Over the past month or so, we’ve been building an index for our coverage. We realize there is a lot of research on this site and also quite a few trades. Fundamental analysis and all entries/exits are indexed by stock ticker and company name here. The index is fairly exhaustive and we refresh it every two weeks.

Quick Note on Apple’s IDFA:

Before I go into July convictions, I want to mention some news from Apple this month that is quite important for all ad-tech investors to know. The “Identifier for Advertisers” known as IDFA was changed in the recent iOS release to where it will now be more difficult to target and track users. This is much big news than the ad boycotts.

I wrote a detailed article for MarketWatch about this last year on the possibility of Apple shutting down the IDFA.

From the article:

The moat that Google and Facebook have enjoyed comes from having first-party relationships with nearly every user who has a smartphone. This is called first-party data and is a loophole used to collect data even after a user is on another property where there is no relationship. For instance, Facebook uses first-party data to power ads on streaming service Hulu, but at this point, the first-party relationship does not exist with Facebook’s social network once someone is on Hulu, and this is done without explicit consent (by both Facebook and Hulu). Easy-to-navigate opt-ins are not offered, as it’s unlikely Hulu viewers, who pay for the app, would want Facebook accessing their viewing data if they had to opt-in.

Another snippet here …

As of now, Apple has no plans to remove the IDFA, although for a company that insists it is a protector of privacy, at the very least, there should be better opt-ins. The changes made with ITP on the browser may not have had a big effect. However, the implications of Apple restricting IDFAs on iOS becomes more serious with the iPhone having a global penetration of up to 20% of smartphone sales. 

Even companies that have fancier IDs, such as Trade Desk with its Unified ID, relies on IDFA to some extent, and any changes to IDFA would limit the ability to collect and stitch together fragments about the user. 

That said, perhaps Apple should have addressed those issues before hyping its privacy efforts. As of now, Apple is enabling a lot of tracking with the IDFA, and this may not be an appropriate compromise for attribution as users are completely unaware their activity can be tracked across the entire device. 

Furthermore, users don’t have any method for approving the software development kits, from Facebook’s Audience Network or Google’s AdMob.

I also covered Apple’s Intelligent Tracking Prevention for the Safari browser in the Google PDF here.

This is not good news for Google and Facebook. How this affects The Trade Desk is something I will make sure to look into. When first predicting this would happen, it seemed The Trade Desk would also be affected but now that this did happen, I need to review the iOS 14 changes before making any hard and fast conclusions. It would be inconsistent for Apple to allow TTD’s unique identifier long-term as the goal is to get rid of these tracking IDs without explicit consent.

There are also some apps this could potentially affect. I need to look into Spotify, for instance, and any others that rely on advertising. Basically, advertisers may not want to pay as much if there’s less information on who they are targeting.

I’ve covered Facebook’s unauthorized tracking methods for a few years including around the Facebook’s Cambridge Analytica fall-out and followed up a few times here and here.

July Update: Reiterating Two Trends

If you are newer to the site and haven’t read our May Convictions Update, you can find this blog here as it expands on a few more stocks on our coverage list and trends we are following. Quite a bit from this update is still pertinent.you can find this blog here as it expands on a few more stocks on our coverage list and trends we are following. Quite a bit from this update is still pertinent.

After the fantastic run-up we saw off March lows, even the most opportunistic tech growth investors are bracing for a pull back. We may get one or we could march onward to new highs. My goal is not to make predictions but to be prepared for all scenarios.

Despite cloud software being a hot category, it helps to break this down as we move into the second half of the year with elevated valuation multiples, which are at a record median of 12.9 EV/Forward Revenue (typically the median SaaS is around 10 EV/Forward Revenue, at most). Shopify and the top 10 are averaging 35.3.

Below, I shed some light on two major trends that I think still have some runway left (regardless of bear or bull market). I’m choosing one trend in the high valuation category and another more varied trend that should gather strength as we go along this year.

The first trend is productivity and also cloud-native communications. I did cover this in the May update but the mark of a good thesis is that it shouldn’t change very often.

This is more of an offensive group with rapid top-line growth. I also discuss infrastructure stocks across the board (not only cloud) and some of the strategies around those recommendations as a defense for longer-term horizons.

