In the short video below, I go over Lyft’s record Q3 results. The company appears poised to exit covid much stronger, as revenue per ride and contribution margin reach all time highs during the quarter. Adjusted EBITDA has also been positive for two quarters in a row, a trend that will likely continue going forward.
Key trends should improve in 2022, which should benefit Lyft’s top and bottom -line. For example, business travel is still subdued, and a continued recovery in business travel is expected as vaccination rates increase. This should support an increase in rides, allowing Lyft to continue to scale its operations. I also discuss broader macro trends that contribute to Lyft's business model. Watch the find out more!
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
This article was originally published on Forbes on May 15, 2020,12:42am EDTForbes on May 15, 2020,12:42am EDT
Tech’s comeback since March has been nothing less than spectacular considering the backdrop of record unemployment and contracting GDP. According to a survey of fifty companies by FactSet, 60% had withdrawn guidance for the year. FactSet also estimates that the S&P 500’s earnings for 2020 have fallen 22% since the beginning of the year, while 2021 earnings have declined 13%.
Meanwhile, many tech stocks have reached all-time highs including one-day moves of up to 40% even when companies withdraw guidance. Twilio, for instance, rallied from $122 to $170 based on an 11% revenue surprise with total returns of 140% in the past two months. Twilio is hardly the exception with Teladoc up 115% and Fastly’s one-day move of 40% on May 7th.
Last month, Goldman Sachs analysts said in a financial note that the S&P 500 index concentration in the top tech companies—Facebook, Amazon, Apple, Microsoft, and Alphabet— was the greatest it has been in 20 years. Meanwhile, these mega-cap companies have reported mixed earnings results (Amazon) or pulled second quarter and full-year guidance (Facebook and Apple).
In a picture, this is what that looks like:
Tyler Durden, Zero Hedge from the article “"Poor Decisions" Galore As Newbie Millennial/Gen-X-ersPour Into Expensive Stock Market: https://www.zerohedge.com/personal-finance/poor-decisions-galore-newbie-millennialgen-x-ers-pour-expensive-stock-market
The saying “history does not repeat but it rhymes” has not yet applied to the dot-com bubble, when five years of euphoria burst into a 78% drop in prices over two years. Tech has largely gone unscathed as it has bumped oil from being the number one industry.
There is some solid support as to why this is not a tech bubble. Mainly, technology now runs nearly every industry. The second reason is that higher valuations are more sustainable today as the revenue growth from tech is much higher than other industries.
Tech Industry Growth has 40-80% growth with outliers up to 148%
In addition, cloud software and platforms also allow companies to scale proportionate to revenue growth. There is less overhead and this helps companies keep costs low as you can scale quickly in either direction.
Nearly a decade ago, Marc Andreessen famously said “software is eating the world” in an essay that spelled out how software was disrupting nearly every industry with “real, high-growth, high-margin, highly defensible businesses.” He questioned the low PE ratios of companies like Apple, which at the time was trading at 15 P/E. Notably, Andreessen’s essay came in close proximation to Facebook’s public offering, as well as Zynga, Groupon, Skype and many other exits for his firm’s portfolio.
Sign up for I/O Fund's free newsletter with gains of up to 403% – Click hereSign up for I/O Fund's free newsletter with gains of up to 403% – Click hereClick here
At the time, he pointed out that fast-growing companies like Facebook and Twitter were conjuring up memories of the dot-com bubble in 2011: “With scars from the heyday of Webvan and Pets.com still fresh in the investor psyche, people are asking, “Isn’t this just a dangerous new bubble?”
Perhaps just as dangerous as thinking any fast-growing tech company with a high valuation is not a bubble is the idea that any fast-growing tech company with a high valuation is a bubble. This is because the market has a way of doing what you least expect.
Pre-Pandemic, Silicon Valley Grew Quiet
If looking at the number of IPOs, we are not in a bubble as the years 2018-2019 saw less than half the number of IPOs during 1999-2000.
Beth.Technology
However, the value of IPO exits does look bubble-like. According to Pitchbook, the value of exits for venture-backed companies hit a record $256.4 billion in 2019. 82 venture-based IPOs accounted for 78% of the total value, or $198.7 billion – more than the previous four years combined (this was partly due to Uber and Lyft).
The exits were successful for venture capitalists as the $223 billion in post-money valuations came from $35 billion in venture investment, or a return of 637%. In turn, this means the public markets paid a significant premium.
Also, the years that followed the dot-com bust saw a serious leveling off. It is the absence of early stage deals in tech right now that is more concerning. Pre-pandemic, Silicon Valley was already noticeably quiet.
Forbes also recently reported on the slowdown in venture capital being ill-timed with the effects of the coronavirus forcing many startups to shut down. This followed a 16% drop in venture capital deals in Q4. The CEO of Starsky Robotics stated, “the downpour of investor interest became a drizzle.” As the article points out, the failure rates of 2020 could end up resembling 2001.
Recently, I published on the lack of venture funding in the Series A and Series B stage for tech companies. When combined with the data on initial public offerings from last year, we see a clear signal from venture capitalists that the exit window may be closing (or is already closed).
For instance, as reported by The Information, early-stage software deals in 2019 declined from 388 deals down to 279. In the seed stage, the number was below 200, or the lowest in six years. According to Inc.com and CB Insights, the estimate for Series A funding has dropped from one in three startups to one in six startups with an estimated 1,000 startups not receiving funding this year.
Meanwhile, the public market is flooded with high growth software companies that report over 40% growth due to an inverse law of small numbers. Basically, it’s easier to post rapid growth early-on but harder to sustain this growth.
Conclusion:
Many investors focus on valuations as the indication for a bubble. As pointed out, this can be misleading as hypergrowth companies are often outliers. In fact, the companies that challenge key metrics the most are often the ones that see the most upside. Amazon and Netflix are prime examples.
Valuations aside, there is a glut of high-growth software companies on the market that have not been tested by a less-than-ideal economy or slowing business cycle. This may not create a bubble, but it can create losses for both institutional and retail investors as the market attempts to guess the winners and is confronted by those that fizzle out.
The more that startups shut their doors, as well, the fewer cloud software customers there will be as the two ecosystems are closely intertwined. The recent pullback in March did not afford the opportunity to find the stable winners before hyper-speculation resumed.
This article was originally published on Forbes on Mar 25, 2020,09:10am EDTForbes on Mar 25, 2020,09:10am EDT
Uber burns over $4 billion annually yet the company is stating it will be profitable by the end of 2020.
Further analysis is required to look deeper into whether Uber is able to accomplish what it has promised or if the company is buying time and appealing for a more promising valuation before it has to raise more cash. The latter is something Uber is incredibly skilled at as the company now trades well below its last private valuation of $76 billion with a current market cap of $35 billion.
