.
Knox enters and exits stocks via real-time updates on the forum. It’s essential to subscribe to his chat room and my chat room if you want real-time updates as we can’t fill your inbox with blog updates for every instance of communication. Please also subscribe to the stocks you are interested in on the forum as we have chat rooms set aside for each stock. This will help you get the most value from the site.
Knox posted on Pinterest yesterday on the forum prior to earnings, as well as Roku and Alibaba

Below, I break down my ongoing high convictions around the Data Center, Productivity Tools, and other Outliers for May. This is in an effort to come full circle on companies I’ve covered in the past and my plan moving forward. Please also keep in mind these aren’t earnings calls as we have some earnings this week and in the near future.

Data Center

This earnings season showed serious strength in the data center with Microsoft beating pre-coronavirus earnings. I like Alibaba here, as well, as the trajectory of their data center growth will surprise the market. This is because China is going from 0 to 100 on their data center growth as a country that has lagged the United States yet has aggressive ambitions to catch up. I’ve been forecasting this for quite some time now (published on FATrader and pre-dating my premium site) and I believe this analysis is currently in play.

Looking beyond Microsoft and Alibaba, Nvidia and AMD are even stronger choices for the data center but will take time to play out. This is because you’ll see companies reduce capex this year and tighten their budgets, which will affect Nvidia and AMD. Don’t be discouraged by that. Our plan is to use this as the final opportunity to lock-in our ten-year position on these companies.

The next layer of the data center is security and monitoring. For every enterprise that moves over to the cloud, especially the hybrid cloud which I’ve covered in great detail for my premium readers, there will need to be endpoint security and network/application/infrastructure monitoring. This is where it can get tricky as the field opens up and there are many competitors in each area. My favorite companies — relative to the competition — are Datadog, Dynatrace and Okta. This means that even if these companies miss earnings that my conviction will remain.

Also downstream from cloud infrastructure is MongoDB and Elastic. I like them both. I’m not sure exactly when the revenue will show up as these are not essentials for all businesses but they should see a boost from the ongoing cloud migrations at some point this year.

PDFs for reference:

Productivity Tools

When I wrote out my convictions for the premium site this year, I talked about productivity tools being a hot space. These tools, especially, save time and reduce costs. Therefore, don’t be surprised if Zoom, Slack and DocuSign continue to climb this year. I do believe valuations will come down at some point across the board as economic data and Fed stimulus battle it out. With that said, I believe these three will continue to break out as their revenue should grow at a clip and you can expect them to have higher valuations than their peers. If you believe there are others that will sustain high valuations this year, feel free to ping me on the forum to discuss.on the forum to discuss.

Knox especially thinks there is strength in Slack’s chart. I think the market is still confused on the company. That’s a good combo to have.

One thing I’d like to make very clear about Slack is that it has one of my favorite components across all tech stocks which is a strong developer community (even though Slack is not open source, there are many custom APIs being developed).

Investors may not realize that Apple’s success is due not only to the iPhone but also the developer community that supported the iPhone/iOS operating system and developed third-party applications. This created a robust ecosystem that was impossible for any competitor to shake. Design played a role too, of course, however Microsoft’s Windows mobile OS got shut out because it did not have the developer following to develop apps. In the beginning, Facebook also had a large developer community that propelled the platform forward which is how Zynga became popular.

In the S-1 Filing, Slack stated there are over 450,000 third-party applications or custom integrations. The number is likely much larger now. What is important to understand is that it’s nearly impossible to envision where Slack will end up in five years from now because the level of iteration and creativity that comes from these customizations is impossible to predict. The forward innovation will come from technologists who are not employees of Slack. They are in need of a messaging system they trust and that can be customized.

For instance, security professionals are now using Slack for anomaly notifications. When there’s a breach, or anything suspect, the security team is notified on Slack. Wall Street investors can set up price movement alerts on stocks. I’ve seen others use Slack to program robots and control commands.

With that said, Slack is following a popular maneuver for monetization that confuses the financial industry and will require a bit of patience before the profitability unfolds. Slack is choosing to scale while being underpriced and then will convert down the road to being priced more in-line with the value of the platform. For now, this means there will be questions around the path to profitability.

Shopify is an outlier that we covered with a prediction that the company would outpace the market due to the focus on merchants rather than customers. Perhaps with covid-19, the emphasis on merchants is more important than ever as many will lose brick-and-mortar sales. I do want to point out that Shopify released a new application. This was something I had predicted they’d do as it was the next natural step after the fulfillment center (an aggregated store front). I thought it might be a website but a native app makes perfect sense. This product announcement is very important for the long-term trajectory.