When I say offense, what I mean is that I think it’s great to continue advancing in trends where there is momentum but it’s also good to look at trends that aren’t in play yet as a means of generating more gains on a long-term portfolio.

Productivity or Cloud Communications: Offense/Momentum

When you think of productivity tools, you should think of eliminating the need to endlessly look for an email you can’t find, engage on long threads with many people CC’d in nested messages, when you have to dig up contact information, switch between apps to reference conversations, or when teams are attempting to collaborate but things get lost, forgotten, or become disorganized and siloed.

There is such a clear need for this on a cost-benefit level, that this category is leading all of cloud right now including cloud infrastructure on spending. This is because the products are cheap compared to what productivity tools and cloud communications can save in regards to time and efficiency.

Here’s from my January convictions update:

Cloud productivity tools claim the majority of cloud budget allocations, and will increase from 10% in 2019 to 14% in 2020. The percentages are even higher among smaller businesses with up to 18% spent on cloud productivity tools in companies with under 500 employees.cloud budget allocations, and will increase from 10% in 2019 to 14% in 2020. The percentages are even higher among smaller businesses with up to 18% spent on cloud productivity tools in companies with under 500 employees.

Meanwhile, the media and anyone who missed out on this trend will have you believe the growth is random or temporary. There are obvious stocks such as Zoom Video and Slack that fall into this category. I’ve also covered Microsoft Teams although obviously not a pure play. However, when I feel strongly about a trend, then I will expand to include more stocks within that category.

This prompted us to include Twilio (PDF from December but reiterating this) and Bandwidth (new coverage in June). Twilio has underlying financial strength that institutions can get comfortable with. The company also has a strong moat evidenced by its high retention rate and revenue growth (that goes beyond the 10% accretive revenue from SendGrid that rebounded from 38% to 58% from Twilio alone).

Twilio’s moat is high switching costs as to switch from Twilio, you might have to port numbers, negotiate contracts with a new carrier, determine if the carrier covers all of the countries needed for your applications and whether the call quality and sending SMS is reliable. Uber might have the capability to do this in-house and/or to source many different vendors in different regions very few applications will have this size of team.

Regarding Bandwidth, if the company can beat and raise on the next earnings report, then I think we will see quite a bit of momentum here due to the company being perfectly situated across all three mega players in cloud native communications at scale. You can read this PDF here. Not only does Bandwidth serve every competitor, but all three (Microsoft, Zoom and Google) companies are capable of competing with telcos for B2B voice.

Notably, Bandwidth requires the video conferencing trend to extend to audio calls, which I believe it will. When I drive by the empty office buildings in San Francisco including high rises and SMB shops, like attorneys or dental offices, I wonder why any of them would have a traditional phone bill rather than a cloud-native phone system. There is really no need for communications equipment or telecommunications services. Cloud voice is cheaper, can be scaled depending on immediate needs, and can be built into collaboration platforms or used as a stand-alone.

On that note, I also covered Teladoc recently and this was put on the top of the list for entry. When I look at the momentum list, this one stands out to me.

From the Telehealth PDF:

Telehealth is the trend that shows the most evidence of overnight, digital transformation ushered forth from covid-19. According to a new report from S&P Global, telehealth patient volume has increased 3,000 to 4,000 percent during the early months of the Covid-19 outbreak.

In times of indiscriminate buying and indiscriminate selling, things can get noisy. As we continue to focus our efforts on breakouts that become buy and holds, we believe this is a trend that will outperform and are eying an entry despite a run-up in some names.

According to the report from S&P Global, providers that rarely employ remote care options have switched over to telehealth services. Facilities such as NYU Langone Health saw 7,000 video visits per day or about 100,000 video visits in April compared to 300 visits per month pre-pandemic.

The company also has a large and immediate addressable market with competitors attempting to quickly pivot. I’m actually encouraged by this because venture capitalists are great at identifying trends with long runways (i.e. I am not discouraged by the competition here at all). I think Teladoc has too much of a first mover advantage and there is a need for a company with credibility due to the urgency of the situation.

Livongo makes sense too, especially for growth around the behavioral health and inroads to remote monitoring. Similar to the above, we have a company moving into a new market and innovating on new territory.

Regarding Slack, I covered this in-depth on the May Convictions blog and my thoughts on this haven’t changed. (Getting a lot of questions on Slack). Please read that update for more information on why the lack of momentum right now doesn’t bother me long-term.

