This article was originally published on Forbes on Feb 3, 2020,05:07pm ESTForbes on Feb 3, 2020,05:07pm EST
Disney earnings tomorrow will report subscriber numbers for its OTT-streaming service tomorrow in what is perhaps the most anticipated earnings report of the week. One day after the launch, Disney announced that Disney Plus had attracted 10 million subscribers. App store data collected in the remaining part of the quarter suggests that Disney Plus continued to outperform.
Disney Plus Beat out Social Media on Many Days
When looking at the top-ranking free apps, Disney’s media entertainment app knocked out the #1 viral sensation TikTok on a few days and ranked higher than Instagram, YouTube, Facebook Messenger, Whatsapp and Snapchat on many other days.
Disney Plus ranking Dec 6th on iOS. Disney Plus ranked as number one in both free and top-grossingon Android on Dec 6th – APPFOLLOW.IO
Across top-grossing apps, Disney Plus held its own against the top-grossing gaming industry with many high-ranking days on Android and the iOS app store. This is rare as the majority of downloads for over-the-top (OTT) media apps come from OTT players, such as Roku, Amazon Fire, Google Chromecast or Apple TV.
Disney Plus outranks competing OTT apps during the first four weeks post-launch. Apptopia estimates 22 million downloads during this time span. – HTTPS://APPTOPIA.COM
While App Store data cannot guarantee an earnings beat, the app store ranking most certainly doesn’t hurt Disney’s chances for a strong earnings report tomorrow. Analysts are looking for either 20 million or 25 million, depending on the consensus source.
Netflix had highlighted search terms in their earnings report to prove the popularity of their programming. Interesting enough, according to Google, Disney Plus was the top trending search term in 2019, showing the popularity of the overall service as compared to any one show in particular.
Disney Plus was a top trending search in 2019, as reported by Google. – GOOGLE.COM
Ahead of Disney Earnings: Bullish Analyst Reports
For Disney’s earnings tomorrow, analysts are predicting adjusted earnings of $1.47, according to FactSet. This represents a decline from $1.84 per share a year ago. Estimates for fiscal Q1 2020 revenue are at $20.77 billion, up from $15.33 billion, according to FactSet. The software platform, Estimize, has an adjusted earnings consensus of $1.49 a share and revenue consensus of $21.18 billion.
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There is a string of analysts who have published positive notes on Disney. Rosenblatt Securities raised subscriber estimates for Disney+ to 25 million users by the end of the first quarter in 2020, up from 21 million. He calculated the penetration at 43% in households without children and points towards the popularity of Baby Yoda in The Mandalorian as an indication of the reach. (Baby Yoda also claimed a top search spot on Google in 2019).
Bank of America released a note at the end of December that stated Disney’s estimate for FY 2024 guidance of 60 to 90 million subscribers appears to be low. Their price target is $168 with a buy rating.
Amazon Prime, not Netflix, is at Risk
Many analysts wonder if Disney Plus will eat market share from Netflix. Instead, Amazon should be concerned as the Prime Video app may be pushed out as the number two streaming app as Disney’s user base grows. According to Apptopia’s data, over the first four weeks, Disney+ beat out Prime Video with total hours spent in-app.
Amazon Prime Now reported subscriber numbers of 150 million, yet failed to be ranked in the Top 20 most ranked shows. This includes Prime’s top hit The Marvelous Mrs. Maisel. This suggests that many of Prime Now’s subscribers may have the app downloaded as part of their Prime delivery service, yet spend little time in the app compared to competitors.
Meanwhile, two of Disney’s Marvell titles were ranked in the top 20 in both 2018 and 2019.
Once Disney proves itself on subscriber numbers, the next challenge will be to convince subscribers with free promotions to pay for the service. The upcoming task for the global media powerhouse will be to release enough consistent hits, like The Mandalorian, to keep up the monthly active user numbers. Quality is clearly not an issue for Disney, yet quantity could be.
Mastering high retention, low churn and viral mechanics will be a new set of skills for Disney, who has primarily specialized in theater releases and theme parks.
Theme park attendance in Hong Kong during the political unrest may affect earnings. The coronavirus and closure of the Shanghai theme park during the busy New Year holiday will also affect earnings next quarter in fiscal Q2 2020. Analysts may overlook these setbacks for now with the main focus being on Disney Plus.
Not only should Disney+ perform well this quarter, according to the data below, but keep in mind, Roku is downstream from Disney+ and will benefit from the company’s success.
When I was researching Facebook last week, something really stood out to me. Disney+ was ranking very high on both free apps and top-grossing apps on Android and iOS. On a few days, Disney+ beat out #1 sensation Tiktok, and on most days, the app beat out Instagram, Snapchat, YouTube, Facebook, Facebook Messenger, and Whatsapp.
This is unusual because the majority of the OTT media downloads don’t come from smartphone app stores. They come from an OTT player, like Roku, Amazon Fire, Google Chromecast or Apple TV.
This deck was collected at the four-week mark (or December 12th). Apptopia told me in an email that Disney saw a total of 30 million downloads on the app store in November and December (so, basically another 8 million after the deck was published).
You’ll see in the deck that retention is lower than usual, but with the OTT volume, Disney should be able to have a decent report tomorrow. Retention is probably low due to viewers watching The Mandalorian and not returning to the app. Disney will also have to prove it can convert free subscribers to paying subscribers when promotions expire (i.e. the Verizon promotion is a year of free Disney+).
From my perspective, this is positive data for Disney and I’m excited to see the earnings report tomorrow. I fully expect Disney to permanently overtake Amazon Prime Now for the number two spot over the next year or so. Global will be a significant strength for Disney.
Theme parks in Hong Kong may affect earnings. The coronavirus may also affect theme park earnings and theater earnings in fiscal Q2 2020 ending in March. I think analysts will look at these as temporary setbacks and will be more focused on Disney+.
Disney also probably spent a decent chunk of change on advertising this quarter. This may affect their earnings, but I think any positive news on Disney+ will overshadow this. Roku will benefit from the ad spend. Also, look at page 8 in the deck– it shows the effects Disney+ has had on Roku downloads.
Please note, the Disney+ information will be in MarketWatch tomorrow per an agreement with Apptopia. I will not be publishing the Roku download information on page 8 of the deck and will keep that exclusive for premium subs.
This article was originally published on Forbes on Jan 20, 2020, 07:49pm ESTForbes on Jan 20, 2020, 07:49pm EST
Two of the world’s largest brands entered subscription video on demand (SVOD) over the past quarter, which means the upcoming Netflix earnings report on January 21 will be under pressure. However, financial analysts are overestimating Disney and Apple, as these companies will not easily catch up to the top streaming subscription service over the long-term.
Netflix has a Firm Hold on OTT
There are more than 190 OTT providers to keep track of in the United States. This has the market in a frenzy, which is one reason we see whipsaw reactions to news of any kind in the OTT market. For instance, Netflix shed $24 billion in market value following the second-quarter earnings release in July. This could happen again, but in the long-run, it won’t matter.
According to Digital TV Research, the OTT market is set to grow from $68 billion in 2018 to $159 billion in 2024. Subscription services will grow by $51 billion between 2018 to 2024, reaching a total of $87 billion.
Netflix is the top subscription service in the OTT market by a wide margin, claiming 87% of OTT households in the United States. In Western Europe, Netflix has a penetration of 70-87% in English-speaking countries and 55-64% in non-English speaking countries.
Disney forecasts Disney+ to have between 60 million and 90 million subscribers by 2024. This is despite many free promotions. Netflix currently has 158 million paying subscribers and is adding roughly 28 million more per year. With this level of penetration, for Netflix, the opportunity that remains is global.
Netflix’s Stock Price Hinges on Global Logistics
Before third quarter earnings, I had pointed out that Netflix’s opportunity is global, and this is why the balance sheet looks frightening to value investors. Netflix’s stock price has most certainly reflected a market concerned with the company’s debt as the stock has posted 0.17% returns – or nearly 0% — over the past 12 months, while Disney and Comcast are up 30% and 31%, which is more in line with the broader market.
The company is in the red with free cash flow due to producing content for many geographic regions. However, as broadband coverage increases globally, and as 5G delivers faster speeds to developed countries, Netflix is well situated to grow its already-dominant user base and to reclaim these costs. Notably, Netflix’s operating margins stand at 18.9%. (More on broadband penetration below).
There is plenty of evidence that domestic OTT players will not be able to handle the logistics of going global. For instance, while Friends and The Office are leaving Netflix in the U.S., many of the shows will remain with Netflix internationally. According to Amy Reinhard, VP of Acquisitions at Netflix, only Disney can compete in international distribution at this time. Netflix also partners with companies like Warner Bros. for international film rights.
Asia’s population represents the majority of the world with gains of 2-3% being more impactful than double-digit gains in North America. According to eMarketer, Netflix’s penetration of Asia-Pacific will advance from 11.8% in 2018 to 14.3% in 2020.
Regions, such as China, have high barriers to entry for standalone services, yet Netflix has secured a promising licensing deal with Baidu-owned QiYi. Netflix’s share in Japan remains at 17%, despite launching in 2015, as the country has an older population that is averse to newer technologies.