From the Shopify PDF in October:

“The question many investors ask about Shopify is whether it can compete with Amazon — or even Alibaba? Today, this is not a possibility as Amazon and Alibaba drive traffic to products and take a premium for helping secure the sale. They own the domain website, so customers are loyal not to the merchant, but to Amazon and Alibaba.

I believe this could be where Shopify will end up, eventually. If the fulfillment center is a success, which will take some time to test and gather traction, then the back-end will be set up for the front-end development of a website or some kind of product aggregator – whether that’s a website domain or another recommendation engine.

For Shopify, it makes sense to first build out the fulfillment center for their point-of-sale software in order for a successful pivot.”

Although I have not written a formal PDF on Docusign, the company fires on a lot of cylinders. The addressable market the company will (finally) be able to serve can become quite large as industries shift towards work from home policies. I will try to write something up officially soon although I’ve favored covering others, such as Lam and Micron, as most know/understand the Docusign story. Regardless, it’s worth repeating that I think their story has improved and is strengthened beyond 2020 by the work-from-home trends.

PDFs/References:

Downgrades For Q2-Q4

Alteryx priced at $5000+ is steep and I pointed this out in previous reports. I would never suggest someone sell a winning position; however, you may want to determine how much downside you’re willing to stomach if the market were to go red. I’m pulling AYX out of the pack as an example because unlike other cloud software, the price is not cheap. If the economy goes back to normal tomorrow, this won’t be an issue. If there are tech layoffs announced in Q2 and Q3, you might want to keep it in mind.

From the Alteryx PDF:

“Alteryx primary risk is the high pricing. The company will have to continually iterate to demand its current pricing while staving off competitors. At over $5,000 per user for the Designer product (and much steeper across other products), economic headwinds could affect Alteryx if companies seeks to reduce costs.”

And …

“Designer costs $5,195 annually per user with optional add-ons, such as location insights for $11,700 and business insights for $33,800. Server expands the offerings from Designer to include APIs and applications for more customized and automated analytic workflows. Enterprises especially have a need to improve internal server architectures for multiple employees and cross-functional teams with custom options. Server costs $58,500 per user per year with add-ons, such as Connect for $39,000.

Connect allows for data cataloging and the discovery of data with the goal of accelerating productivity. This is not a core product for Alteryx at this time, rather it provides an end to end pipeline for a full range of needs. There is indication from the Server add-on pricing that the cost is in the $39,000 range.”

We’ve also seen initial reports that human resources software is not holding with SAP expecting a decline this year and analysts downgrading similar companies, like COUP, PAYC. (The market has not taken notice). This means Workday could be exposed. Workday also carries over $1 billion in debt and may need to borrow more in the future.

PDFs:

Ad-Tech

As you know by now, I’m concerned about ad-tech for a few reasons. The peak to trough that occurred between Jan/Feb and March has been hard to quantify as company executives provide fairly vague overviews of “single digit declines” or “double digit declines” or “approximately flat” or “stabilized” while avoiding hard and fast numbers. Those that gave more specific numbers sold off (PINS and TWTR). All around, guidance is being pulled for the year, which is unique to ad-tech within the industry of tech. Meanwhile, ad-tech is trading at all-time highs.

I’ve covered this in great detail already as to why I began the year with ad-tech as one of my top trends and changed my position on this for Q2-Q4 2020 and maybe early 2021. For me, there is too much risk with stocks trading at all-time highs that are going through a major readjustment in supply/demand. I’d need more information on forward revenue this year and next year before committing to these valuations. Considering companies can’t provide this, then I’d want a discount in valuation.

I want to follow up on Roku specifically. The difference between Roku and the other ad-tech companies is that it’s situated in the center of an important micro-trend as a pureplay. This means it’s a gamble as to when the true breakout occurs because the trend is so strong.

On one hand, Roku may have a tough year as a company that is not profitable and relies on advertising. On the other hand, Roku may have a breakout year as a company that sees record adoption at a time when connected TV is already one of the best trends in technology. Knox will do his best to provide for both situations but I want to emphasize we are long on Roku and it’s one of my highest long-term convictions even with advertising headwinds. With that said, it’s likely Roku misses earnings or negatively surprises the market in some fashion this year. Follow Knox on the forum if you’re building a new position here.