Infrastructure: Defense/Diversification

The one area where I am very bullish is infrastructure and the need for better connectivity. There are many ways to look at this microtrend but the way I’ve chosen to do this is all encompassing. Whether it’s hyperscalers, edge computing, virtualizing networks, lower latency/faster application delivery, increased internet speeds for the end user or if you choose to think of this in buzzier words like “5G” and “Artificial Intelligence” … all of the above is very interesting to me right now from a longevity perspective (i.e. not sure what the July returns will be but looking for returns next year or next five years).

There are two reasons why this is important right now. The first reason is that we have maxed out our capacity and what we are capable of with 4G and our current wireless infrastructure. In July, I will dedicate more time to covering edge computing. This is a topic where I began holding interviews in Q1 2019 with companies like Mutable and Schneider Electric – Mutable is the AirBnB for hyperscalers and Schneider is tackling the power and cooling issues edge computing will need to overcome with micro data centers.

In a nutshell, the purpose of edge computing is to bring the power of cloud computing closer to the device. This goes beyond delivering content faster or small edge applications. This is about opening up new use cases with an overhaul to the current paradigm to bring data and compute closer. No company today is truly doing edge computing the way this will be done to open up new use cases in the next three to five years. I plan to cover this in-depth both editorially and also for my premium readers, as well – probably mid-to-late July.

The second reason infrastructure is important is that we will lag China if we are not careful about upgrading our infrastructure for new use cases; most especially artificial intelligence. For about a decade now, leaders at security conferences have been discussing why wars will no longer be fought on the ground, rather they would be fought in cyberspace. Improving our infrastructure is not simply a convenience for streaming faster Netflix movies, rather it’s a matter of the United States remaining a world super power. Regardless of political opinions, China is gaining strength through infrastructure. This is what the Huawei ban is about.

Therefore, we should see serious pressure from a wide range of demand: the government for defense purposes, enterprises who want to stay competitive, SMBs who want to scale, startups who want to innovate including a new class of graduates who develop AI applications, and the end user who will consume a wide range of products and solutions that come from the new AI and 5G hype cycle.

What lies beyond the bigger infrastructure players (Amazon, Google, Microsoft) is a big mess of hardware companies, semiconductors, price wars, high capex, exposure to trade wars and geopolitical tensions and earnings that can often miss the mark. No wonder everyone likes cloud software!

With that said, it’s a bit contrarian to recommend companies with 7% or 10% year-over-year revenue growth to tech investors who are accustomed to a minimum of 40% and upwards to 100% revenue growth for their top performers. I explain below why my counter-trend analysis on individual stocks may be bold in this momentum-frenzy environment but important to consider.

Keep in mind that when an infrastructure company does well, it can become a 10-bagger with many restful nights. These typically aren’t momentum stocks and that has some major benefits. You can think of cloud software as hitting singles and doubles that keep the game going but a great infrastructure stock is a grand slam that creates a lasting and rewarding impact.

For example, I can rest easy with my Nvidia and Microsoft calls from 2018 knowing these companies will stand the test of time. In fact, I believe they will both be among the world’s most valuable companies in ten years from now. The switching costs are so high and moat so defensible that there’s little question or debate as to where the returns will go (i.e. up and to the right). I covered a similar concept in my recent Microsoft article that pointed out how hundreds of cloud software stocks funnel into cloud infrastructure (it’s like the neck of a funnel).

Point being, imagine if we can pick the right infrastructure stocks this year with 5G, artificial intelligence and cloud computing applications built on these companies over the next decade? That’s what I’m doing when I cover some of the stocks below and what I’m doing when I cover stocks that show very little revenue growth now but have a serious shot at being a foundational piece to the new paradigm.

Keep in mind that out of ten infrastructure stocks, maybe I will nail five and the other five will need to be considered part of the process. This stuff isn’t obvious basically and it’s complicated. If you want a higher success rate, then momentum stocks and more temporary gains are the only way to go. This can be accessed through my most recent cloud update: “Top Cloud Stocks for H2 2020.”

Marvell:

Marvell is at the center of many important trends with a $23 billion market cap. One thing to keep your eye on is Nokia and Samsung ramping up to provide telecom infrastructure where Huawei has been banned.