Despite the coronavirus causing the company to cut back operations nation-wide with declines of up to 80% in ride-sharing volume, Uber is receiving analyst upgrades based on the company’s variable cost structure. These analyst upgrades come despite slowing growth and $7 billion in debt on the balance sheet while being deeply unprofitable with record-setting adjusted net losses of $4 billion in 2019.
The overall financial performance defies the CEO’s statements, which are based on a single non-GAAP reporting measure “Rides Adjusted EBITDA.” This non-GAAP reporting measure is new to Uber as of Q3 2019 and replaces the less favorable contribution margin.
Overview of Uber:
Uber’s revenue in the fourth quarter of 2019 grew 37% to $4.07 billion. However, it reported a net loss of -$1.1 billion compared to a net loss of -$887 million in the same period last year. EPS was negative -$0.49 compared to -$0.52 expected.
Full-year 2019 revenue grew 26% to $14.1 billion and net loss was -$8.5 billion compared to a net profit of $997 million for 2018. Stock-based compensation was $4.6 billion in 2019 for a net loss of $4.1 billion and adjusted EBITDA of negative -$2.73 billion.
Notably, Uber sold some operations in Russia and Asia, which provided one-time income, and caused the company to post the $1 billion in net income in 2018. In 2017, Uber posted similar losses at $4 billion.
Monthly Active Users (MAU) increased 22% to 111 million in the fourth quarter of 2019 helping to boost the company’s revenues. The Uber Eats promotional expenses continue to drag the company’s profits despite being the segment with the most growth.
Earlier this year, the company sold its food-ordering business in India to a local company Zomato in exchange for a stake in the company.
Uber investors are encouraged by the non-GAAP Rides Adjusted EBITDA metric, which breaks out the profitability of Uber’s ridesharing business separate from Uber Eats and other bets, such as autonomous vehicles. Uber reported a 281% increase in Rides Adjusted EBITDA from $195 million to $742 million in Q4 and a 34% increase from $1.54 billion to $2.07 billion in full year 2019. The company’s overall EBITDA margin is -57.58% compared to the sector median of 12.99%.
The company stated on a recent call to investors that they have $10 billion in unrestricted cash. Uber carries long-term debt of $5.7 billion and a capital lease obligation of $1.5 billion, or about $7 billion total in obligations. Despite the combination of steep losses and ample debt, the CEO stated the balance sheet is “incredibly strong” due to the absence of short-term debt.
There is clearly a sharp contrast between the financials and the CEO’s statements, which means Uber has a lot to accomplish this year in the face of coronavirus shutdowns.
Analysis of Adjusted Rides EBITDA:
Uber has been opportunistic in breaking out adjusted EBITDA for rides as a means for reaching profitability. In the 10Q details, Uber does not break out the number of ridesharing trips and monthly active users separately from Uber Eats and Freight although there is a statement in the summary that Gross Bookings grew 20% and Eats grew 73% year-over-year.
Gross Bookings is defined as “the total dollar value” including taxes, tolls, fees and without an adjustment for consumer discounts and refunds. Essentially, Gross Bookings is similar to Ride Revenue, the metric that Lyft reports. Uber’s Gross Bookings growth is actually quite low at 20% compared to Lyft’s Ride Revenue at 52%.
Some of Uber’s weaknesses and risks are known to the market. This is one reason the price-to-sales ratio is very low at 2.3 with a forward price to sales of 1.7. Compare this to other companies that went public last year, such as Zoom Video with price to sales of 53 and a forward price to sales of 39, or Slack with a price to sales of 17 and a forward price to sales of 14.
Uber may look attractive to some investors at this current valuation given the risks. However, this is a company that is far from true profitability across all revenue segments.
Subsidies Inflate Demand
I’ve been critical of the ride-sharing business model since pre-IPO when the media speculated Uber would reach $100 per share.
The problem with the ridesharing business model is that the more money the business makes, the more the business loses. This is reflected in the past three years of financials between 2017-2019. Essentially, Uber and Lyft used private funding to subsidize rideshare demand in the year leading up to their public filings.
In 2017, Reuters published that Uber passengers pay only 41% of the actual cost of their trips, citing research from transportation consultant Hubert Horan. At the time, Reuters warned that this creates an “artificial signal about the size of the market” after Uber had released limited financial data as a private company that showed losses of $708 million per quarter.
The cost of the ride is not high enough to cover the cost of the ride, therefore, we see unusual losses. However, if the companies raise prices, demand will decrease. These companies must chose between subpar growth in order to become profitable or subpar earnings in order to drive demand.
The markets did not reward Uber for driving demand at the expense of its bottom line. Instead, Uber became the biggest IPO loss in history. Uber is attempting a new path, which is to pare back on losses while accepting lower demand and revenue at 20%. This is most evident in the
The problem with this scenario is that the market may not like slowing growth either. In fact, we see “Trips” growing 32% year-over-year, which is much lower than the 100% growth reported in the S-1 Filing when trips had doubled from 5 billion trips in September of 2017 to 10 billion trips in September of 2018. (Revenue should be aligned with number of trips, and also doubled, unless subsidies were very steep.)
It’s also important to note that Uber removed the original non-GAAP measurement “Contribution Profit (Loss)” and replaced it with Adjusted Rides EBITDA. This is because the Contribution Margin was too revealing of Uber’s losses with a declining rate from 14.7% in Q2 2018 to 8.2% in Q2 2019.
In an effort to appear profitable in the ridesharing segment, Uber has stopped reporting on contribution margin. – UBER
Lyft: Pureplay Model
Lyft provides a model for a pureplay ridesharing company with a reported 52% year-on-year increase in its fourth-quarter 2019 revenue to $1.01 billion up from $669 million. This is much higher growth than the 20% Uber reported for its ridesharing segment.
For the full-year 2019, revenues increased 68% year-over-year to $3.6 billion
Net loss increased to $356 million from a net loss of $248.9 million in the same period last year, yet on an adjusted basis, the net loss margin was slightly higher in the current year at 35% compared to 37.2%.
Adjusted EBITDA loss margin improved from 37.5 percent in Q4 2018 to 12.9 percent in Q4 2019. More importantly, Lyft has remained consistent with its non-GAAP metrics and reports a contribution margin of 54% up from 45.5%.
In my opinion, Lyft’s financials are more straight forward in how the ridesharing model can achieve profitability while maintaining enough growth to satisfy tech investors.
Beware of a Changing Story
The last thing to note, which is quite important, is the story for Uber is changing frequently. Uber Eats is driving the growth and is the more stable part of the business in the current coronavirus economy, yet a portion was sold off in India to lower expenses and achieve profitability.
Autonomous vehicles were a major part of Uber’s story due to concerns around drivers who bring never-ending legal battles on the misclassification of employment. In as recent as January, autonomous driving was the most likely path to profitability for Uber. This story has changed entirely in two months’ time, yet it will be quite challenging for Uber to separate autonomous vehicle R&D from its financials.