International markets such as Central and Eastern Europe, the Middle East and Africa have upside specifically for acquired titles, an area of strength for Netflix.
If Netflix continues to dominate globally, then the company could be serving 50-70% of all developed countries and 20% of the developing world. With the limitations of broadcast and linear television, it is unprecedented to have a truly global media company. We will see the full effects of this once broadband penetration increases and 5G speeds bring OTT content at reasonable speeds to mobile devices.
Broadband Penetration and 5G
The OTT market in the United States has taken a decade to surpass pay-TV, with Hulu launching in 2007, popular set-top-boxes launching circa 2008 and Netflix streaming service launching in 2010. This growth has been assisted with the wide availability of high-speed broadband.
You can expect the global market to take twice that long, or maybe thrice. Broadband is slow to non-existent in many countries, although progress is being made. Brazil, for instance, reports a 20% annual improvement in households with 4 Mbps or greater (Netflix requires 3 Mbps or greater).
Japan and South Korea have nearly 50 million people with speeds of 100 Mbps or higher. Fiber technologies and broadband are prominent in Japan and South Korea, along with Australia, Hong Kong, Malaysia, Singapore, Taiwan and Vietnam. There is room for growth once higher broadband rates are achieved in New Zealand, Indonesia, Thailand, India and the Philippines.
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Overall, OTT video is projected to grow to 6.4% of emerging market households, or 103 million in total by the end of 2019. This is up from 19.4 million in 2014. By 2025, digital growth will add over a billion middle-tier consumers for telcos, which will also help to open the market for OTT players.
Media is a universal staple for quality of life, and OTT delivers cheaper content on-demand compared to broadcast or linear television. Some forecasts place 2040 as the pivotal point when essentially every person on the planet will have internet access, up from roughly 50 percent today. With the same data, others are more optimistic and are forecasting 2030.
Gene Munster told CNBC that “Netflix is not going to make a dramatic change to our lives in the next decade.” This misses the point entirely that Netflix is set to make a dramatic change for the remaining 6.5 billion people outside of the United States and Western Europe.
Beyond Subscriber Numbers: User Engagement
Netflix is not only capturing market share from cable TV attrition, but the company is also seeping into Hollywood’s addressable market.Recently, Netflix received 24 Oscar nominations, which is more than any major Hollywood studio or distributor.
High-ranking content isn’t exactly new for Netflix. In both 2018 and 2019, Netflix claimed 19 of the top 20 most streamed shows. According to Christy Ezzell, senior director of TV Time, this is partly due to Netflix’s investment in global audiences, including significant regional investments in foreign-language content and licensing partnerships. For instance, DARK and Elite are foreign-language originals that topped the top 20 list and beat out Amazon Prime on all accounts, including The Marvelous Mrs. Maisel. Notably, two of these are Marvel originals and will count for Disney+ moving forward.
These charts are incredibly important for understanding user engagement as opposed to subscriber numbers. For instance, Amazon is reportedly in the number two spot for OTT services yet is absent from the top 20 list for content. (I suspect subscriber numbers are skewed with Amazon Prime members who subscribe for the free one-day shipping or Whole Foods discounts, yet are more loyal to Netflix in their viewing habits).
Keep this in mind, as both Disney+ and Apple+ attract users with free promotions. Subscribers may sign-up yet use the service very little compared to Netflix’s level of engagement.
Conclusion:
Interestingly enough, many criticize Netflix for continuing its lead at 87% of subscribers through 2023. Again, they are also missing the point that this is the law of large numbers, as a leader cannot hit 100% of all OTT households and now Netflix must look outside of the United States for growth.
Global OTT is not a market we’ve seen before, and there’s nothing to compare it to in terms of scale and subscription revenue potential. To think Netflix is in trouble due to domestic competitors is to misunderstand the opportunity and the slow process of OTT proliferation due to broadband access in undeveloped countries and the forthcoming 5G in developed countries.
The positive here is that the $12 billion debt overhead and competitive landscape will likely spook the market a few times in the near-term and shake up the stock price, as it did following the Q2 2019 earnings. For anyone who wants a global OTT pureplay for the long haul, this should be welcomed.
I’ve included some information regarding Netflix’s stock price below.
Review of Netflix’s Stock Price
Netflix has held the $385 resistance zone since late 2018. This is a significant region that Netflix is looking to retest in the coming days and weeks. Netflix just reclaimed the 50-day and 200-day simple moving average (SMA), which will now act as support. It’s also worth noting that the 200-day SMA is signaling that the long-term trend is pointing downward.
In the chart above, you can see decreasing volume as Netflix approaches the $385 resistance. Although the internals of Netflix are showing a clear uptrend, which is supported by the MACD and the RSI, there is also negative divergence with the price making lower highs while the RSI makes higher highs into overbought territory. It’s important to monitor whether the internals break down through their respective uptrends along with the price.
Netflix is trading between support at the 200-day SMA and resistance at $385. If Netflix fails before testing $385, the structure suggests a setup that can see a retest of the October lows. This structure can be viewed as a reverse cup & handle pattern or, from Elliott Wave, a 1-2 i-ii structure, which will be confirmed below the $250 support. This level will need to be monitored closely if we see a renewed downtrend. However, if Netflix can break above $385 and close with heavy volume above this region, we could see new highs.
Roku’s stock price is up by almost 500% over the past two years. Compare this to the S&P 500, which is up less than 25%. That’s 20X more returns than the average stock.
The upward trend has not been on a straight line. Roku’s stock price has had four major drawdowns that average about 52%. Two of these drawdowns were greater than 60%. Being long a volatile company like Roku since its IPO is not easy, and it especially takes increased conviction to stay long Roku as we approach the end of the current cycle. However, for those that were insightful enough to see that Roku is not a hardware play, nor a content generating OTT play, but instead a Connected TV Advertisement play from inception, have been able to hold Roku through the drawdowns despite market noise.
In this report, I will look at the fundamental case for buying Roku stock. I will also perform a technical analysis of the company’s stock price as entry and exit is crucial for high-growth stocks. This technical analysis reflects the choppy reaction to the company’s third-quarter earnings report.
Roku’s Fundamental Background
Roku is one of the most misunderstood names in technology. A common argument against Roku is that it is a small company with no moat in the streaming industry. They also argue that competition from cash gushing companies like Apple, Google, and Amazon will threaten its lead. In reality, the opposite is true. Roku may be small in comparison, yet it still leads with 39% market share in OTT hardware in the United States compared to Amazon in second place at 30%.
In the most recent quarterly release, the company announced that its users had grown to more than 32.3 million. This is nearly double what the company had in Q2 2017 with 15 million users. The average revenue per user has grown from $11.22 in Q2’17 to more than $22.
The ad platform segment of Roku’s business is the fastest growing and most important. It is also a high-margin business. In the 2017 financial year, the segment had more than $225 million in revenue. This revenue rose to $416 million in 2018. In the most recent quarter, the platform segment grew by 79% to more than $179 million.
Another misconception about Roku is that Roku is in competition with the likes of Disney+, Netflix, and HBO Go because of the subscription service it offers. In reality, the company does not compete directly with these companies, even with its SVOD platform. This is because Roku is mostly in the business of serving adverts and using its data to provide a better ad experience. My partner, Beth Kindig, covers this in more detail in her fundamental analysis (here, here, here) .
The closest competitors to Roku are Amazon and Hulu. Comcast’s Peacock, which will be an ad-supported streaming platform, will also be a competitor, but only domestically. This is because these companies compete for connected TV ad dollars.
Roku has an added advantage because of the vast data it has on its consumers due to owning the hardware. Also, the agnostic nature of Roku’s business makes it favorable for smart TV manufacturers. This is because it does not compete with them on the level that Google or Amazon does.
One final not on Roku, valuation is a constant issue that bears have talked about. It is true that the company appears to be overvalued. The company is valued at more than $15 billion. This is a premium for a loss-making company that is expected to make more than $1.1 billion this year. The company has a forward P/S ratio of 9.9, which is a significant premium. Consider that companies like Amazon, Netflix, and Spotify have a forward PS ratio of less than 6.
Technical Outlook for Roku’s Stock Price
Roku Volume Report
The volume activity in Roku tells us a lot about the current environment we are in, as well as what institutions are thinking. “Smart money,” or institutions, have teams of analysts and professional traders moving large amounts of cash. This typically shows up as massive volume spikes, coupled with noticeable changes in the stock price. The price at which they decide to buy in bulk, or sell in bulk, typically acts as new support/resistance that the price must push through.
What’s noticeable is that around the $127 region, we went from seeing predominantly green volume spikes, to predominantly red volume spikes. The zones in which we are seeing these large liquidations is between the $158-$127 region.
This will be a lot of liquidity to make up, and we usually will see a shift in momentum when the reverse occurs, – i.e., large green volume spikes coinciding with a noticeable shift in price. Until I see us break through the $158-$163 region, with new increased volume spikes, I would be cautious of the current retracement back to new highs.
However, it’s worth noting that this shift could be starting to occur with rising green bars suggesting a renewed interest. I’d like to see institutions take out large positions at current levels before getting excited. So far, the only large volume spikes in this region has been to the downside.