Here’s a recent press release from Nokia and its partnership with Marvell. The new partnership will provide customized chips based on processor designs by ARM. The new chipsets will be placed in Nokia’s 5G radio access technology. These chipsets will replace the field programmable gate arrays (FPGAs) that Nokia chose for its products and turned out to be very expensive. According to Barclays, Nokia was also affected by Intel’s delay on the 10-nanometer (which we covered on the AMD report on this site – see below). This led to the nasty $6 billion post-earnings plunge Nokia saw in the its market cap. 

Nokia’s products based on its system-on-a-chip technology made up 10% of shipments in 2019 and are expected to grow to 35% by the end of 2020. By 2021, Nokia’s SoC and infrastructure processors, currently branded as ReefShark, is expected to reach 70%.

In addition to Nokia, I outlined that Samsung could also grow quite rapidly from the fallout with Huawei and included the following chart.

Samsung looks tiny here but that doesn’t tell the full story as Samsung reportedly took first position in global sales in the first part of 2019 with 36% sales compared to Huawei’s 28% and Nokia’s 14%. Also, Huawei and Samsung are the only end-to-end providers of 5G infrastructure.

Here’s what a snippet from the Marvell PDF:

Marvell supplies components for 5G base stations and both Nokia and Samsung are customers. In turn, Samsung works with Verizon, AT&T, SK Telecom, and KT. Samsung has been able to capture business that Huawei has lost, and the level of this future growth is an important catalyst.

According to Gary Mobley of Wells Fargo, Marvell can generate $600 million in incremental revenue from 5G base station customers compared to the $2.9 billion over the past four quarters (20%) of revenue.

Marvell management confirmed they expect $600 million per year from 5G revenue on the last earnings call. The speed of this growth depends on Samsung and Nokia’s market share.

Marvell worked with Samsung on 4G infrastructure. These two companies are now collaborating on delivering compute power for massive MIMO beamforming. You can access more information on this in the 5G Part 1 PDF.

“Massive Multiple Input and Multiple Output (MIMO) sends the data through multiple data streams called layers, which increases parallelism and throughput. MIMO helps avoid lost signals with multipathing, which allows the base station to send multiple copies of the same signal for increased redundancy. Note: The antenna array is one fundamental change to 5G infrastructure. The initial 5G rollout will use existing cell towers, however, newer, dedicated 5G network infrastructures will require many more antennas than used in previous generations.

Beamforming: Rather than broadcast all of the signals in all directions, telecommunications beamform the signal towards the receiver. This helps to minimize interference and increase the data rate. Wi-Fi routers employ beamforming now, and this will become an essential component for 5G. The FD-MIMO uses both horizontal (Azimuth) and vertical beamforming (Elevation).”

Intel plans to also extend from the core through access to the edge to compete with Marvell, yet Marvell is more experienced in the access network. According to this analyst from Moor Insights and Strategy, the decision between the x86-based SoC from Intel and the Arm-based SoC from Marvell will “last for multiple generations” due to 5G being more software based and written for one or the other.

In my opinion, the reward for owning Marvell is taking a calculated chance the company locks up the 5G access network with Arm-based SoC. To me, there is enough evidence this can happen and is well worth the risk – especially as Nokia has already experienced a setback from Intel.

AMD:

AMD has accomplished a feat of innovation and progress against the 800-lb gorilla, Intel. This company is exhilarating by crushing the competitor on performance and price (in my little world, it’s exhilarating, anyways!). Here’s what I said in the AMD PDF Report:

“Intel is playing catch-up with a comparable 10nm release planned for Q2 or Q2 2020. The Ice Lake Xeon Scalable Processor with 38 and 48-core options could be pushed into 2021, according to a Wells Fargo note. By the time Intel catches up to AMD’s August 2019 release of the 7nm Radeon and Rome processors, AMD will likely be releasing its next feature line codenamed Milan.

It’s important to note that Intel’s upcoming 10nm can be comparable to a 7nm chip, as stated by Taiwan Semiconductor as the naming of chips is becoming less important over time. One area where Intel’s chips outperform is they can draw up to 300 watts compared to AMD’s maximum of 225 watts.

However, marketing names aside, AMD has blatantly stated the second-generation EPYC server processors had 1.8 to 2 times the performance advantage of Intel’s Xeon processor line and is half the cost in some instances. Companies like Hewlett-Packard, Google and Twitter were part of this launch.”