CEO Dara Khosrowshahi highlights the “variable cost structure” of the business, which translates to not having to pay drivers employment benefits. Notably, the misclassification of employment is receiving renewed criticism with the ride-sharing business shut down from the Coronavirus.
The workforce of 5 million drivers have no unemployment, sick leave or health care. Although company is offering sick pay for drivers who test positive for the coronavirus, this does little for the majority of the drivers who are ordered to stay home to avoid the spread of the virus. Now, the company is now asking the government to offer the drivers benefits while Uber highlights its variable cost structure to investors.
Conclusion
The statement that Uber will be profitable is confusing at best as the company cannot simply separate the ride-sharing segment in order to make this claim. Even if this was possible, the ride-sharing growth is the lowest across all segments at 20% and ignores the catalysts of Uber Eats and the autonomous driving division.
In a recent call, Khosrowshahi stated the company has $10 billion in unrestricted cash, yet the CEO also stated the company could lose up to $6 billion from the Coronavirus quarantines. I believe Uber will need to raise more money in the near future and will do (and say) whatever necessary to raise its market cap before doing so.
As Apple’s stock price powers to new highs, returning over 60% YTD and touting the highest market cap in history, now might be a good time for investors to reflect as Apple trades at resistance. With upwards of $260 billion in revenue, a profit margin of 22%, Apple is a cash-generating machine. It produces around $50-$60 billion in free cash flow annually, with reserves of over $100 billion. It is extremely kind to shareholders, with one of the largest buyback programs on the Street. In fact, Apple has spent around $120 billion in stock buybacks since the beginning of 2018, and kicks out a dividend. Apple is, without question, one of the greatest businesses the world has ever seen.
However, there are times where great businesses do not always make great stocks at times. If we look at the current valuations, Apple’s stock price is trading with a P/S of 4.5, a P/E ratio of around 25 and a price to free cash flow of 20, as of the writing of this report. While these valuations are relatively mild compared to some of the valuations being shopped around in the tech industry, for a company with a market cap of $1.3 Trillion, these valuations suggest future growth in order to justify current prices. It is here, with their future growth prospects that I see caution.
Apple’s Stock Price is Up While Revenue is Down
In 2019, the company had revenue of $260 billion, down from $265 billion in the previous year. Analysts originally expected the company’s revenue to grow to $274 billion, or 5.3% this fiscal year, and around $294 billion or 7% in the following fiscal year. This will be slightly below the 7.2% growth that is expected among information technology stocks.
In the latest quarter, its growth rate was just 1.8%, significantly lower than what other FAANG companies reported. Facebook revenue grew by 28% while Amazon rose by 23%. Netflix and Google had revenue growth of 31% and 20%, respectively. Even Cisco grew by almost 5%. And for further comparison, the US economy expanded by 1.9%.
Apple’s poor growth would have tanked any technology stock, yet Apple’s stock price is up 60%. Though I believe Apple has the cash as well as the capability to pull numerous pivots in its future, the loss in revenue will likely accelerate before these pivots can manifest, which will compress margins, and thus affect current valuations.
iPhone Saturation – Will it Affect Stock Price?
If we dig deeper into their latest revenue report, we discover that smartphone sales declined YoY by 15%. Saturation is an inevitable phenomenon for revolutionary inventions. For example, Utilities and wireless phone coverage were once considered hyper growth sectors at one point in time, but the inevitable saturation took hold, leading these companies to now be considered defensive value plays. Saturation appears to be taking hold in the smartphone market, which is why we are seeing a deceleration in smartphone sales YoY; with an expected 2% fewer sales per year going forward.
Furthermore, with saturation, we see manufacturers start to slash prices to capture fewer units sold. This quarter, Apple reported that iPhone sales declined by 9% since the previous year and that they are also reducing the price of their new iPhone 11. Both news items point to the reality of market saturation.
The iPhone is arguably the greatest tech driver in history, as well as Apple’s primary source of revenue. So, Apple will have to cover the losses with their other products to make up the difference. This is where I see the inconsistency between the stock’s valuations and their current offerings.
Services
Apple’s services generate revenue through various subscription fees. These fees come from several well-known Apple services, including iCloud, iTunes, Apple Music and various types of apps.
Although these services grew by 18% this last quarter, the total revenue generated was only 37% the size of iPhone sales. This level of growth is simply not enough to cover decreasing revenues from Apple’s iPhone sales.
Furthermore, there are also concerns in the service sector. The problem is that the services that Apple offers have relatively lower margins than the iPhone. A good example of this is Apple Music. Apple doesn’t disclose Apple Music’s gross margins, but going by Spotify’s own margins, we have every reason to believe that Apple is similar. Spotify’s gross margin is just 26%, which is smaller than Apple’s iPhone net profit margin. It’s important to note that the services segment of Apple is tied to the iPhone and may experience slower growth as the smartphone market continues to saturate.
Apple +
There’s also a lot of hype around Apple TV+’s potential at filling the growth gap. According to the Wall Street Journal, Apple is spending more than $6 billion on new content, and it’s only likely to go up as the streaming war continues.
At current prices for the service, it’s impossible for Apple to make a profit even with a hundred million subscribers. Apple can still be a contender in this crowded space, but it will likely take time, and be more of a cash drain than a generator in the short-term. Meanwhile, smartphone saturation is only going to continue, which means that Apple TV+ will not be able to solve Apple’s current revenue problems.
Apple Pay
Apple Pay is another service that Tim Cook talks about repeatedly. During the latest earnings call, he revealed that the service had surpassed PayPal in terms of volume of transactions. The service is also expanding into various markets. Additionally, Cook also praised Apple Card, a new product developed in collaboration with Goldman Sachs that promises to expand Apple’s revenue.
Apple Pay has the potential to generate a large cash flow, but there are questions about how big it can get. In the trailing twelve months, PayPal had a gross revenue of $17 billion and a net income of $2.53 billion. Visa and Mastercard had a combined revenue of $38 billion and a net income of $17 billion. So even if Apple were to dominate this market, its consolidated net income will not be sufficient to cover the loss in iphone sales. And, more importantly, it will take time to take market share, which will not solve the revenue issues Apple currently faces.
Apple Wearables
Another area that’s worth looking at are Apple wearables. In the last quarter, revenue from wearables, home and accessories rose by 54% to $6.5 billion. This growth was driven by the success of various Apple products, particularly Apple Watch, Airpods, and BIS products.
These wearables are great products that do have higher margins, just like the iPhone. The big question, however, is if they can grow fast enough to offset losses in iPhone sales. Despite its great performance, Apple’s wearables, home and accessories business is still behind the Mac division, which earned $6.9 billion during the fiscal fourth quarter.