Insider Activity
Insider buying is significantly more notable than insider selling. This is especially true when dealing with a high growth company that just went public; also, there could be numerous personal reasons why insiders are selling. But, it’s worth noting that all the insider activity in Roku since its IPO has been selling with zero buying. Nobody knows this business better than the insiders, and what they do, or do not do, can give insight to where they see growth vs market valuation. It’s worth noting that no insiders are buying their shares at current prices, which I’d agree makes sense if you are a buy and hold investor with a long time frame. However, in the short-term, there could be plenty of momentum left in Roku.
Internal Strength of Roku’s Stock Price
Going into earnings, we had cautioned our readers that $131-$127 was support and resistance was at the $156-$158 region. Any trades in this region on this stock were higher risk. We were correct, as the stock dropped to $119 but quickly bounced back. It has now been climbing and has even posted some marginal gains since prior earnings drop, and we are approaching a critical price cluster.
Simply put, if the stock price breaks $163 and closes well above this price, then I’ll be targeting the above the $200 region before any major drawdown occurs. However, this will require a broader macro bull market. I think it is more likely Roku remains choppy with lower entries available than where it is priced right now.
The internals support this position as well, as of now. In the above chart, the MACD has rolled over, and just recently flipped back up, suggesting strong short-term momentum. Until it breaks above the most recent high on the MACD, this could be a fake-out. The RSI is confirming caution as well. Until we can break the 70 line, which has historically indicated a bullish posture, I’d be cautious on the current uptrend as Roku continues to trade between support and resistance. We are currently oscillating between the 40 line, which has been bullish support and the 70 line, which has been bullish resistance.
Many investors are playing momentum with Roku right now, and we believe this is the correct strategy at current prices. Going long Roku today should be done with stops in place or a systematic exit strategy to protect any gains. Therefore, Elliott Wave is the preferred method for increasing the probability for successful entries on long positions for a momentum trade, as well as set ideal targets for a more long-term time frame.
Above is the 30-minute chart of Roku going back from it’s all time high. My Primary Elliott Wave count has Roku’s stock price completing its larger degree Wave 3 push just above the 138.2% extension at its all-time highs. This is historically a lower top for a typical target for a 3rd Wave, which usually targets the 161.8% extension.
If Roku can break back above the 78.6% retrace and then take back the 138.2% extension around $163, we will likely see a push to the 168.2% extension before any significant drawdown that would constitute a 4th Wave correction (this is shown as an “alt (3)” and “alt (4)” on the chart). As of now, the evidence supports that Roku is in its 4th Wave correction, and as long as it stays below to current resistance, there will be chances for lower entries on a more long-term basis. However, if we close above $163, I will likely add to my current position with tight stops to play renewed momentum as Roku powers to new highs.
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.
Roku is a company that has proven nearly every bearish prediction wrong with consistent revenue growth despite being surrounded by steep competition and tech heavyweights in over-the-top media.
Roku investors that have been long since its IPO have lived through three fifty-percent drawdowns. Therefore, the reaction to earnings this quarter was unlikely to phase anyone who has followed this stock for any length of time.
I encouraged my readers to not be phased by market reactions when Roku was priced at $30, when it was priced at $60, and when it was priced again at $30. During that sell-off, I said the company would become a tech darling and reach $100 in stock price in two years, which was bold to predict 200% returns. Of course, the company went on to reach 350% returns in a short time span of about one year.
The market received Roku earnings report on Wednesday after the market closed. Streaming hours passed 10 billion hours in the third quarter, while active accounts increased to more than 32.3 million. The most impressive number in the Roku quarterly earnings was the average revenue per user, which increased to $22.58. This number has more than doubled since the second quarter of 2017.
The Roku earnings report showed that quarterly revenue increased to more than $261 million. Platform revenue grew by 79% while ad revenue more than doubled. This was a 50% YoY growth and was above the consensus estimates of $256.9 million. The company lost 22 cents a share, which was 6 cents above the consensus estimates of 28 cents a share.
Overall, the company beat the consensus estimates, raised guidance, reported strong user growth, and increased ARPU.
However, Roku has double-digit negative EPS and will for some time. Roku financial statements show that EPS is declining QoQ. Its consensus EPS forecast of -$0.28 compared to -$0.09 in the year ago quarter. Annual EPS won’t improve either, per analyst consensus, with -$0.50 ending in fiscal year December 2019 and -$0.43 ending in fiscal December 2020.
We’ve already seen a few companies get crushed by the market if they have a small miss, which is the paradox for growing tech companies who are often penalized by the market by foregoing earnings to capture peak growth, which in turn, becomes rewarded by the market once it materializes into earnings. In other words, if Roku misses anytime in the next couple of years, it’ll be with EPS rather than revenue. The market, which is confused by the many OTT streaming services and hardware players, will penalize Roku. This most certainly will not be the last time the stock sees double-digit pullbacks.
I also foresee the market abandoning Roku and many other solid tech stocks that aren’t profitable yet during the inevitable value rotations. Keep in mind, investors also did this with Netflix, Google, Apple, Microsoft and Amazon during 2009.
Misunderstood Competition is an Edge
As is always the case, the market has a record of underestimating small companies that are battling with other big companies like Apple, Disney, Google, and Comcast. This is why Roku still remains one of the most volatile stocks in the market. This also proves the affinity investors have towards brands rather than technology. Yet, it is the latter that drives growth in new markets.
The nuances in strategy and technology are terribly important to understand in the crowded OTT space as it helps to have conviction when a stock drops 50% or more, yet then goes on to be the best performing stock of the 712 stocks with a market capitalization over $10 billion in 2019.
Let’s break down what I mean by Roku having very little direct competition.
SVOD vs. Connected TV Ads
Roku does not compete with Disney+, Netflix, or HBO Go because these are subscription services. Subscription video on demand (SVOD) is in a category of its own as the opportunity Roku is capitalizing on is Connected TV ads (CTV Ads). Advertisers are paying a premium for CTV ads, which is Roku’s market. The distinction between markets is important, and one that Wall Street missed when discounting Roku as a long-term opportunity by labeling it a hardware company for its first couple of years on the market.
Roku directly competes with Amazon and Hulu, as they compete for Connected TV ad dollars. However, as the market is well aware, data is king as it allows for better targeting. Hulu has to barter data as it’s a single application without a platform or hardware (i.e., it shares and connects third-party data, including with Facebook). Third-party data is always weaker targeting than first-party data and could be subject to privacy issues.
Razor-Razor Blade Model
Discounting the hardware and taking a loss is an excellent strategy to maintain a moat on data for advertising. Both Amazon and Roku own the hardware, and at current prices, the hardware likely causes negative or very thin margins. This is similar to the razor-razor blade model, where you discount the razor to sell the razor blades for life.
This positions Amazon and Roku for first-party data across OTT applications. Anything data related is subject to privacy issues and anti-trust issues. This is at the core of the controversy with Facebook and Google.
Roku is again set apart here, as the company only does OTT. The company does not share the data beyond the OTT player it owns. Amazon, however, is collecting data in a way that could come under anti-trust scrutiny as they take e-commerce data and broker this on the OTT player, which is anti-competitive with other ad exchanges.
Amazon is well aware of this, and is being proactive rather than reactive by opening up its demand-side platform to other DSPs, such as The Trade Desk, which was announced in July of this year. On a side note, Facebook learn from Amazon’s playbook as reputational damage is hard to shake.
Roku, however, does not need to worry about this as data never leaves the OTT hardware that they own, where they have a first-party relationship.
Valuation:
Connected TV ads are ballooning because they combine audience data with the viewability and completion rates of linear television. Roku’s valuation at 14 price-to-sales seems high at first, yet the one-year forward price-to-sales is trading at 9.3 due to the forward growth opportunity in Connected TV ads. Roku earnings estimates for 2020 and 2021 are $-0.29 and $0.6178 respectively. Therefore, the market may still be lukewarm with knee jerk reactions throughout 2020.
For example, last November, video-first SSP Beachfront reported that ad requests for CTV had increased 1,640% from November of 2017. While this is only one company’s growth in a single segment, the opportunity is so ripe, it’s hard to quantify. More astonishing is that Connected TV ads surpassed mobile last year for capturing the largest number of impressions and video completion rates.
Roku’s revenue growth will be exciting; however, the company is not likely to be profitable until 2021. In the third quarter Roku income statement report showed that revenue grew by almost 60%. This was almost double that of Netflix and triple that of Google.
Traditional metrics show that Roku is not a cheap company to own. Its forward EV to EBITDA ratio of 393, which reflects the lack of profitability. It’s not surprising the stock is trading in the range of $127-$131 following earnings, which was former support.
Depending on macro trends, we could see Roku trade around $100 again as this is an important psychological level, as shown below. It is also along the 50% Fibonacci Retracement level and along the 200-day exponential moving average. Long-term, I see Roku as one of the most promising tech stocks on the market and have provided projections to my premium subscribers.
Knox Ridley, technical analyst, will be covering Roku in-depth with technicals next week. He has guided many successful entries on this stock for our premium members, including entries lower than $100.our premium members, including entries lower than $100.