For Q2 through Q4, I have changed my viewpoint on The Trade Desk. I think Snap is weak too (I understand the market doesn’t think this right now). The market beating up Pinterest and not Snap is interesting to me on many levels (and the lack of response when Snap raised debt immediately following earnings).

I personally feel that Facebook and Google are somewhat saturated and will need new growth markets but that’s counter to the market (I’ve felt this way about Apple too for most of 2019 and into the near future). Those three have enormous amounts of cash so micro-trends/growth markets are irrelevant because of traditional DCF analysis.

5G

Our 5G coverage was primarily focused on business cases. I believe the government will continue to push for 5G and that INSG and WIFI are solid choices as they require little to no capex. In fact, they lower capex depending on the situation.

I also like Twilio as a very early 5G play. Twilio is exposed to many different industries and we will find out in the earnings report tomorrow if retail/ecommerce and health care offset any of the others (such as Lyft and Uber) plus the decreased marketing budgets that SendGrid likely saw.

PDFs:

Outliers & New Coverage

Lam Research, Micron and Qualcomm are solid choices to keep an eye on. Knox will update in the forum if he sees something interesting here price wise.

I’m still very bullish on Chainlink for reasons that are not obvious right now. I believe Chainlink will jump from being a crypto to a reputable form of collateral for blockchain smart contracts. I want to emphasize that Google and Oracle are early backers.

Bitcoin is also going through the four-year halving this month. I’ll write up an editorial in advance.

Regarding blockchain, I had written an article about how blockchain and health care will one day merge in order to make data more available for cures. This is an area that should take off with the pandemic. I’ll be hunting for breakthroughs here.

PDFs:

Checking In and Earnings Update

Posted on April 30, 2020June 30, 2026 by io-fund

Quick note: Of the best five performing tech stocks during the pandemic, three of them were featured on this site with a low cost basis: $ZM, $INSG and $SHOP.

I’m publishing a premium report on Micron tomorrow. This is a stock forecast to have a nice sized cyclical comeback.

You’ll get a May spreadsheet and convictions update blog early next week. By now, you know the bear thesis. We will now continually work towards a bull thesis as a backup option. This will look like our 2019 strategy with good trade set-ups and reasonable stops.

With that said, I still believe we will see many of the buy and hold targets we set out on the spreadsheet but this will take patience. In case we are wrong, you will now see an ongoing effort to spell out an alternative scenario with Knox primarily focusing on bull trades.

You can read my thoughts on a few stocks we cover in Forbes including Slack (bullish), Roku (bullish despite ad-tech headwinds) and The Trade Desk (short-term bearish Q2-Q4).

From this week’s earnings reports, I’m still quite keen on Datadog and Dynatrace. You can access the PDFs published previously on Datadog here and Dynatrace here. They remain favorite products due to the migration to hybrid cloud. Microsoft’s impressive earnings report this week should help these two companies. This is what I said in my April convictions overview:

“Cloud at the infrastructure level and cloud at the platform level should do well. One of the reasons I focused on cloud for the premium site during the sell-off is that it’s insulated from trade wars and recessions. My article at the time said, “My prediction is this may be one of the last cycles when tech is considered less safe than value stocks. As the market will find out (the hard way), cloud software is actually very safe. It is insulated from trade wars and overseas manufacturing issues. It reduces costs for enterprises, which is ideal for a recession. Lastly, cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech — such as mobile, e-commerce and advertising — which are reaching saturation, are finding themselves in the crosshairs of anti-trust and are susceptible to consumer spending changes.”

I’m also interested to see what Alibaba reports with the re-opening of the Chinese economy while being positioned in the middle of major trends, like Amazon.

AMD’s earnings report was strong, in my opinion. I detail this below.

I wish I could be as bullish as the market is on ad-tech but unfortunately the delta between Jan/Feb and March could not have been expressed more clearly. As stated in my convictions update: “To recap, ad-tech companies could have a positive earnings surprise but it’s not probable they will get through the three long months of Q2 unscathed. Patience here is going to pay off. Usage going up well over double digits and revenue being flat to down is not something to get hasty with.”

To be clear, I would never suggest anyone sell a winner but I think it’s important for me to make forecasts at current pricing and point out the story is changing this year for ad-tech.

Earnings Overview:

Microsoft:

Microsoft had the best earnings report of any tech company, thus far. The company beat pre-coronavirus expectations. This matches my thesis that the data center would be a safe haven this year as spelled out in this blog post. This is not only due to work-from-home trends, which were well reported, but also the microtrend of hybrid cloud slated to do well this year.