Meanwhile, Apple’s iPhones generated $33.36 billion in revenue this final fiscal quarter, despite a 9% decrease year on year. So the important point in all this is that, despite their tremendous growth, Apple wearables and accessories are just not in the same league as iPhones.
Buybacks and Apple’s Stock Price
Any other tech company with decelerating revenue, and the likelihood of continued deceleration in the near term, while facing an end of cycle environment that will eventually affect the consumer, would not see their share price increase to such valuations. So, it’s worth noting the importance of one of Apple’s key components in their current strategy, which is not a permanent solution.
Apple has turned to buybacks to boost its stock and spend its cash hoard. Since January last year, the company has spent more than $120 billion on buybacks. The question, though, is how effective these buybacks are to retail investors.
Large companies with growth problems have used buyback programs as short-term solutions for sluggish performance. In the short-term, share repurchases can help boost a stock price. However, in the long-term, Apple’s share price growth will depend on the performance of certain specific segments. The chart below shows Apple’s diluted EPS growth in the past five years.
Source: Ycharts
Technical Outlook for Apple’s Stock Price:
Structure
As a technical analyst, I do not go against the trend until I see either a rewarding risk/return set-up at key levels, or a noticeable shift in trend emerges. Apple is currently in an incredibly strong uptrend since bottoming in December of 2018; however, Apple’s stock price is at a significant level.
It’s worth noting that it’s 2019 uptrend appears to be in a corrective fashion – a series of 3 waves up, which is always point of caution. Typically, when I see this, it points to a correction in a larger degree prevailing trend.
Furthermore, if we take the length of the first wave up off the December low to its peak in May of 2019, it went up 51.63%. After bottoming out in July of 2019, Apple’s stock price began the current wave up. You’ll notice that Apple’s share price is at the symmetrical percentage growth of the first wave – 51.63%, which coincides with the 100% extension.
In technical analysis, the market tends to move in symmetry, especially in corrections, and the $258-$262 range will act as major resistance for Apple’s continued charge up. This is exactly what we have seen as well, as Apple’s stock price has been hovering around this level for many trading days. If it can close above the $262 range and hold on to that region, I believe there is a strong possibility that it will trade up to the 250% extension of the 30-year cycle uptrend of around $300.
However, if Apple cannot break above the $260 range, it could retest the $222 price range. If it falls below this range then the yellow target box will be in play, thus confirming that the uptrend from the December low was merely a powerful correction in a much larger decline.
If we look at Apple’s internals, a few points jump out. For one, the volume is decreasing as the stock price is increasing, suggesting there’s not broad participation in this uptrend, and that may be the result of weak buying volume on top of even weaker selling pressure. If this is the case, as soon as buyers get exhausted, we could see a sharp decline.
The MACD is currently at its highest point in Apple’s history, the second highest was in September of 2018. An elevated MACD is a bullish sign, but when we hit extremes, it becomes a point of caution. The RSI is in a current uptrend along with price. If this uptrend breaks along with the price, we could be in for a retest of important support zones. I will be watching the RSI for a clue to a change in momentum.
Knox Ridley runs a premium site alongside Beth Kindig. You can check out her fundamental analysis on Apple on this site.
We want to make sure you’re aware that Uber’s lockup period expires on Wednesday. According to CNBC and MarketWatch, this will cause 763 million shares to become available on 1.7 billion total shares, or roughly $22 billion in shares … that’s a lot of liquidity required for a company that has troubled fundamentals.
I’ve covered Uber extensively since its IPO. I won’t repeat all of the points here but you can find links to the past analysis below.
We’ve seen solid companies like Zoom experience drops after the lockup period. We’ve also seen IPO hype companies like Beyond Meat drop 22%.
We believe Uber will be hit from all sides. Employees are not happy with Uber. There’s been layoffs since the IPO and a change in management, including controversy around the former CEO. Early investors are likely worried about their returns, especially with the heat on WeWork, another one of Softbank’s big bets. The company is at a thresh-hold where early investors can still make a decent gain.
I’m not too concerned with an “earnings beat” as we don’t believe the company will withstand the liquidity on Wednesday. Lyft had an earnings beat and the stock declined the next day (on that note, I’m sure Lyft will be affected by the lockup expiration too).
FactSet analyst estimates are at a loss of 70 cents per share on revenue of $3.63 billion.
Uber’s price action is not much different from our market update last week. In short, Uber appears to be in a larger degree, 3 move correction – outlined by the purple (A), (B), (C) in the chart. The (A) wave down unfolded in a 5-wave pattern, bottomed in October, and is now correcting upwards in a 3-wave fashion, which is the (B) wave. The micro structure of Uber in its (B) wave does not offer confidence that this is the beginning of a new uptrend, but instead just a short pause.
The red lines indicate the retrace levels of the (A) wave. Uber just barely broke the 23.6% retrace level before turning back towards support. We typically see 3 wave corrective moves operate with symmetry on the larger degree and smaller degree. This will be heavy support, and is also the likely target for the corrective (B) wave just before the final leg down begins. If Uber cannot touch this level, and instead turns down from current levels, I will move my final target down lower.
The red bar across the screen indicates a strong support region for Uber around $31.40-$30.50 This region was defined by 4 daily major volume spikes, indicating institutional money is likely allocating a position, which implies that these levels will be strong zones of support/resistance. The current level is major for Uber, and if it breaks through, expect new lows for Uber and for the final (C) wave down to be in progress.
Our stop for the short position will be at $40.25. The reason for this stop is twofold: (1) it’s just above the 61.8% retrace level indicating strong momentum; (2) it’s just above the $40 price cluster.
This price level marks two of the largest volume spikes in Uber’s daily trading. In other words, it’s likely that “smart” money as well as many other investors got trapped at these levels. If Uber can break through the level of selling that should occur at these levels, it’s a sign of more upside to come.
We have been shorting Uber since its IPO, and are pursuing this set-up.
If you want to wait for confirmation, wait for Uber to break support at $30.50, and place a stop at $31.50. This is a more conservative short. Long-dated puts with a strike price of $30 can also act as conservative insurance for a possible market downturn.
I grew critical of Apple earlier this year when it became clear the company would decline in revenue year-over-year, yet investors and analysts alike continued to pump the stock. With yesterday’s earnings report, we have further confirmation that Apple is not a growth company anymore although it continues to trade at growth valuations.
While many celebrated yesterday’s earnings report, there were notable signs of erosion. To start, Apple has lost $5 billion in revenue year-over-year, from $265 billion to $260 billion. This is despite having the “best fourth quarter ever,” according to Tim Cook. The truth is that the EPS was higher due to buybacks.
My analysis in MarketWatch published prior to earnings, pointed out that the iPhone was exposed to macro smartphone saturation. Those numbers showed a deeper decline than overall revenue with a $22 billion decline reported year-over-year.