A version of this analysis appeared in MarketWatch prior to earnings on November 6th, 2019.A version of this analysis appeared in MarketWatch prior to earnings on November MarketWatch prior to earnings on November 6th, 2019. It has been updated and lengthened post-earnings.
Connected TV advertising is in my top three favorite tech trends for near-term gains, as discussed in the PDF that covers Roku and The Trade Desk. This is a massive opportunity that is occurring right now and should be given close attention.
Connected TV takes the best part of mobile (audience data) and combines it with the best part of television (brand messaging). This is a very important trend for brand dollars that should not be dismissed as “eyeballs migrating to OTT.”
The opportunity is much larger than represented by the number of people who are cutting the cord as
Connected TV ads are not merely a 1:1 ratio. Rather, these ads represent a higher ratio as the demand (advertisers) consider the medium more valuable. There is evidence that Connected TV is closer to a 2:1 and up to a 5:1 ratio in terms of its value to advertisers in terms of the rates they are willing to pay.
It may be hard for investors to imagine that some advertisers don’t like working with Google, Facebook and mobile or desktop, in general. This is a very real issue in the advertising world. Many big brands are not convinced that these mediums offer true, lasting impressions. They also do not trust the measurement offered as it’s behind a blackbox that they have no control over. Nielson offers an audience measurement system that many brands are accustomed to for traditional television.
Below is an illustration of television holding its own against mobile. Keep in mind, this is despite 5 billion mobile devices entering the market over the past decade compared to 2 billion television sets. The 34% who have held onto their television budgets are the advertisers this PDF is referring to, plus any of the remaining advertisers who are frustrated with a lack of measurement and click fraud on the other mediums.
Connected TV ads already see a $20 average revenue per user, according to Roku’s earnings. This is 200% more than social ads, such as Twitter, at $9 ARPU. It took Facebook over a decade to surpass $20 per user while we can trace the relevant emergence of Connected TV ads to late 2017/early 2018. You’ll also see below that Telaria’s CPMs on Connected TV ads are nearly 5x higher than average CPMs and have surpassed Facebook’s CPMs at the height of its dominance (and even with all of that Facebook data).
For quick reference, here are some CTV ad statistics referenced in the August PDF which related to the overall size of the opportunity:
Mobile’s share of programmatic video will peak in 2020 at 53.9%. By 2021, mobile’s share will dip below the 50% mark due to the rise of CTV ads.
To illustrate the growth of CTV, SpotX saw the share of impressions it serves through connected TV increase from 15% in Q1 2018 to 33% in Q1 2019. Innovid also saw CTV ads jump from 13% to 27% and Extreme Reach reported an increase from 15% to 44% over the time span of a year. Telaria reported triple digit growth in revenue from Connected TV ads at 133% year-over-year.
To date, CTV ads account for $8.2 billion of the $70 billion spent on global TV advertising in 2018. Data is driving personalized ads with data-driven video increasing 79% in 2018. Customized ads combining localization and personalization can generate over 12,000 unique versions with the largest customized ad having over 200,000 customized versions. This provides an engagement lift of over 78%.
According to CMO.com, an eye-tracking survey revealed that TV commands 2x the active viewing attention compared to YouTube and 15x the active viewing attention of Facebook. Completion rates are also higher on connected TV at 95% compared to 75% on desktop and 72% on mobile. Brands are convinced they should integrate with digital audience data with 28% saying they have already done so, but 68% plan to do so by September 2019.
Telaria Overview
Telaria is a volatile small-cap stock and even solid earnings has not helped to stabilize the price. Revenue was up 47% with the CTV business growing 133% year-over-year. Gross profit of $14.7 million was up 31% year-overyear in the last earnings report. The company increased the full year revenue guidance to $68-$72 million, up from $66-70 million.
When comparing Telaria to other connected TV stocks on the market, the two differentiators are that it’s headquartered in Israel, which may position it better for global inventory. The opportunity for CTV ads is global, and this could be a major positive for Telaria.
The second differentiator is that Telaria is primarily a sell-side or publisher platform – rather than a demand-side platform. For comparison purposes, The Trade Desk is a demand-side platform. More on this below.
Telaria is not a pure play but they are focused enough on connected TV to almost meet the criteria. They also sell mobile and desktop inventory, which is not as interesting to me in the current environment as these are not hyper growth categories.
Telaria Fundamentals
The most important key metric to focus on in Telaria’s report is CPMs, or the cost per 1,000 impressions, which grew from $11.58 to $15.41 year-over-year. These are very impressive CPMs, although not entirely surprising as in my previous report, I have stressed the importance of CTV ads for brand advertisers.
Brands who have the big advertising budgets, such as Coca-Cola, Geico, McDonalds, etcetera, are willing to pay much more for television. Compare this to Facebook’s 2018 CPMs which are driven by hordes of data and were considered “skyrocketing” when they hit $11 CPM at Facebook’s 2-billion user peak in 2017-2019.
Due to Connected TV ads and high CPMs, Telaria was able to report $2 million over the $15.5-16.5 expected at $18.2 million in the last quarter. The company reported adjusted EBITDA of $1 million with EPS of -$0.03.
Full year guidance was raised from $66-$72 million to $68-$72 million with Q3 2019 guidance at $16-$17 million.
Notably, there is no long-term debt on the balance sheet and the company has $58 million in cash.
Valuation is another area where Telaria checks quite a few boxes. Roku and The Trade Desk can wildly fluctuate, but at time of writing, forward price to sales is 14 for both companies while Telaria is at 4.8.
In the recent earnings report, leadership stated, “This quarter, we also advanced our technology leadership by becoming both the first video platform to provide Nielsen verified audiences to programmatic CTV buyers and by launching our addressable audience targeting solution.”
This is intriguing as traditional television buyers are impartial towards Nielson for measurement and verified audience purposes. The majority of the television advertising industry is tied to Nielson data.
The company also expanded the addressable market feature, although addressable is a common offering among
ad companies these days. The more important announcement is Nielson as the brands who are buying Connected TV inventory rely on Nielson for broadcast and linear television ads.
As you’ll see in the Risks section below, executives at Telaria come from Nielson, which is an interesting advantage for supply-side partnerships.
Sell Side Vs. Demand Side
Put simply, the sell-side works with publishers (inventory or supply). For Connected TV, the publishers are the apps where you view content: Hulu, HBO, Netflix, Vudu, ESPN, etcetera. Sell-side platforms have direct relationships with publishers.
The demand-side works with advertisers (demand). This is companies like Expedia, Coca-Cola, Geico, McDonalds, T-Mobile, Verizon, BMW, Mercedes, and sometimes other publishers who want to advertise their services (ESPN could buy advertising on Vudu, for instance).
Programmatic is real-time bidding that removes salespeople. Ad companies often talk up this piece, but in reality, just about all ad-tech is programmatic and offers real-time bidding these days (and has been since about 2012-2014 when ad-tech underwent this evolution for mobile and desktop ads). This is not a differentiator. It does help to facilitate more ad placements and some brands who were adamantly against mobile or desktop will use programmatic for the first time with Connected TV.
There are strengths to the sell-side approach. The first is that switching costs are higher for publishers than for advertisers as publishers have to install software into their applications to serve the ads. They’ll typically limit the number of sell-side platforms they work with as it can create app bloat to broker with too many sell-side platforms (SSPs).
Telaria advertisers an impressive client list, including Sling, Hulu, PlutoTV, A&E and the Discovery Channel. One thing to note: ad-tech companies can integrate via server to server rather than through software. The latter is a much stronger relationship. Telaria, and other ad-tech companies, typically don’t disclose if the client list is a direct software installation or a server-to-server integration. In the case of a server to server integration, the switching costs are not high and the relationship is similar to DSPs who have to consistently outperform in order to win the business.
For example, Telaria may have a direct relationship with Warner Brothers but not with Hulu (who likely uses more than one SSP).
To contrast, the demand-side is almost never loyal and almost always has low switching costs. Often, advertisers will run campaign tests across as many as twenty DSPs and will run the campaign on those who perform the best. This is the downside to programmatic and server-to-server integrations across ad exchanges. Even when the SSP is a server-to-server integration, they are not as aggressive as advertisers in switching.
It requires very little time or energy to run these tests. Some advertisers will repeat this process frequently before every campaign, going with only the DSP who is performing well in that month. DSPs will differentiate among themselves with features such as omni-channel advertising to become a one-stop shop for campaigns across multiple mediums and device types.
Of course, as the world is well aware at this point, data is king. The publisher will be paid more if the advertiser can target the audience with more precision. Therefore, the sell-side has an advantage because the direct relationship with the publisher provides the best data. To illustrate, Roku is a publisher of the Roku Channel and a platform owner, as well. There is a lot of data here from these sources, and therefore, the average revenue per user is very attractive at the $20 ARPU.
Demand-side platforms, such as The Trade Desk, rely on the identifier for advertisers (IDFA) from Apple and their own Universal Ad ID. This helps to track the user for omni-channel advertising and retargeting, such as when a person switches from watching OTT apps to browsing on mobile. However, the playing field is equal for IDFA across all advertisers while The Trade Desk is attempting to have an advantage with their own proprietary Ad ID.