There are a few reasons AMD could become the “it” stock again. The first is the launch of the 7 nm EPYC CPUs which are expected to hit in August. Mercury Research believes AMD can grow market share from the low single digits to the low teens. Next Platform thinks AMD could hit 20 percent of market by 2021:

An article in Next Platform frames AMD’s forward data center revenue well: ‘The question is can [AMD] double it again in 2021 and get what would be its rightful share of datacenter CPU capacity, which should be somewhere around 20 percent of the pie … We think that given the desire for competitive pricing in the datacenter and the issues that Intel has had in getting its 10 nanometer “Ice Lake” processors in the field, there is a very good chance for AMD to have that 20 percent share in 2021.’

AMD’s forward revenue guidance for 2020 is very strong at $8.68 billion under the assumption the data center will be about $1 billion. In the financial analyst day that took place earlier this year, AMD provided projections of $14 billion in annual revenue by 2023 based on 20% CAGR (slide 11). The company placed the projection for data center revenue at 30% of total sales by 2023 (slide 12). Compare this to $6.73 billion in revenue for 2019.

This summarizes my thoughts:

To recap, I like cloud infrastructure and chips powering cloud IaaS for the current public cloud market (now), the near-term growth in the hybrid market (next 1-2 years) and the AI market (3-5 years). To me, this is well diversified across budgets and enterprise needs.

F5 Networks:

The analysis on F5 Networks hinges on the company expanding beyond the partnership with Rakuten Mobile to virtualize radio access for reduced capex. Here’s what the PDF said about this partnership:

“Rakuten is Japan’s biggest mobile virtual network operator (MVNO). In early 2019, the company announced plans to build a network in 12 months without significant capex. The reduced capex is made possible through a cloud- native network.

The goal is to shift towards Network Functions Virtualization (NFV) technology, which uses the principles of cloud computing to create service delivery platforms “with greater agility and customization.” The end result is a Radio Access that is virtualized and running as a virtual network function on a private cloud. You can read more here and the press release regarding Rakuten’s partnership with F5 here.more here and the press release regarding Rakuten’s partnership with F5 here.

What F5 proposes is to use a mix of public and private cloud (i.e. hybrid) to optimize networks through the concept of network slicing. Network slicing is the practice of running multiple networks as virtual independent operations on common infrastructure.

The main thing to understand here is that our current infrastructure does not allow for computational-intensive tasks and workloads to deploy with low latency. The solution is network slicing, which is a way of using multiple operators and dedicated or shared resources to deliver processing power, storage and bandwidth.

This will help 5G networks serve customers with different needs ranging from automotive to manufacturing.

• Connected vehicles
• Robotics automation
• Enhanced security can occur with authentication at the network slicing level
• IoT can have different slices for different IoT users
• Live broadcasts including AR/VR – or even just cloud gaming

Network slicing can help continuity in a fashion similar to international roaming. Rakuten is getting a head start by using a software-defined cloud network to decrease capex and scale quickly. This moves away from high-capex hardware infrastructure to more of a cloud computing architecture. F5 is essentially working at the telco level to help further the footprint for 5G service.

This month, according to F5’s more recent announcement, Rakuten mobile was increasing the partnership to include application security services.

The takeaway is that what Rakuten and F5 are doing is quite ambitious. If they nail this, expect others to follow. This sums up F5 well from the PDF:

However, as companies seek to scale application deployment, there are infrastructure-level issues that cloud software companies will struggle to solve. F5’s experience with hardware and a pivot towards software could be a winning combination. This goes beyond end-to-end application infrastructure, where the company already has a solid reputation (i.e. Datadog and IBM’s RedHat both favor F5 as a partner here). F5 is also doing a good job of staying in front of the trends of microservices and the Kubernetes platform.

Lam Research:

Lam Research is a cash flow machine and has serious top-line growth potential, as well. The market right now is driven by momentum but when bottom lines start to matter again, Lam Research will make for excellent diversification in high growth portfolios.

As covered in the PDF:

“Applied Materials reported $14.6 billion in revenue last year yet similar cash reserves of $3 billion as Lam Research with $9.6 billion revenue. The 5-year free cash flow growth rate for Lam Research is 38.12% compared to Applied Materials at 12.47%. The 5-year free cash flow growth rate for KLA is 7.52%. This is a significant spread on free cash flow and the comparables.”