Although Apple has ceased reporting smartphone unit sales, the numbers reveal there are fewer smartphone units being sold. Moving forward, with the recent release of the iPhone, Apple will contend with a lower average sales price. This is bound to affect smartphone device revenue moving forward, which declined at a rate of 15% year-over-year.
Overview of Mobile Saturation:
The smartphone market contracted to 1.462 billion units in 2017 and to 1.420 billion units last year. While almost 1.5 billion smartphones sales a year globally is substantial, the law of saturation drives down prices. I wrote about the price effects of mobile saturation in March, prior to Apple lowering prices for the first time with the iPhone 11.
China represents about one-third of smartphone penetration compared with the U.S., at one-12th. Pricing wars are evident in Asia, where China’s Huawei has grabbed market share to become the world’s fastest-growing smartphone seller. The company has seen a 66-fold increase from 3 million units sold in 2010.
Samsung may be the true bellwether for mobile, as the company is in first position for total smartphones shipped and is the world’s largest manufacturer of memory chips. In the first quarter, the company reported a 60% drop in operating profits, followed by a 56% decline in the second quarter. Analysts expect another decrease in the third quarter. Smartphone units have been making lower highs and lower lows over the past two years.
Notably, IDC forecasts the pricing wars will continue with 5G handsets in Asia, as low-cost models are expected to hit the market next year. In the U.S., Latin America and Japan, the average selling price (ASP) of a 5G handset will be around $1,000, while it will be $600 in China.
Don’t Believe the Earnings Beat:
The fiscal Q4 earnings beat is at odds with overall performance. Although profit topped expectations, this is the first time since Tim Cook took over in 2011 that Apple declined in profit in all four quarters of a fiscal year.
The media touts the services revenue as the answer to the iPhone decline. As we saw this year, double digit declines on the segment responsible for $165 billion in revenue (iPhone) is not easily staved off by a revenue segment posting $40 billion per year (services).
If one did not look closer at the numbers, it would easy to think services was a major growth segment. We see the growth was at 18%, which is below the 20% traditional benchmark that defines growth. As of now, this doesn’t appear to be the answer to the gaping iPhone decline. This is proven by the annual decline in overall revenue.
Wearables growth of 55% to $24 billion in revenue is decent. However, again, the iPhone decline was steep enough at $22 billion to wipe out the entire Wearables category.
I had pointed out in a Fox Business News interview prior to earnings that its unlikely lightning strikes twice with the iPhone as it’s not only one of Apple’s best growth drivers historically, but it’s also one of the best growth drivers we’ve seen across the tech industry. This is evident in last year’s smartphone revenue of $165 billion, which I also pointed out will be Apple’s peak year in mobile.
Note: although I provide an entry price for Apple on Fox Business News, this is something Knox Ridley specializes in and covers as a contributing analyst to our premium site Tech Insider Research. You can catch his detailed technical analysis published on Seeking Alpha next week.Knox Ridley specializes in and covers as a contributing analyst to our premium site Tech Insider Research. You can catch his detailed technical analysis published on Seeking Alpha next week.
Here is a snapshot of Apple’s performance over the past year. If the stock ticker was not attached to the graph, it would be hard to guess this is the world’s most valuable company.
As most investors know, Apple has plenty of cash. It produces about $50 billion-$60 billion a year in free cash flow and has over $100 billion in cumulative reserves to fund new projects. While analysts are optimistic about many new pivots, these will weigh on margins. This is especially true for Apple TV+, which comes with a high content bill and low subscription revenue, as the OTT streaming service will be bundled for free or priced at $5.
Keep in mind, Apple’s cash reserves are seeing the effects of the buybacks, and Alphabet has now surpassed Apple in cash reserves. Apple has $102 billion compared to Alphabet’s $117 billion. This is due to Apple spending $122 billion on stock buybacks since the beginning of 2018. Alphabet is growing, as well, at a rate of 20% year-over-year.
Analysts who are raising Apple’s price target based on fiscal 2020 cite Apple TV+ revenue as a primary reason with little discussion of the forecast for Apple’s main growth driver. Apple TV+, which will compete with Amazon Prime Video, Netflix and other TV-streaming services, is more likely to cause bottom-line losses in the short term as Verizon is offering the subscription for free while requiring costly original content from headliners such as Oprah. (She doesn’t come cheap.)
In my opinion, these new price targets seem more like an attempt to cover current positions, as the majority of institutions are holding this stock at lower entry points.
Many Apple proponents will use the stock as an income stock, yet the company trades at growth valuations. The buybacks Apple is doing on a consistent basis is alarming for a tech company, who should be innovating with cash reserves rather than propping up the stock price to beat earnings per share.
In the most recent quarter, Apple disclosed it had spent $17.9 billion to buy back 92.6 million shares during the fiscal fourth quarter. During the three prior quarters in the fiscal year, Apple had spent $49.2 billion. There is $78.9 billion remaining in its stock buyback program. The reduced share count this year has helped Apple beat earnings per share of $2.91 with $3.03 reported with fewer outstanding shares as a result of the buyback.
Apple has bought a total of 2 billion shares over the past six years, which brings the shares outstanding to their lowest level since 1999, according to Charlie Bilello, who is also a Seeking Alpha contributor.
Conclusion:
Apple will be particularly exposed to lower consumer confidence when this occurs. Mobile saturation is already showing its effects with a $22 billion loss in iPhone revenue year-over-year. In fact, the saturation of the iPhone could prove to be one of Apple’s biggest challenges to date, as the company attempts to make many pivots, all of which will add noise to the big picture that mobile’s golden days are behind it. This will not be resolved by a single quarter’s earnings “beat,” nor will it be absorbed by services revenue until at least 2023.
If your investment thesis is to focus on primarily cash reserves and cash flow, while ignoring growth and the leverage of buybacks to boost EPS, then Apple is likely in your portfolio. As a tech analyst, who look towards future growth for the highest gains, this is a company where I am personally on the sidelines and is not a company I can recommend long-term.
A version of this analysis appeared in MarketWatch on October 29th, 2019. It has been updated and lengthened post-earnings.A version of this analysis appeared in MarketWatch on October 29th, 2019. It has been updated and lengthened post-earnings.MarketWatch on October 29th, 2019. It has been updated and lengthened post-earnings.
I want to drop a quick note about my analysis published in MarketWatch this week on Apple. The company has released all iPhone 11 models simultaneously this year, so there’s a chance they do well short-term. Longer term, releasing all models is very likely to negatively impact Apple in future quarters.
I struggle to see why Apple is trading higher than its peak in 2018. Even with an earnings beat, we will see a decline in overall revenue YoY. We are seeing double digit declines in Apple’s top revenue segment, the iPhone. The effects of smartphone saturation will be even more evident when consumer confidence dips. This is why Samsung is seeing 50% lower operating margins – consumer confidence in China is at a 2-year low and pricing wars are driving prices down (a major warning sign of saturation). Apple has followed by lowering prices.