When comparing apples to apples, the sell-side is better positioned as they hold the data and the inventory in a space that is more limited in inventory than in advertisers. The relationship that is created by installing software holds more weight than the relationship that is dependent on monthly pricing.
You can see evidence of the value of SSPs historically in the mobile ecosystem. The larger players acquired sellside platforms, such as Google’s acquisition of AdMob for $750 million and Twitter’s acquisition of MoPub for $350 million. These ad companies have little reason to acquire a DSP as this is where they already excel and is easy enough to build, if you have the data. Similarly, Facebook acquired LiveRail for $500 million for its premium video publishers.
Risks
As noted in the supply-side discussion, ad-tech companies don’t disclose if their client list is a direct software installation or a server-to-server integration. The impressive client list that Telaria discloses, including Sling, Hulu, PlutoTV, A&E and the Discovery Channel, may be brokered to Telaria through server-to-server integrations rather than directly served through ad software. This is a risk because another SSP can easily establish a serverto-server relationship through a web of ad exchanges. Direct software is a more protected relationship.
A primary risk is that Telaria does not have a straight path behind ownership and management. We do not have a passionate-founder type like Anthony Wood or Jeff Green at the helm. I’ll outline what I’ve been able to gather and add some information as to my experience with ad-tech companies during that era.
Founded in 2012, Telaria’s former company, Taptica, was a mobile user acquisition company. Interesting enough, Neilson EVP Itzhak Fisher was an early investor, which may be why we see Nielson recently partnering with the company on audience measurement. By April of 2014, Taptica wasn’t doing well and sold a purchase option for a $1.5 million line of credit. By October 2014, Marimedia purchased Taptica for $13.6 million.
By May of 2015, the company issued a profit warning and Marimedia changed its name to Taptica. The company then went through a series of acquisitions, including Tremor Video’s demand-side platform for $50 million. There were mergers in 2018 and 2019, resulting in Taptica renaming itself to Tremor International.
Notably, Hagai Tal, the CEO had to step down due to concealing material facts during a sale in 2011. The former CEO of Matomy Media, Ofer Druker, then took over as CEO of Taptic and Termor International. Mark Zagorski has been CEO of Taptica since 2017, and has connects to Nielson, having served as CEO of a Nielson company named eXelate, and EVP of Nielson’s Marketing Cloud.
Needless to say, the history is complicated. Taptica and Telaria have decent client lists, which helps. This was an era which was particularly hard on ad companies. Part of the anti-trust issues we see with Google and Facebook is that they forced many ad-tech companies out of business.
There is always a lot of risk when investing in an ad-tech company, and I pointed this out with my analysis on The Trade Desk. There is endless competition as there is no intellectual property to speak of. Advertisers are looking for the best addressable media at the best price, and publishers are looking for the highest returns. Whoever is capable of climbing to the top of the pile (of the 2,000 ad-tech companies on the market) usually isn’t there for very long (1-3 years) The only exceptions are if you have proprietary first-party data or other direct relationships.
Technical Analysis
By Knox Ridley
Telaria (TLRA) has had a rather complex structure ever since it began trading in 2013 under Taptica/Tremor. In fact, its all-time high occurred on its IPO around $11.09. Since then, its structure has been a complex, overlapping, corrective (A,B,C) structure up until today.
In other words, it bottomed in early 2016 at $1.29, and though it’s been in an uptrend, that uptrend has been characterized by a series of 3-wave corrective moves. This would put us in the final C-Wave push of this uptrend. So, after a massive move from $1.29 to $10.66, the structure of this uptrend seems to be part of a larger degree corrective structure, which is highlighted by the blue A,B,C.
That being said, the structure of TLRA is not as reliable as the current trend currently in place. Time and time again when I’ve seen these larger-degree, corrective moves up, over time, and with some additional momentum, morph into a larger degree 5-wave structure, which I never want to miss out on.
Or, I’ve seen them morph into an even more complex structure or extend to much higher levels. This can be especially true when analyzing the charts of small to micro-cap stocks that are thinly traded. In short, seeing a complex corrective structure in a small cap stock, I take this as the market not really sure what to think of TLRA at the moment.
As you can see in the chart, TLRA reached the 100% extension of the A wave (A=C in blue), and then turned down hard. It found support at the 23.6% retrace level, which coincides with the 200-day moving average. I outlined this region in yellow, and would place a stop just below $5.75. Below this region and the likelihood of closing the massive gap around $3.70 becomes elevated. This will provide entry with a rather tight stop – low risk with high reward.
Furthermore, the MACD has found a base, and is now turning up, while we go into earnings.This is a sign that momentum is shifting back to the upside. Also, note the volume has elevated to new heights, which is signaling increased interest, which has been heavily tilted to the long side. With volume lowering into this pullback, and the stock resting over the 200-day, it appears that TLRA is in a wait and see mode with their earnings on deck.
The Netflix critics who point towards massive debt load and the unsustainable $12 to $15 billion annual content production costs causing a bleeding of free cash flow are not wrong to question these things. They are absolutely correct in thinking this company could be a ticking time bomb.
I’ve always avoided writing negative analysis on this company because I hesitate to think Reed Hastings doesn’t have plan. He’s one of the better entrepreneurs of the past decade as far as execution and hard-to-nail pivots.
Most naysayers refuse to recognize the wide margin Netflix has in OTT subscribers compared to the competing streaming services. This stands at 87% in the United States and 70% in developed, English speaking countries. They claim 50-60% in developed, non-English speaking countries.
Amazon Prime is supposedly in second place, yet they are entirely absent from the Top 20 most streamed shows. I don’t trust the numbers here as Prime is many things beyond OTT and some of these subscribers could have Prime for shipping or groceries, yet remain loyal to Netflix in their viewing habits. Of the Top 20 most streamed shows globally, Netflix claimed 19 of them (although the number should be adjusted for 17 shows as Disney’s Marvel counted for two of the rankings).
Despite the noise of new OTT entrants, the projections from unbiased analyst firms continue to put Netflix at a wide margin with 87% in the United States.
The real question is what will Netflix’s penetration be globally? Half of the world does not have broadband and many geos that do have slow speeds. I believe Reed Hastings is gunning to be the first truly global media company. The barrier to entry is high for global and the only other streaming service that has the ability to license content internationally is Disney.
If Netflix reduces its content bill over time (the company has stated this is the peak spending year), and meanwhile, simply keeps doing what it’s been doing on the execution front, it has the possibility to reach the majority of global households.
I do think they’ll have to offer a reduced subscription fee for catalog content and keep the higher subscription fee for premium and new content in order to fit global household budgets, but the numbers are there .
The slow proliferation of fast broadband and OTT has the market somewhat confused right now. The Untied States is far ahead with OTT accessibility and this has skewed how investors see this opportunity. They are not considering that Netflix’s biggest headwind is global broadband speeds. They are thinking this is a turf war in the United States, and therefore, the debt load looks prohibitive for only 150 million households.
I don’t get to choose the titles of those articles. If I could have chosen the title, it would have been “Get Netflix When It’s Dirt Cheap and while Broadband Penetration is Low.”
Below is some technical analysis from Knox on entry scenarios. If we reach his target number, we will update you.
This isn’t an earnings call. Netflix could beat earnings. I just think it’s pretty high risk with the market perception around OTT subscription services right now with Apple, Comcast, etc.
p.s. I have a PDF coming for you tomorrow on Telaria, the small cap focused on Connected TV ads.
Netflix Technical Analysis
by Knox Ridley
The Very Big Picture (Weekly Chart)
Going back to the beginning of its trading, the weekly chart of Netflix is interesting. To see a stock as explosive – in both directions – like Netflix, follow a uniform trend channel, as well as adhere to extensions on such a large time frame, actually shows a sense of order to its path upwards.
The blue roman numeral count shows the very large degree cycle count, which operates on a time frame that is not as useful to most investors. That is, unless we are coming close to the end of a wave and the beginning of another, which I do not see happening just yet.
My main count has us still within this larger degree 3rd Wave in blue roman numerals. This means, if we go to a lower degree of time within this cycle count, we are looking at the primary count in orange. This count will be more useful to us because we have topped out in Wave 3 and are correcting into Wave 4.
Third Waves are typically accompanied with a trend’s peak momentum, which is what we are seeing when looking at spike in the MACD. Being in a 4th Wave, there are a number of price clusters that could find final support.
There’s a confluence of extensions highlighted on the graph: the pertinent extensions to the cycle count in blue roman numerals are on the right in blue; (2) the extensions of interest to the primary degree count in orange is on the left in orange; (3) the 23.6% retrace level to the internal red count is also in red.
As you can see, there’s a confluence with these important points, which will be major support regions in any significant pullback. Also, keep in mind the 23.6% retrace level is on the chart to offer perspective on just how far Netflix can reasonably fall.
Please keep in mind we are talking about a primary degree count, which started in 2005, and in 2019 we are just now completing Wave 3. So, this correction could take weeks to months to play out. In the meantime, we can play the momentum on a lower degree, which is highlighted below.
Close Up
Zooming into the 2 hour chart, we get a better understanding of specifically where we are within this larger trend that is unfolding. We are in an A,B,C correction, where (A) bottomed at the December low in 2018, (B) peaked in June of 2019, and we are currently in the final (C) wave, which appears to be unfolding in a 5 wave pattern, and is highlighted by the red letters red.