Perhaps the more important question to ask is what companies are downstream from hybrid cloud and the data center segments. As stated, I’m favoring Datadog and Dynatrace this year as cloud infrastructure counterparts.

MIcrosoft earnings came in at $1.40 EPS compared to expectations of $1.27 EPS. Revenue of $35 billion beat expectations of $33.76 billion.

“We’ve seen two years’ worth of digital transformation in two months,” Satya Nadella said.

Google:

Google especially focused on direct response having “substantial year-on-year growth throughout the entire quarter.” The other positives to Google’s report is the traffic, which peaked “at four-times maximum activity during the Super Bowl.”

Android app downloads were another plus with a rise of 30% from February to March.

Sundar Pichai noted that search is expected to recover quickly due to a clear sense of ROI. He referenced the quick recovery in 2008.

Note: eMarketer published an analysis of search ad spend with the conclusion it will drop about 20% in Q2. published an analysis of search ad spend with the conclusion it will drop about 20% in Q2.

Perhaps the more ironic part is that while Google is giving an upbeat earnings report on advertising, they themselves are cutting marketing and reducing their ad budget (even while being in one of the more insulated non-consumer industries with a huge cash pile).

According to a leaked internal memo, Google is cutting costs by about 50% through the rest of the year.

This was based off the following memo: “Just like the 2008 financial crisis, the entire global economy is hurting, and Google and Alphabet are not immune to the effects of this global pandemic. We exist in an ecosystem of partnerships and interconnected businesses, many of whom are feeling significant pain.”

Google had the following to say about the dichotomy of: Jan/Feb and then March … “Q1 was in many ways the tale of 2 quarters. For our advertising business, the first 2 months of the quarter were strong. In March, we experienced a significant and sudden slowdown in ad revenues. The timing of the slowdown correlated to the locations and sectors impacted by the virus and related shutdown orders.”

Ruth Porat, the CFO, reiterated there was “an abrupt decline in March.” She also offered the following: “In March, revenues began to decline and entered the month at a mid-teens percentage decline in year-on-year revenues, although, users’ search activity increased, their interest shifted to less commercial topics. In addition, there was also reduced spending by our advertisers.”

Regarding YouTube, Porat stated, “As a result by the end of March, total YouTube ads revenue growth had decelerated to a year-on-year growth rate in the high-single-digit.”

Porat stated similar for network revenues – that revenue growth had decelerated in the high-single-digit by the end of March.

The company also focused on the strength of Google Cloud as a means of diversification to advertising.

Facebook:

Similar to it’s ad-tech counterparts, Facebook discussed “facing a period of unprecedented uncertainty’ as of March, yet Wall Street viewed the earnings report as favorable for a surge in price.

The company beat on revenue but missed on earnings. Q1 numbers came in at $17.74 billion and $1.71 EPS compared to analyst estimates of $17.33 billion with $1.74 EPS.

Similar to Google, Facebook’s CFO, Dave Wehner, stated, “we have a really cautious outlook on how things are going to develop” due to a broad-based pullback. The market rallied on the CFO’s comment, “Ad revenue has been approximately flat compared to the same period a year ago, down from the 17% year-over-year growth in the first quarter of 2020.” The April revenue accounts for a 39% increase in ad impressions.

Perhaps one of the most important comments across all of the ad-tech earnings calls was when the CFO pointed out that ads follow GDP growth, “We are understandably cautious given that most economists are forecasting a global GDP contraction in Q2, which if history were a guide, would suggest that the potential for an even more severe advertising industry contraction.”

Sheryl Sandberg stated, “Our total ad revenue for Q1 was $17.4 billion, which is a 17% year-over-year increase. After a strong start to the quarter, we saw a significant impact on our business as a consequence of the pandemic from the second week of March onwards.”

AMD:

AMD had a decent earnings report IMO yet the market did not respond accordingly. The company was one of a few that provided forward guidance at all, let alone forward guidance that is close to pre-coronavirus levels.

The forward guidance provided was 20% to 30%, or 25% at the midpoint, down from 29% at the midpoint. Meanwhile, the company maintained its forecast for adjusted gross margin of 45%.

AMD was in-line with reported revenue of $1.79 billion and EPS of $0.18 while analysts expected revenue of $1.78 billion on EPS of $0.18. This represents a 40% increase from last year with AMD’s highest gross margin in eight years.