Regardless, with or without an earnings beat, Apple’s annual revenue will be lower this year than last year. Any other tech company would experience a major sell-off if reporting lower YoY revenue.
Apple has a lot of cash, but to expect a synchronistic handoff between services (or any other pivot) and the iPhone is overly optimistic.
Regarding Lyft, this company is able to report cleaner numbers than Uber. I am very bearish heading into Uber’s lock-up expiration and will personally be betting against both companies again. I have half my position in now, and will lock-in the remaining half of my short position after Lyft reports in the event we see an increase in price from Lyft’s earnings. This will be round four for me on these shorts.
Unlike most tech stocks, Microsoft’s stock price has over 30 years of trading action to analyze. With more data to analyze, I tend to lean heavier on Elliott Wave theory to predict Microsoft’s future. stock price because of the many layers of wave patterns that will naturally unfold over time.
This is a guest post provided by Technical Analyst, Knox Ridley
This article will lean exclusively on Technical Analysis as we start from a monthly chart and zoom into a daily chart to reach the conclusion that Microsoft’s stock price may have some upside left in the trend, but a sharp decline is in the near future, followed by a multi-year renewed uptrend.
Multi-Decade Picture of Microsoft’s Stock Price (monthly charts)
The red extensions are based off the length of Wave I, and then placed at the base of Wave II. The extensions are thus measurements of Wave 1 combined with the internal Fibonacci Ratios (outlined on the right of the chart).
Above is the monthly chart on Microsoft’s stock price going back to its IPO. We have a massive 5-wave pattern unfolding that perfectly aligns with Fibonacci ratios. The exact ratios we use on a daily chart are thus present on a monthly chart, and if you follow the ratio lines in red, you can easily see how the price reacts to these specific levels. It’s because of this that I lean on Elliott Wave as an estimation for the overall direction of Microsoft’s stock price, especially when we can analyze so many layers, and especially considering we are on the final leg of a 30 year 5-wave cycle.
The red extensions are based off the red cycle count that started at MICROSOFT’s IPO. The Fibonacci circles are based off the 3rd wave high and the 4th Wave low.
Not only can we use Fibonacci ratios to estimate support and resistance zones, but we can also use the same ratios to gauge the timing of an uptrend. I only use this technique on large trends, but as you can see above, Microsoft’s stock price tends to warp, bend and react to these levels, as well. In some instances, they act as strong resistance and support.
From my estimation, the price is coming to an inflection point between time and price. The price is moving closer to the 400% resistance circle in black, and is currently hovering between the red 350% and 338.2% price levels in red.
I’m expecting Microsoft’s stock price to make a distinct move within the coming weeks as we approach this inflection point. Either the price will turn down in a corrective fashion, or after bouncing around the resistance levels, we should see the price continue to the next level.
2009 Bull Market (weekly chart of stock price)
Each count has its own internal extensions, which match the color of the count. Red indicates the extensions of the large cycle count, blue represents the primary count off the 2009 low, and the orange represents the retrace level of 3rd wave within the primary count.
If we dive deeper into Microsoft’s price action on a weekly chart, we can see the uptrend from the 2009 low until now. Keep in mind, the large cycle uptrend that started from the IPO, which is highlighted in red, is composed of its own 5-wave structure. Since 2009, we have been in the final 5th wave of the red cycle count, and that count is comprised of the 5-wave primary count, which is highlighted in blue, circled numbers.
My best estimation of this primary count has us pushing to the end of a 3rd wave and possibly just now entering the 4th wave correction. Third waves are typically accompanied by peak technical and is present in the MACD, which is another indicator that we may be close to topping. Also, the 3rd wave will typically reach the 161.8% extension. In this case, we have an extremely extended 3rd wave that reached the 223.6% extension as well as the top of the trend line in blue.
I’m expecting the 4th Wave to correct to the target zone I’ve highlighted in the green box eventually, which is between the $120 – $92 price range. Keep in mind, the $92 price range, though may seem extreme, but it is only the 23.6% retrace level.
It’s worth noting the big picture ahead of us, and the inevitable downside we will face. However, it’s also worth noting that this could take months to play out before we hit a final bottom in the 4th wave drawdown. In the mean-time, I believe the daily chart offers some clues to the short-term direction of Microsoft’s stock price.
If we zoom-in further using the daily chart, we are looking at the final push of the 5th Wave of the 2009 uptrend. What’s worth noting is how well Microsoft has held up as the bulk of cloud stocks are experiencing significant drawdowns. That alone is a show of short-term strength, which should be noted.
Furthermore, Microsoft is trading into an upward sloping triangle pattern, which is highlighted in blue. Price has virtually been rangebound, sloping upwards in a narrowing band. Notice how the RSI has been moving in its own triangle pattern. When I see this, it tells me that the RSI is resetting for the next move higher. The internals are coiling, building up strength, while price is staying stable.
Seeing consolidation of both the price and RSI at all-time highs is bullish, in the near term. Today, Microsoft gaped through the upward resistance, making all new highs, which means we will likely see a continuation of the extension to new highs.
However, if we close below the $128.5 support region, I expect the 4th wave correction to be in effect. If we break to the upside, and close above the $146. 50 region, I expect the bull market in Microsoft to resume as we extend further in this 3rd Wave push.
Cloud is priced for perfection, even after a large rotation out of the sector that is still in progress. Microsoft’s earnings and short term technicals show that the price probable will extend further, extending the 3rd wave push of the primary count off the 2009 lows. If you want to play the long side, I would place a stop just under the $128.50 support region, and consider that the time to invest for the long haul is not at current prices.
This market environment is about playing momentum with tight stops. Even though the long-term analysis is showing a pullback in the future, there is still some opportunity to ride the remainder of this bull market with momentum, as Microsoft leads the way.
The big picture is to capture the final 5th Wave push after the 4th Wave correction takes place. When we bottom, Microsoft will be one of my core holdings as we get the final push of this 30-year cycle trend.
Another day, another headline saying Alphabet’s Google and Facebook are being investigated for allegedly breaking privacy laws and engaging in anti-trust behavior.
Google GOOG, +0.95%GOOGL, +0.98% has been the subject of three antitrust investigations conducted by the European Union, resulting in more than $8 billion in fines.
Now the company, which controls 31% of global digital ad dollars, will face the U.S. on anti-trust matters. A big question is if governments will be effective, as they may not understand how social-media and internet businesses operate.
In April 2018, Congress tried to piece together how Facebook’s FB, +2.74% platform works. It ended up being a disaster. Anyone who works in the mobile-ad industry knows that the mobile device, notorious for its massive data leakage, could be used to collect thousands of data points daily to reveal personal thoughts, behaviors and political preferences.