Notice the RSI making higher highs, which is putting it into overbought territory (above 70), while the price action is making a lower higher. This is highlighted with the red circles, and is a negative reversal patter, which suggests more downside is on the horizon.
The final targets I have for this (C) wave push, is at minimum the $227.50, which will close the gap-up from January of 2018. However, the more likely target will be the A=C price around $212-$211. I would be interested in seeing how the stock holds support around this region, and see how the price behaves before committing. If this level does not hold, then the extensions in the weekly chart will come into play, and we could be in for a more aggressive correction.
Miracles do happen, and if we close above the $335 resistance level, which is highlighted just below the green arrow, I would consider Wave 4 over, and for us to be in the primary 5th wave push to all new highs. We feel this is unlikely due to the headwinds the company faces – some that are very real headwinds and some that are driven by perceptions.
Momentum swings in both directions. Last week, we woke up to Roku at a 20% drawdown in a single trading day. In fact, within 2 weeks, Roku’s price has fallen 39% from its all-time highs. If you are new to Roku, it would be easy to panic. However, for those that have been involved with Roku from its IPO didn’t even flinch. Within 2 years of trading, Roku has had 3 drawdowns of around 50% from peak to trough. The largest drawdown has been 64.47%, and without a strong conviction, there’s no way an investor could sleep while holding Roku for the long haul.
Whenever we see the market get it wrong, again, on Roku, and the technical break significant support, as a Roku investor, I don’t get afraid, I get excited. It’s times like these that I look to add to my Roku position as I have personally outlasted every Roku drawdown since it went IPO. The point of this report is to gauge the probability of Roku’s current drawdown, which can act as a reasonable point of entry.
Elliott Wave
Roku’s impulsive chart pattern is unfolding nicely. My primary count has us completing a blow-off top 3rdwave, highlighted in the blue numbers, where the explosive 3rdwave, with peak technical momentum, pierced the upper range of the trend line. We are currently starting the 4thwave down and when we zoom into the 1-day waterfall event, we can see a clear 5-wave pattern down, insinuating a 5-3-5 correction is underway. I estimate this correction will take us to the 50% – 61.8% retrace level ($96-$77), after we get a corrective bounce.
These levels not only coincide with the trendlines developing, but they also coincide with the 100% extension and the 78.6% extension. I see this area as a strong region to expect the pullback to find support, and depending on the broad market, could be an excellent place to add to, or begin building a position.
Basic Technical Analysis
Some of my favorite gauges for market health and actionable decision making is based on basic trendline/momentum data.
First off, I anchored a Volume Weighted Moving Average (AVWAP) to the December low, which is the momentum line highlighted in pink. This moving average clearly shows that, even with a near 40% drawdown, the bulls are still in control. This moving average lines up perfectly with the 200-Day moving average, highlighted in blue. These 2 levels will act as major support as they move into the targeted support ranges, strengthening the support within this region.
Moving onto the broken support regions, you’ll will notice the 3 separate tops (one of which we are currently experiencing). Below these tops you’ll notice the line in the sand support region, highlighted in dotted black. Roku has definitively broken through the current support, after breaking a significant trend line, also highlighted in black. Notice the red arrows. There are 3, all lining up with the exact moment the RSI, MACD and price broke their respective trend lines from the December low.
I would urge you to be cautious trying to buy the dip too soon in Roku. I do believe we will see a corrective bounce from over sold levels, but I expect it to be corrective before we see the final drop into the 50% – 61.8% retrace zones. You’ll notice the histogram in the MACD, dropping to levels we have never seen with Roku. When we see such a sharp drop in the MACD, more times than not, it’s an indication of too soon, too fast, which leads to the very least a bounce. Also, you’ll notice that the RSI is right on the 30 line, indicating oversold levels as well.
However, while we are looking at the RSI, I want you to notice how many times the RSI broke the 40 line, which in a bull market the RSI will usually not break, and then dropped to the 30 line. Three times this occurred, and 2 of those time lead at least a 50% drawdown. I use this as further evidence to hold off on adding to Roku at these levels.
In conclusion, I believe the $96 level will be the next support region that Roku will react to. It’s due for a bounce, I’m expecting at minimum to the $115-$120 region, but this bounce should be corrective before we drop to the 61.6% region. I will look to add to my position around this price cluster.
Connected TV advertising is in my top three favorite tech trends for serious gains in the near term of 2-3 years, and therefore, the opportunity requires a lengthier analysis. CTV ads offer investors a sizable opportunity, which has not been available for over a decade – since the early proliferation of mobile devices. The CTV ad market will take at least until 2021, and perhaps until 2023-2025, until the market is mature and the gains slowdown.
Roku and The Trade Desk are first movers in connected TV advertising in their respective categories of OTT platform/player (ROKU) and third-party ad network (TTD).
Roku investors are speculating the Roku Channel can compete with the big 4 for time spent on over-the-top applications: Netflix, Amazon Prime Video, Hulu and YouTube. Investors in The Trade Desk are speculating the third-party ad network can stave off competitors, which are likely to appear in droves over the next two years as the ad-tech space is the most crowded space across the technology sector with little IP to speak of. Those are the risks while the runway for this opportunity is quite long.
1.1 Overview of Connected TV Advertising
Connected TV advertising is taking market share from mobile for a few reasons that are important to understand.
The first is that brands with the largest ad budgets prefer television advertising as opposed to desktop or mobile.
I’m referring to companies such as McDonalds, Geico, Budweiser, Pizza Hut, Coca-Cola, Macy’s, BMW, Mercedes, Toyota, Loreal and Nike, for example. Big-budget brands have struggled over the past 10-20 years because mobile and desktop are not as effective for brand messaging yet these mediums have been stealing the eyeballs and are fueled by data.
Budweiser ads are not plentiful on mobile or social but they continue to pile in the ads for televised sports and pay dearly for Superbowl ads. Beer drinkers are also on mobile but Budweiser can’t measure the impressions because the screen is small, the customer is distracted/on-the-go and these brands need at least 30 seconds for a proper impression. Mobile and desktop are better for companies that want clicks and “purchase intent” rather than brand impressions.
However, despite the high cost of TV commercials, they do not offer data on the audience who is viewing the ad. The only information Budweiser has to buy an audience on traditional television is the content that is being watched (football). If Budweiser has determined that men between 25 to 45 are the heaviest beer drinkers, with Connected TV ads, they can now target them specifically on television. Perhaps Michelob Ultra wants to target people who are health conscious. They can do this with audience targeting through Connected TV ads rather than wasting money on showing ads to people who are not health conscious (general football audience) or guessing on what health conscious beer drinkers watch in the evening. They can buy the exact audience “health conscious.” Pizza Hut can buy a college student audience. Geico can buy an audience of income earners in the $40,000 to $70,000 range. State Farm can buy families who own homes. Mercedes can buy audiences who make over $150,000. Macy’s can buy audiences of families who have children for school shopping ads.
These brands can buy audience targeting on television – and this has not previously been the case.
Connected TV takes the best part of mobile (audience data) and combines it with the best part of television (brand messaging). This is a very important trend for brand dollars that should not be dismissed as “eyeballs migrating to OTT.” The opportunity is much larger than represented by the number of people who are cutting the cord as Connected TV ads are not merely a 1:1 ratio. Rather, these ads represent a higher ratio as the demand (advertisers) consider the medium more valuable. This places Connected TV ads in a league of their own.
We are in the early days of Connected TV ads and already see a $20 average revenue per user. This is 200% more than social ads, such as Twitter, at $9 ARPU. It took Facebook over a decade to surpass $20 per user while we can trace the relevant emergence of Connected TV ads to late 2017/early 2018.
1.2 CTV Ads by the Numbers
Mobile’s share of programmatic video will peak in 2020 at 53.9%. By 2021, mobile’s share will dip below the 50% mark due to the rise of CTV ads. To illustrate the growth of CTV, SpotX saw the share of impressions it serves through connected TV increase from 15% in Q1 2018 to 33% in Q1 2019. Innovid also saw CTV ads jump from 13% to 27% and Extreme Reach reported an increase from 15% to 44% over the time span of a year.
To date, CTV ads account for $8.2 billion of the $70 billion spent on global TV advertising in 2018. Data is driving personalized ads with data-driven video increasing 79% in 2018. Customized ads combining localization and personalization can generate over 12,000 unique versions with the largest customized ad having over 200,000 customized versions. This provides an engagement lift of over 78%.
According to CMO.com, an eye-tracking survey revealed that TV commands 2x the active viewing attention compared to YouTube and 15x the active viewing attention of Facebook. Completion rates are also higher on connected TV at 95% compared to 75% on desktop and 72% on mobile. Brands are convinced they should integrate with digital audience data with 28% saying they have already done so, but 68% plan to do so by September 2019.
SECTION 2: The Trade Desk
The Trade Desk is a “demand-side” or “buy-side” ad platform which allows advertisers to buy ads in an auctionlike format through real-time bidding. This is an automated method for buying and selling inventory that eliminates the need to call up an agency or salespeople to place the ads. The official term for this is programmatic, and the trend is popular in ad-tech, with over 50 demand-side platforms that transact programmatically. By utilizing machines instead of salespeople, the cost of the ads goes down and both parties (supply/publishers and demand/advertisers) prefer programmatic due to fewer middlemen and higher returns.