Positives in the report included a 73% increase in computing and graphics chips to $1.44 billion, up from an expected 58% growth.

In the earnings call, Lisa Su noted a “very nice acceleration of the cloud business as [AMD] went through the quarter.”

The launch of Milan is also scheduled for this year (reference PDF for more information).

“In terms of where we believe demand will be versus 90 days ago, it’s pretty similar. And the way I would say it is, we see cloud being strong. What we see is not just putting on more capacity, but really the ramping of new platforms and so we view that as a positive. We have strong enterprise adoption as well. When we look at our pipeline in enterprise, it’s continued to grow, and continue to grow in the first quarter and continue to grow in sort of the first month here of the second quarter.” -Lisa Su

AMD reported a 21% decline in enterprise embedded and semi-custom chips which AMD said was due to a drop in gaming console sales. Sony and Microsoft have plans to release next-gen consoles in Q4 of this year and this segment will regain ground when this occurs.

The forecast for Q2 is set at 21% growth year-over-year to $1.85 billion with a 4% increase sequentially. Ryzen contributes to YoY growth while Epyc processors will drive quarterly growth.

AMD did mention a potential slowdown in infrastructure spending. This matches Google’s decision to slow down Capex this year.

Q1 2020 Earnings Coverage

Posted on April 23, 2020June 30, 2026 by io-fund

This is an especially important earnings season as we hear from executives for the first time since the pandemic. I’ve provided a summary of the earnings reports from this week and my takeaways.

In this update, I cover Texas Instruments, SAP, Lam Research, and Xilinx and the insights they provide on the data center. I also cover Snap’s earnings report and Netflix. I’ll cover Intel’s report on the forum tomorrow evening.

Main Takeaways:

Data center is coming in strong as we forecasted. There are many instances that confirm this below.
Despite Snap’s breakout, I don’t see anything that invalidates what I’ve published about ads being weak post-covid. In fact, Snap saw significant drop off between Jan/Feb ad revenue and April. I detail this below.
Pay attention to SAP’s guidance around software. I had mentioned that instead of guessing on the various software players that it may be stronger to go to the infrastructure level and SAP could be the beginning of a few reports in weakening software.
I cover Netflix below. Roku will see solid user growth while revenue in Q2 for Roku could go either way.

Texas Instruments:

Per the earnings call, Texas Instruments believes there is a “significant chance for a recession” and is modeling their forward guidance on the 2008 recession. In summary, the 2008 recession snapped back in two quarters time.

TI plans to run factories in Q2 2020 and Q3 2020 in the same way the company ran in Q1 2020 with the expectation they will be sitting on inventory when the demand returns in an effort to maximize optionality for customers who may not be able to forecast at this time.

Q1 revenue was $3.3 billion, down 7% from a year ago, with EPS of $1.24 per share. Texas Instruments guided for Q2 revenue in the range of $2.61 billion to $3.19 billion and earnings per share to be in the range of $0.64 to $1.04.

Although the company did not provide much insight into how Covid-19 affected various revenue segments, TI did confirm that “enterprise systems increased double digits based on strong data center demand.” The company also stated that Industrial and PCs increased while Automotive and Mobile decreased. Communications equipment declined 50% year-over-year but there was an increase quarter-over-quarter.

SAP:

SAP missed on revenue by about $10 million with Q1 revenue at 6.52 billion Euro. The company stated that cloud revenue is expected to continue with rapid growth in 2020 backed by a 25% expansion in the current cloud backlog.

Regarding Covid-19, the company stated that a “significant amount” of new business is being postponed and with software licenses revenue most impacted and falling 31% year-over-year. As of now, the company is guiding for revenue in 2020 to be in the range of 27.8 to 28.5 billion Euros down from 29.2 billion to 29.7 billion Euros.

JP Morgan came out with downgrades to software in a similar category as SAP this week.

Netflix:

Netflix added 15.7 million new subscribers compared to expected 8.2 million. The company reported mixed results, however, with EPS of $1.57 and $5.77 billion in revenue compared to expected EPS of $1.65 and sales of $5.76 billion. Earnings rose 107% and sales rose 28%. Netflix is guiding for new subscribers of 7.5 million compared to estimates of 4.1 million. The second half of the year is expected to be light on subscriber growth.

Some of Netflix’s strength is the company’s arsenal of content, which interesting enough, the debt load to create this content is what has fueled criticism of Netflix for the past few years. Free cash flow will improve from negative $2.5 billion to negative $1 billion.