And regarding top line growth:

According to the recent investors day presentation, the company expects revenue to reach $14.5 billion to $15.5 billion for 2023/2024. This assumes a water fab equipment market assumption of $60 billion up from a market of $46 to $47 billion in the current year. If the market is more bullish by this time frame, the addressable market estimate for WFE is $70 billion with Lam Research’s revenue at $17 billion and EPS of $36.

In 2019, Lam outperformed water fab equipment growth (WFE) 2:1 with CAGR of 16%.

The markets that Lam serves are set to rebound:

“According to IC Insights, NAND Flash sales declined 27% in 2019 and will rebound at 19% in 2020. DRAM sales declined 37% in 2019 and will rebound 12% in 2020.”

Future catalysts for Lam include the Sense.i platform that produces a 50% improvement in etch output density. Upgrades to 3D NAND have been an ongoing catalyst.

Lam’s moat comes from the lead the company has with service contracts and customer collaboration. Lam’s customers include Micron, Samsung, SK Hynix, Toshiba and TSMC.

Datadog and Dynatrace:

Although Datadog and Dyntrace are lumped in with cloud software right now, I view their revenue as more resilient as it’s tied to infrastructure monitoring. These are companies I reiterated in April in two updates that I was keen on them for the solid trend of cloud IaaS.

In addition to the productivity and cloud communications trend above, these two stand out from the H2 Cloud Stocks momentum list as they fall into the infrastructure trend, as well.

PDF on Datadog here
PDF on Dynatrace here

Inseego:

Inseego creates more connectivity between the device and the tower. The fixed wireless access market is expected to grow 98% CAGR between 2019 and 2026. That growth is eye-popping. We originally covered Inseego for 5G but the coronavirus and stay-at-home have ignited the company for 4G uses. About two weeks ago, we wrote at the top of the market update that Inseego will do well if stay-at-home ordinances are implemented again. I

I explain this in further detail on the 5G update in May with reference to the HEROES Act.

“The HEROES Act was passed by the House and the bill is now moving towards the Senate, where the $3 trillion may not pass. Regardless, a bipartisan provision in the bill is the “Emergency Connectivity Fund” with $1.5 billion going towards the funding for “Wi-fi hotspots, other equipment, connected devices, and advanced telecommunications and information services to schools and libraries.”  There’s another $4 billion to be allocated to emergency broadband service.”

The takeaway is that Inseego should be a nice hedge if states start to implement stay-at-home orders again. Will that lead to a bear or bull market? I’m not sure but Inseego should do well either way.

Atomera and Boingo:

These companies are high risk-high reward as they are dependent on partnerships. Atomera is very volatile as it’s based on Phase 4 contracts. This is an all-or-nothing situation with a decent management team trying to solve engineering challenges for enhancing transistor capabilities and reducing chip size. The Investors Presentation in March stated the company is engaged with 50% of the world’s top semiconductor market.

Management stated on the recent earnings call that the Phase 4 deals could be delayed. This is one to watch. High risk/reward would be entering prior to Phase 4. Lower risk/reward would be waiting for a Phase 4 deal. I favor the second scenario because if the team can make this happen, then there will be a lot of runway left for the stock.

Boingo defies financial analysis and relies entirely on product. Essentially, Boingo solves the issue of indoor connectivity for 5G for arenas and large spaces. Boingo’s main competitor was Huawei, who admittedly had a better product but at the cost of security concerns. Now that Huawei is out of the picture, Boingo becomes an even more obvious choice for Verizon, AT&T and T-Mobile. The risk here is if the ordinances against big group gatherings from the coronavirus has shelved this concern (i.e. arenas are closed for now).

Boingo PDF here
Atomera PDF here

Qualcomm

Qualcomm is sitting in plain sight as the de-facto leader for 5G. Compared to previous generations, Qualcomm stands to become a bigger beneficiary.