Strong drivers for The Trade Desk include omnichannel capabilities, which is the ability to buy ads across many channels, such as mobile, video, audio, display, social and native. The universal ad ID is another important differentiation as it offers an anonymized ID that helps track users, target audiences and provide attribution. This feature is rare for a third-party ad networks and helps The Trade Desk compete with first-party data companies (Google, Facebook, Amazon, Snapchat, Pinterest, etc.) To further compete with first-party data companies, The Trade Desk buys data. This is combined with the brand advertisers’ data on a data management platform for targeting purposes.
Differentiation in this category is essential for investors in The Trade Desk to track closely. Risks are noted below, with the primary risk being the competitive ad ecosystem, which includes many companies that are able to copy ad-tech features as there is very little IP and/or complexities with these products. There is also little loyalty from advertisers who will quickly switch to the next best-performing programmatic DSP.
2.1 The Trade Desk and Connected TV Ads
Connected TV ads is one of many revenue segments for The Trade Desk. In the most recent quarter Q1 2019,
The Trade Desk stated CTV spend grew over 300% from a year ago. In previous years, The Trade Desk reported 1000% growth in Connected TV advertising from Q3 2017 to Q3 2018 and 900% growth when adjusting for the period between Q4 2017 and Q3 2018.
“We've never seen an opportunity like CTV before and I don't think we'll ever see one like it, again … It is the biggest opportunity we've ever seen (and) probably ever will.” – TradeDesk CEO
2.1B Amazon Partnership
The Trade Desk shares jumped in late July following an announcement that Amazon Publisher Services is partnering with The Trade Desk and Dataxu TouchPoint, which will allow advertisers access to Amazon’s inventory on Amazon’s Fire TV marketplace. Publishers on Amazon’s Fire TV marketplace will also benefit from increased access to advertisers.
There are a few things to note about this announcement:
• Amazon will likely open up ads to more demand-side platforms with CTV advertisers. The Trade Desk will be competing with Dataxu and Amazon DSP on Fire TV inventory for now. However, it’s likely there will be more demand-side platforms joining as it’s common for the supply side (content publishers) to work with as many buyers (advertisers) as possible.
• It’s not clear if The Trade Desk and Dataxu’s demand will be as competitive on CPMs. Amazon has the better in-house data and targeting information.
• This could be a PR move for Amazon to be proactive on anti-trust while giving up a small amount of revenue (small for Amazon, not small for The Trade Desk)
Regarding the PR move, the motivation behind the announcement may be that Amazon is being proactive in side-stepping anti-trust issues. The Trade Desk and Dataxu are competitors to Amazon’s own demand-side platform Amazon DSP. By giving away a small piece of the Connected TV pie, Amazon protects itself from regulation. If this is the angle, it’s an incredibly smart move by Amazon and third-party ad networks stand to benefit.
2.2 The Trade Desk Financials
The income statement on The Trade Desk is solid for a company of its size. Revenue in Q1 2019 grew 40% to $120M from $85M in the year-ago quarter with positive net income of $10M. Adjusted EBITDA grew from $18M to $24M. Growth YoY has been a consistent 50-60% for over 4 years posting 52% in 2017 from $202M to $308M and 55% in 2018 to $477M.
We already discussed rampant growth in Connected TV advertising, however, The Trade Desk is also strong on mobile at 45% YoY and mobile video at 60%. Customer retention at The Trade Desk is at 95% and has been in this range for 20 quarters, according to the 2018 Financial Results (note: many ad companies claim high retention). Data spend was up 80%, cross-device up 300% and audio up 270%.
However, these numbers come with an outstretched valuation of $12 billion market cap on $500M in annual revenue and $10M in profit. The price-to-earnings ratio is 135 and the price-to-sales is 24, at time of writing.
The Trade Desk advertises that it has been profitable since 2013. This requires caution for buy-and-hold investors. There is very little R&D to be spent on ad-tech as there is no moat to protect. The ad ecosystem is capital efficient because the technology is not complex enough to require a large team of engineers. In technology, being capital efficient right out of the gate can often spell trouble long-term if the development of the product is easy for competitors to copy.
2.3 The Trade Desk Risks
Competitors will not knock The Trade Desk out of position this year, however, the future for an ad network in CTV ads, omnichannel programmatic with a data management platform in the stack, and/or with an ad ID will become decisively hard turf to protect. The early profitability reveals the lack of complexity in the ad-tech stack, and this is true for all third-party ad networks.
The ad industry is highly competitive, and the track record of third-party ad platforms performing well long-term is nearly non-existent following a year or two in the limelight (i.e. Millennial Media, Criteo, etc). This is due to hundreds of competitors globally.
Demand-side platforms are especially at risk as the supply-side controls the relationship. In this case, The Trade Desk is at the mercy of the supply-side platforms who often work with as many demand-side platforms as possible to get the most demand and the highest ad rates on their content. (It’s called supply and demand for a reason, and the supply will, of course, want to increase demand with no loyalty provided to The Trade Desk).
The Trade Desk states the company is “one of the fastest growing and most profitable software platforms in any sector.” This is false advertising. The Trade Desk is a third-party programmatic ad network and this is a very distinct category from software. This statement is especially troublesome.
The company also claims a disproportionate total addressable market as they include TAM that is shared by Google, Facebook, Amazon, all social apps, and all television advertising ($1 trillion industry). The company states a $33B TAM for programmatic, although this is also shared by dominant digital FAANG companies.
Conclusion:
CTV ads are a big enough opportunity for The Trade Desk to continue to perform well. The stable revenue segments of mobile video and desktop are diversified with the explosive revenue segment of CTV ads. There is no reason to believe The Trade Desk will miss earnings.
However, the stock is very expensive and will be penalized due to price in broader market reversals. Please see the technical analysis for buy-and-hold entry/exit scenarios.
Regarding the next 1-3 years: one key differentiator for The Trade Desk is the universal ad ID. If The Trade Desk lost the universal ad ID capability to track users, this would impact the company negatively. On the flip side, Big Tech anti-trust issues or privacy regulations could strengthen The Trade Desk’s market position. The universal ad ID should be watched closely for positive or negative product announcements.
Monitoring the competitive landscape will be essential for The Trade Desk over the next 1-2 years. I expect competitors to appear in droves with at least 7-10 new viable competitors for CTV ads in the next 24 months. If you are a Research Services subscriber, you will know of these competitors in advance.
SECTION 3: ROKU
Roku is the only pure-play CTV ad option that owns its own hardware platform and operating system. This is an enviable position that only Google and Amazon claim, although notably, Roku has more hardware players in households than either Google Chromecast or Amazon Fire TV with 40 million U.S. customers using Roku once per month. Roku also has the advantage of knowing OTT better than any other company as the original provider of set-top-boxes. Connected TV ads and OTT hardware is the company’s 100% laser focus.
Many investors over-estimate original programming and subscription services. According to Nielson, only 20% of time is spent on original programming while 80% of time is spent on catalog content. Meanwhile, Netflix is spending $8 billion per year to produce original programming. Many ad-supported choices have subscription fees, such as Hulu and YouTube TV, which forces consumers to pay for subscriptions while still seeing ads.
Overall, there is subscription fatigue in the OTT space with individual channels charging $8+ for single channels to $45+ for YouTube TV. These fees add up to more than a cable bill, in some cases. Roku’s growth has come from executing well on a channel that is entirely free and supported by ad dollars – a welcomed business model compared to the competitors.
Pay TV attrition funnels into Roku’s addressable market. For every dollar AT&T and Comcast lose, Roku is situated to gain. In 2011, pay TV subscribers fell by 8,000 in 2012 and the losses accelerated to 164,000 in 2014. Three years later, the losses grew 20x to 3 million subscribers. By 2023, live-linear OTT video subscriptions will surpass traditional broadcast TV.
Beyond Connected TV ads, Roku is a hardware player and operating system. In Q1 2019, the company estimated that one-in-three smart TVs sold in the U.S. were Roku TVs. I originally covered Roku’s partnership with smart TVs in early 2018, and why being vendor agnostic would be a boon for future growth. In other words, in the arena where Apple, Amazon and Google compete, Roku is a neutral party. TCL, RCA and Samsung/Tizen chose Roku.
The global OTT devices and services market is expected to reach $165 billion in 2025 compared to $29 billion in 2015. As stated in the introduction, there is phenomenal growth being reported across CTV ads with triple-digit and even four-digit growth percentages. As a pure play option, the majority of Roku’s revenue comes from capitalizing on this opportunity.
Notably, Roku has a significant amount of proprietary data for advertisers to leverage. By owning the viewing platform, Roku is able to collect data across OTT apps.
1.1 Roku’s Global Potential
I first covered Roku’s global potential in May of 2018, and we have yet to see Roku’s global expansion. I believe Roku will become a large cap stock with global execution and could reach a $100 billion valuation from the cheap hardware proliferation in global markets combined with the free-supported ad channel and primary driver of platform revenue.