When Facebook CEO Mark Zuckerberg answered a question on how Facebook makes money — “We sell ads, senator” — he wasn’t fooling the ad industry. It’s well aware that Facebook sells audiences and identities, as the company’s ads would be worthless without extracting data points from the mobile device and aggregating them for targeting.
This isn’t your typical targeting of pizza (or beer) ads during football games. This targeting knows you better than you know yourself, as it monitors your actions with data science and look-alike modeling.
The only force that can stand up to the complex tracking methods used by Google and Facebook will be an opposite, yet equal, force. It will not come from governments, which think that paying for search results is the problem. Rather, the problem is the pervasive code and software that continually tracks people, which no competitor can compete with.
Turns out, there is an opposite and equal force in magnitude that has chipped away at the anti-competitive tracking that occurs in the browser with Intelligent Tracking Prevention (ITP). Yet it has not done so on the leakiest device of all: mobile. And that would be Apple AAPL, +0.85%.
Pervasive tracking is anti-competitive
Facebook and Google aren’t the only companies that track users on mobile and browsers. They simply have software and code in more places. For instance, Facebook’s software is in 32% of the top 500 app market — and up to 800,000 applications. They track billions of non-Facebook users with software that can track you whether you have navigated one of their digital properties or not.
There is no way to opt out of Facebook or Google from tracking you, as their tracking is simply everywhere. In fact, security experts, including Bruce Schneier of the Berkman Center for Internet and Society at Harvard, call such tracking outright surveillance.
The incredible depth of information those giant companies have on mobile and internet users is the “moat” that generates unprecedented cash flow in advertising. Both ad-dollar machines have inertia from the data being collected, and it doesn’t appear that the EU’s General Data Protection Regulation (GDPR), anti-trust lawsuits in Europe and the U.S., or the Cambridge Analytica scandal is going to slow those companies.
The flow of data is provided by tracking code across websites. Those include the Facebook “like” button and sign-in. It’s also done through software development kits (SDKs), such as Facebook Audience Network, which is installed in 32% of the top 500 apps on the market. Google simply acquired Android to have tracking across the majority of mobile, and then went further, acquiring AdMob in 2009. That ad network was especially popular on the Apple iPhone.
The moat that Google and Facebook have enjoyed comes from having first-party relationships with nearly every user who has a smartphone. This is called first-party data and is a loophole used to collect data even after a user is on another property where there is no relationship. For instance, Facebook uses first-party data to power ads on streaming service Hulu, but at this point, the first-party relationship does not exist with Facebook’s social network once someone is on Hulu, and this is done without explicit consent (by both Facebook and Hulu). Easy-to-navigate opt-ins are not offered, as it’s unlikely Hulu viewers, who pay for the app, would want Facebook accessing their viewing data if they had to opt-in.
Privacy issues aside, there is no way for another ad company to compete when Google and Facebook collect that much data. Other companies are copying their approach by tracking users with universal ad IDs, including leveraging Apple’s Identification for Advertisers (IDFA).
Apple’s ITP prevents browser tracking
To understand how technology can neutralize tracking, it’s important to look at Apple’s Intelligent Tracking Prevention measures, which were launched in 2017. Apple’s ITP placed a limit on how long cookies are available for third-party contexts by removing third-party cookies after 24 hours.
At first, ITP did not have an effect on Google, as users of its search service and other properties visit those sites daily and, therefore, are not considered third-parties. Some critics say ITP strengthened Google as one of few remaining options to target niche audiences.
In 2018, Apple continued to battle data collection on the Safari browser by shutting down finger printing, a method of triangulating a user’s identity through fonts, screen dimensions and plug-ins.
In March 2019, Apple announced ITP 2.1, which limited first-party cookie storage to seven days. To put that in perspective, a Google Analytics cookie, in theory, would last for up to two years. Safari can now delete it within a week.
Finally, in May 2019, Apple limited tracking to 24 hours, including Google and Facebook.
We’ve seen statistics from publishers where they get half the CPM value — cost per thousand impressions — as a result of ITP’s impact. If they can’t have good targeting, some of their sites become less worthwhile for their advertisers.
Google and Facebook are the companies most affected by ITP 2.2, which was released in May 2019. Still, the companies reported record second-quarter ad revenue — $16 billion for Facebook and $38 billion for Google.
That may be due to Apple’s Safari and Mozilla having a small share of browser activity, or it could be because Facebook and Google have daily first-party relationships with users. A third possibility is that it’s too soon to understand the effects of ITP.
Keep in mind, the browser is not nearly as powerful as the mobile device.
At the Advertising Week conference in New York last week, there was a presentation by Gadi Eliashiv of Singular titled “A World Without IDFA: The Implications for Marketers.” I caught up with him after the presentation to get more background on Apple’s Identifier for Advertisers, or IDFA, and the possibility of Apple restricting the identifier. Unlike cookies on the web, where there is a tag on the browser, mobile identifiers have much stronger tracking capabilities. The identifier belongs to the device and works across applications and devices.
Eliashiv pointed out that attribution, or the tracking of advertising’s effectiveness, will always be a reality as it’s important for advertisers to track return on investment (ROI), and this ultimately supports the mobile ecosystem for the development of new apps and features. He also thought the recent iOS 13 upgrade, which offers users the option to sign into apps via an email address that Apple generates, is a way of logging into apps and getting personalized experiences without having to give up personally identifiable information.
As Eliashiv said, if it were an easy decision, then Apple would have already made it.
Apple’s chance to make a statement
As of now, Apple has no plans to remove the IDFA, although for a company that insists it is a protector of privacy, at the very least, there should be better opt-ins. The changes made with ITP on the browser may not have had a big effect. However, the implications of Apple restricting IDFAs on iOS becomes more serious with the iPhone having a global penetration of up to 20% of smartphone sales.
Even companies that have fancier IDs, such as Trade Desk TTD, +3.04%, with its Unified ID, relies on IDFA to some extent, and any changes to IDFA would limit the ability to collect and stitch together fragments about the user.
That said, perhaps Apple should have addressed those issues before hyping its privacy efforts. As of now, Apple is enabling a lot of tracking with the IDFA, and this may not be an appropriate compromise for attribution as users are completely unaware their activity can be tracked across the entire device.
Furthermore, users don’t have any method for approving the software development kits, from Facebook’s Audience Network or Google’s AdMob.
Even with anti-trust regulations, this level of tracking will continue. That is, unless Apple steps in.
Core Platform Contribution Margin is described as “profit (loss) as a percentage of core platform adjusted net revenue.” This describes the profit margins from every ride-hailing trip or food delivery, (the latter applying only to Uber). This margin falls between gross margin and operating margin.
CPC Margin is calculated by starting with core platform net revenue, minus costs like marketing research-and-development costs, and the result is the “core platform contribution (profit) loss. Divide this by core platform net revenue.