I’ve covered Netflix’s additional strengths in previous editorials.

Snap:

Snap is up 35% on strong Q1 subscriber growth and a revenue beat. The company reported $462 million in revenue compared to analyst estimates of $428.8 million. Average revenue per user was at $2.02 versus $1.68 per user in the year-ago quarter. Daily active users are up 11 million users to 229 million total. In the past, Snap reported relatively flat DAU growth so the 11 million stands out despite being quite low compared to other social sites from Covid-19 usage. For comparison purposes, Pinterest is expected to add 30 million users from 335 at end of Q4 to 365 million users in Q1.

In the earnings call, management discussed the lower levels of ad demand in more detail. Revenue growth was very strong in January and February at 58% year-over-year before falling to 25% year-over-year in March – essentially slashing revenue in half.

In April, the decline continued at 3-4% per week to 15% year-over-year growth through April 19th and 11% year-over-year growth in the current week. This means revenue growth was slashed by 80%.

If the decline continues, this will put Snap at negative YoY revenue by May.

“Like everyone, we’re hearing from advertisers that the global outbreak has dramatically shifted the way that they’re thinking about marketing. Some have paused while they’re rethinking their messaging and others are cutting funding to save jobs.” -Jeremi Gorman, Co-founder and Chief Business Officer, Snap

Meanwhile, Twitter guided for negative revenue in March so it makes sense Snap would join Twitter on this trajectory.

Despite the weak forecast for Snap based on April growth, the stock surged 35%. Knox will be updating the forum on the chart and status of the short position. We may have been early on this one but I don’t see anything in the earnings report that invalidates the thesis.

Lam Research

Previously, Lam withdrew fiscal Q3 guidance in March stating it may not reach previously announced targets. Some of this was due to factories in Malaysia being shut due to government directives to shut businesses. Lam missed slightly on revenue at $2.5 billion compared to $2.58 billion expected from the December quarter. EPS of $3.98 was in-line with the revised consensus. The company has $5.6 billion in cash after drawing $1.25 billion from its revolving credit facility.

Most importantly, Lam Research confirmed that cloud and enterprise-demand remains strong while consumer markets are weak.

“The need for equipment and capacity to support work from home initiatives is causing cloud service providers to increase CapEx, creating the potential for a surge in server demand. Third-party estimates suggest that cloud capacity would need to increase 10-fold to service the peak workloads seen as shelter-in-place rules went into effect. Although these heightened workloads are likely a short-term phenomenon, this event will underscore the need for companies to invest more in infrastructure and business continuity capabilities as the daily economy and our dependence on technology continues to expand over time.” -Tim Archer, CEO

The company is exiting March with record backlog as the demand environment is strong yet the supply is constrained.

“And we haven’t seen those plans change and that demand remains kind of at the same level it was in January. And which means that we have a full order book, and we’re – really, our challenge is how to get these tools to customers. And I would say 100% of my conversation with customers right now are about how to get the tools they need to them. And I think that will continue for some period of time. And as Doug said, we will reassess after that period to see how demand is being affected.” -Tim Archer, CEO

Lam is forecasting for June revenues in fiscal Q4 to be higher than March with current operational performance. With that said, Lam is not providing exact financial guidance due to covid uncertainties.

Xilinx

Xilinx beat earnings but issued soft guidance. Revenue came in at $833 million and EPS of $0.94 cents compared to expectations of $827 million and $0.92 cents EPS. Revenue growth was 12% year-over-year and EPS growth of 8%.

Xilinx guided for revenue of $660 million to $720 million in the current quarter, down 19% year-over-year and down 9% QoQ. This is due to weakening demand for communications products and “macro-related weakness.” Xilinx did note there was strong overall growth in the data center. The company is guiding for full year revenue of $3.21 billion to $3.28 billion compared to previous full-year sales of $3.4 billion.

Xilinx is seeing issues with demand. We should know more with Intel’s report if this is a trend across semis or unique to Xilinx. Areas of weakness for Xilinx include Automotive, Broadcast and Consumer. Areas of strength included data center and wired/wireless group.

“The Data Center Group performed as expected with strong sequential growth primarily due to contributions from compute acceleration, driven by a mix of both cloud and high performance compute customers. We saw notable strengths from a hyperscaler deployment of a FPGA-based SmartNIC and our DCG opportunity pipeline continues to grow at double digits, particularly in video, HPC, database and fintech applications.” -Victor Peng, CEO