The low price point for the hardware coupled with the free content should be very desirable in emerging markets. Roku’s OS has 3,000 channels compared to the next competitor with 1,300 channels. This variety will do well for global audiences who have varying tastes in content. Roku also has a free mobile app that can reach the 3 billion smartphones in the world, 80% of which are Android due to the cheap average sales price.
The bottom line is that Roku has maintained the lead in the United States as the top streaming media player by helping reduce costs for cord-cutters. Their business plan is to keep costs very low for their customers. It’s only a matter of time before they bring this to the billions of people overseas who want to reduce the cost of television.
2.2 Roku’s Financials
In 2017, as a newly public company offering investors transparency, Roku revealed lackluster revenue growth leading up to its IPO. In 2015, annual revenue was $319M, and in 2016, the annual revenue was $398M. This is why some investors had a hard time buying the stock when it listed in September 2017.
The revenue turnaround is easy to understand when compared with the trajectory of CTV ads as analyzed by this report. CTV ads were nascent in 2017 and started gaining traction in 2018. Roku soon began posting revenue growth of $512M in 2017 and $742M in 2018.
Most recently, Roku reported 79% growth YoY in Q1 2019 on its ad platform revenue with total revenue at $134M.
Roku is not profitable with net income of negative $10M. Adjusted EBITDA is positive $10M.
In order to lock-in market share, Roku offers its hardware players at low prices, which eats at margins. In Q1, Roku lowered prices of its hardware by 4% YoY. Roku spends heavily on R&D at $55M in the last quarter to help maintain its lead as a top OTT player and ad platform. That’s nearly 40% of revenue spent on R&D. In Q1 2019, Roku had $265 million in cash and short-term investments.
This quarter, Roku’s outlook calls for 42% year-over-year revenue growth to $223 million at the midpoint. Adjusted EBITDA will be a loss of roughly $7.5 million in Q2 at the midpoint. This is due to product development and a new lease. Keep an eye out for Roku beating on revenue and missing on net income or adjusted EBITDA over the coming year as the company fiercely protects its turf with R&D during this time of golden opportunity in CTV ads.
2.3 Roku’s Risks
The majority of time spent on OTT is on Netflix, Amazon Prime Video, Hulu and YouTube. These channels comprise 75% of viewer time. In addition, the OTT market is heating up with the entry of Disney as a major player. Although most of these subscription channels do not directly compete with Roku for brand ad budgets (they are subscription channels), they do compete for time spent on Connected TV. Please keep in mind, these are viewing habits for the United States and global markets will change the trajectory of subscription vs ad-supported — with ad-supported being favored.
On hardware, Google Chromecast and Amazon Fire can reduce prices to lock-in users with little effect on the mega-cap companies’ bottom lines. Roku may need to continue lowering prices on the hardware player to remain competitive. Amazon’s DSP remains Roku’s biggest competitor.
Conclusion:
Investors do not need to choose between The Trade Desk and Roku. Rather, investors need to get these companies at the right price for the highest returns. The Trade Desk has potential over the next two years and requires monitoring for a buy-and-hold strategy beyond this. Roku has potential for the next five years and may have a sudden, upward trajectory with global expansion.
From a tech analyst perspective, Roku has a better moat than TTD. Amazon and Google have not been able to shake Roku — and there is no evidence that this will occur in the future.
Roku will likely report strong revenue growth into the foreseeable future. The profitability could spook Wall Street, and there may be surprises in the operating expenses, but subscribers to Research Services should use this to your advantage as you are now well aware of the CTV ad opportunity.
Connected TV advertising is going through a lucrative and important transition right now that will remain stable during economic downturns due to the free price point and the CPG brands who buy TV ads. I do not believe Roku is expensive relative to its growth potential. However, the technicals show weak internals and there may be better buying opportunities with patience. Please see the technical analysis for more information.
How Roku and The Trade Desk Compare:
• The Trade Desk has the same market cap as Roku with nearly 35-50% less revenue.
• Notably, TTD has better cash flow and is marginally profitable.
• Roku’s Cost of Goods Sold is bloated at 50% or more of revenue, which is a negative. Roku has thin margins on the hardware player revenue as it’s cheaply priced to get people locked into the ad platform.
• Roku does spend 2x more on R&D than TradeDesk, which is a positive as they should be investing to maintain their lead.
• I favor Roku between the two but CTV ads are a big enough opportunity to add both to your portfolio at the right price and/or to buy calls.
SECTION 3: Technical Analysis
Provided by Knox Ridley
Section 3.1: The Trade Desk
The Trade Desk has traded in a relatively uniform bullish channel. I currently see it finishing 5 waves up from the December low in a larger degree 5 Wave count. The larger degree 5 wave count has us completing a wave (3), which I believe is playing out now. Below $226, and we will likely see this Wave (4) retrace fall somewhere into the green box – $174-$108. This will be our target to ride Wave (5) to new highs and beyond. If you are not invested in TTD, around $150-$135 will be a good entry.
It should be noted the strength of TTD’s uptrend. It is currently above its 8-Day EMA and-21 EMA. The Trade Desk, like many stocks in the tech sector right now, are making higher highs with decreasing buying pressure. This can be seen in the Pink Arrows, and if you’ve been keeping up with my analysis, you’ll recognize I’m using the term negative divergence frequently. This is when the RSI/MACD is making lower highs while the stock price is making higher highs. This is a sign of weakening buying pressure and an unhealthy uptrend. It typically leads to a correction, unless new material information is released to justify increasing buying pressure.
Another pattern to note is that TTD formed a classic candle stick pattern known as a 2-day reversal. This is when a trend is interrupted by a massive spike up on higher than normal volume, and then the next day reversed in full on even higher volume. This is a signal of exhaustion, and can signal a trend reversal.
You’ll also notice how the 50-day EMA acted as a major support in the picture above. If we break this trend, we will likely find our entry in the green box targeted on the chart. For now, let’s see what TTD gives us.
• Most likely scenario: TTD breaks support at $224, and we wait for a bottom to form, followed by a renewed uptrend to enter a long position.
• Less likely scenario: TTD breaks out to new highs on high volume to $285. If this happens, we will also initiate a position with wide stops.
• Notably Beth is bullish on TTD and does not foresee any fundamental issues. Rather she sees Connected TV ads as an opportunistic trend with a long runway. Keep this in mind for earnings.
Section 3.2: Roku
Since its IPO, Roku has been trading within a well-defined trend channel (in solid blue lines). It has bounced multiple times from the top of the trend line to the bottom channels, trading within a uniform fashion within this band. As you can see, Roku is at the top of the trend channel again, and has been bouncing around the ceiling, trying to break through. It’s worth noting, the more a support/resistance level is tested, the weaker it become – this holds true for the $114 level, which would make a new high, and the $88 support, which is the line in the sand for Roku’s continued advance.
The upper trend channel has been significant resistance for Roku, marking a short-term top twice before, followed by a decline in price. Today, we are, once again, testing this trend line with some notable differences:
• Roku is staying on the trend line for an extended period. It tried to turn down, found support around $88 and is back on the trend channel again. This is a show of strength, which needs to be factored.
• Negative Divergence: as Roku’s price increases, its RSI is decreasing, signaling a weakening buying pressure (note the pink arrows’ divergences). The same can be seen in the MACD’s peaks – as the price of Roku increases, the MACD is making lower highs. This is a show of internal weakness, which usually precedes a pull back.
• The Volume is decreasing as the price advances. In a bull trend, we want to see volume expanding along with the price. This is a signal that the buying pressure is thinning out.
• The MACD has rolled over from a high point and is pointing down. This is a sign of weakening internals, and usually precedes a pull back.
• Roku has broken the 21 Day Moving Average and is touching its 50 Day (orange).
• Notably Beth is bullish on Roku and does not foresee any fundamental issues. Rather she sees Connected TV ads as a very opportunistic trend with a long runway. Keep this in mind for earnings.
One final point, if you look at the chart below, you’ll see an outside reversal pattern (or bear engulfing pattern). This is when the high and low of the day is at greater highs and greater lows than the day before. What makes this pattern strong is: (1) the more days it engulfs the stronger (2) the larger the engulfing pattern vs the days prior is a show of strength (3) the engulfing pattern happens on higher than normal volume.
This pattern engulfs 7 prior trading days on higher than normal volume. I’d consider it a relatively strong indication of a trend reversal.
Technical Analysis operates within probabilities. The weight of evidence supports lower prices for now. Let’s see how it performs around this area. If it breaks through the $88 range, we could easily see it trade between the $60-$45 rather quickly (green box in the graph). On the other hand, if it can break through the long-term uptrend channel with heavy volume, this will be a bullish reversal.
Conclusion:
(1) With this being one of our highest conviction ideas, we want you to get the best price possible to hold for the long haul. We believe you have a chance to secure Roku in the high $50s to low $60s with patience. For now, we need more information on how the stock trades between the $88-$114 range to improve the odds of the gamble.
(2) Notably Beth is bullish on Roku and does not foresee any fundamental issues. Rather she sees Connected TV ads as an opportunistic trend with a long runway. Keep this in mind for earnings. Roku’s pullback will likely require a broader market sell-off.