The operating profit margin is lower than the Core Platform Contribution Margin as the latter doesn’t include R&D from autonomous vehicles. Conveniently, they’ve come up with a metric to remove these investments.
I’ve written about Uber and Lyft extensively and want to expand on a few key metrics that are causing further concern. There are thousands of key metrics across the technology industry not recognized by the financial industry. Venture capitalists rely solely on these key metrics to make informed decisions around which companies they should invest in.
Popular key metrics in mobile are monthly active users, daily active users, average revenue per user, churn and retention. For cloud SaaS, net retention rate, monthly retention rate, gross revenue retention, customer lifetime value and customer acquisition cost are a few key metrics that are important.
Here’s a snapshot of key metrics tracked by a VC on a SaaS investment:
Uber and Lyft’s Key Metric:
Core Platform Contribution Margin is described as “profit (loss) as a percentage of core platform adjusted net revenue.” This describes the profit margins from every ride-hailing trip or food delivery, (the latter applying only to Uber). This margin falls between gross margin and operating margin.
CPC Margin is calculated by starting with core platform net revenue, minus costs like marketing research-anddevelopment costs, and the result is the “core platform contribution (profit) loss. Divide this by core platform net revenue.
The operating profit margin is lower than the Core Platform Contribution Margin as the latter doesn’t include R&D from autonomous vehicles. Conveniently, they’ve come up with a metric to remove these investments.
Here’s a snapshot of Uber’s contribution profit (loss) worsening quarter-over-quarter (40)% and also the decline in contribution from the core platform over the past six months (87)% with an increase in other bets.
As a percentage of revenue, the Uber’s most recent contribution margin is 8.2%. Here is what the contribution margin looks like historically:
Compared to Lyft’s contribution margin, which is nearly 5x better and has been very consistent, as well:
Negative (or very low) contribution margins indicate that Uber is becoming less profitable as it gains more customers. This could be due to Uber competing in global markets and needing to lower prices to remain competitive.
The problem for Lyft, is that due to its association as a ride-share company, it will continue to be overshadowed by Uber’s performance. From a key metrics standpoint, Uber is weaker than Lyft. Regardless, both companies are weak fundamentally and provide an excellent opportunity to hedge long positions.
Additional Reading on Uber and Lyft’s Fundamentals:
Path to Profitability is a Dead End
Uber: Q1 Earnings
Uber’s IPO Lyft’s IPO
SECTION 2: Lyft Technical Analysis
By Knox Ridley
We don’t have a full year of price action for Lyft, but we do have some information to work with. First off, if we look at the Anchored Volume Weighted Average Price (AVWAP), which is anchored to the opening high, you’ll notice that Lyft’s price has predominantly stayed below that line, which is highlighted in aqua blue. Furthermore, the recent leg down is showing significant weakness, which can be seen in the separation between the AVWAP and the current price.
This same weakness is further highlighted between the separation in the long-term trend line, highlighted in black and the current trend price. As the RSI approaches the 60 line, the price is making a much lower low, which is not even approaching this trend line or the AVWAP. The continued separation between the AVWAP, long term trendline and the price is an indication of increasing weakness in Lyft.
Institutional Buyers/Sellers:
Those massive spikes in volume indicate institutions buying and selling at specific prices. Because of this, these price points will mark significant support/resistance zones. This is noticeable in how the price bounced around the institutional price clusters, highlighted by the black lines, before finally giving way to the downside last Tuesday, September 25th. This most recent selloff not only broke with force through this support region, but also the 61.8% extension, making all time new lows.
This is notable for a few reasons. One, there is institutional money that sees Lyft as a buy at these levels, so a large amount of money is pegged at these prices. Also, these levels indicate strong support for this very reason, which now will act as resistance.
Negative RSI Reversal:
The negative RSI reversal pattern is currently playing out in Lyft. This happens when the price is making lower lows, while the RSI makes higher highs. This is an indication of fading momentum, and a great indication of further downside ahead. This pattern is highlighted with the blue circles in the chart.
Furthermore, the internal strength of Lyft is quite weak. It has been stuck in bear internals, unable to barely break the 50 line before turning back down to oversold levels. In a bear market, the RSI will not cross the 60 line. When I see a stock unable to cross the 50 line before turning back, it’s a sign of a strong downtrend in play.
Elliot Wave:
There’s a clear first leg down (A Wave), corrective move back up (B Wave), and we are now in the process of a new leg down (C Wave). I’m targeting the 100% extension of the A Wave, which puts us in the $27-$27.50 range.
Typically, we’ll see the down legs in a corrective move that are of equal length (A=C). We will see bounces along the way, but as long as Lyft stays below its AVWAP and the long-term trend line, I will be targeting this zone as a profit taking zone for my short.
SECTION 3: UBER TECHNICAL ANALYSIS
By Knox Ridley
There’s slightly less price action with Uber. For a brief period, it engaged in a slight uptrend, spending half of its time trading above the Anchored Volume Weighted Average (AVWAP), anchored to the high of its open, which is highlighted in aqua blue. However, once it broke the AVWAP, it started a downtrend that appears intact and pointing to more downside.
Negative RSI Reversal:
The RSI is showing the same negative reversal pattern we see in Lyft. This pattern is very reliable in indicating that a new leg is developing in the downtrend. I think it’s very likely that we will make new lows.
Further evidence that the price is rolling over can be found in the KST indicator. The KST is one of my favorite change in direction indicators. It’s a combination of short-term and long-term Rate of Change indicators combined into one. As you can see, the KST has moved back up to the high, while the price of Uber is making lower highs. The KST is currently rolling over hard, which I use in conjunction with the other indicators to help me determine a short.
Elliot Wave:
All corrective retraces move in a 3 wave pattern (A,B,C). The 3rd leg (C), is typically the length of the first leg (A). Now the internal structure of these corrective moves can move in a 3-3-5, pattern or a 5-3-5 pattern, but the larger pattern is usually a 3-step move. Furthermore, when a stock has very little price action, the Fibonacci ratios tend to be great sign posts for a change in trend, or an indication of a further decline.
I currently see the A-wave as complete, and then the market began an brief uptrend – the corrective B-wave. I was expecting the B-wave to be longer, which I highlighted the likely regions in blue. However, once the price action hit the long-term trend line in black, which coincided with the 23.6% retrace line of Wave A, the downtrend commenced, which is an indication that the B-wave is over.
The market likes symmetry, and 3-leg corrections will typically exhibit this symmetry. So, the length of the A-wave (1st leg) will determine the length of the C-wave (3rd leg). This final push will typically be of equal length or an extended ratio of the A-wave (first leg). So, if the C-wave will be a similar length as the A-wave, that will put us around $25.75. This is my final target for my short position before we should see a corrective rally, which will either be the start of a new uptrend, or a corrective rally in a much larger 3-wave correction.