Per the Qualcomm PDF:

On that note, Qualcomm can charge more for 5G chips. Analysts estimate 5G smartphones will offer Qualcomm the opportunity to sell 50% more dollar chip content per device versus the prior 4G generation, due to the increasing complexity and higher pricing. Dollar chip content refers to the dollar value of chips that a device holds. (source: Barrons).50% more dollar chip content per device versus the prior 4G generation, due to the increasing complexity and higher pricing. Dollar chip content refers to the dollar value of chips that a device holds. (source: Barrons).

There are debates over how significant 5G will be for consumers and if they’re prepared to pay for upgraded smartphones. Regardless, Qualcomm is well-diversified across 5G modem chips, 5G New Radio (NR) mmWave private networks, XR devices for AR and VR, and cellular vehicle-to-everything (C-V2X) for autonomous driving.

Micron:

We’ve covered Micron on this site. The company had a nice earnings beat this week with strong guidance. The company forecast adjusted fiscal fourth-quarter earnings of $0.95 to $1.15 EPS on revenue of $5.75 to $6.25 billion. Analysts were expecting earnings of $0.79 EPS on $5.46 billion revenue in the upcoming quarter.

In the current quarter, the company beat on revenue and missed on EPS. Revenue came in at $5.44 billion with EPS of $0.71 EPS compared to analyst expectations of $5.27 billion in revenue and EPS of $0.75.

My main hesitation with Micron is that the company is third behind Samsung and SK Hynix on NAND/DRAM. With that said, the company is priced better when looking at PE ratios and EV/sales compared to Lam Research. 

Micron PDF here.

A few more random thoughts …

As most of you know, I’ve covered Roku very (very) extensively. We are early to this trend and the market is confused by this. I had said on a previous occasion the stock could become a 10-bagger. You have to think very long-term as Roku does advertising-on-demand (AVOD). The market is confused because Netflix does SVOD (subscription video-on-demand) which has been around for 10-15 years. AVOD has been around for 2-3 years.

Here is a message I recently wrote on Roku explaining some of the more recent questions:

The reason I mention Pay TV ad dollars is because the market mistakenly thinks OTT is very mature bc Netflix has been around awhile. The AVOD market is quite nascent. Rather than look at cord cutters, I am looking at the migration of ad dollars to judge where we are in the cycle (i.e. very early). 

My understanding is Roku is covering all angles from the OS to the app channel to the demand-side ad platform. It’ll be tough to outsmart Roku’s management from a strategy perspective. If Google just throws a lot of weight into this (and cash) then I am okay with Roku being number two due to the size of the opportunity as a pure play.

Regarding global, Roku has a really solid OS for very cheap. They put TCL on the map not the other way around by providing TCL with a super solid connected TV operating system. I don’t think Roku needs one manufacturer that badly. 

Globally, there are lots of cheap television manufacturers that should view Roku as an asset to boost sales. 

Feel free to browse the free blog for early Roku coverage and also the premium site in the stock index where all of our premium coverage is indexed by stock ticker.

On the topic of Netflix, I think this company could become very strong through the coronavirus situation at a time when Disney is relatively weak. If you have questions on Netflix, feel free to ping me on the forum under the stock category.

If you’re new to the site, check out Chainlink for blockchain. Might be trading a bit high right now but blockchain smart contracts are very interesting and a trend we are very early to cover.

Thanks everyone! Really appreciate the readership and your support for this website.

We are moving away from ranking the stocks by conviction as the organization forced us to choose between too many stocks that we have equal conviction on. The conviction and story rarely change and the monthly time frame set up an expectation that the conviction changes very frequently. What does change daily/weekly is price. Instead, we are going to display our portfolio and the stocks we are watching closely for entry. This will also serve as a reference page for Knox’s active trades. This list combines the fundamentals with technicals to find good entry points for our active watch list.

You can view our portfolio here.herehere.

These include: (1) Active Portfolio, which is the tech portfolio that tracks our open-trades and long-term positions; (2) Conviction List, which tracks the gains made in Beth’s top picks from the date of her first publication on each stock and those we are watching to enter; (3) High Growth list, which tracks the current momentum names for anyone looking to play quick moves in the market.

You can view a list of research and stocks covered here. stocks covered here. Please use this list to get acquainted with the general microtrends we are targeting as well as the positioning of the companies we believe will benefit most from these microtrends. We will build out this list to have brief information on the conviction so check back soon.

We are also testing a new hedging strategy that meets our objective of building and protecting a long-term, buy and hold portfolio (i.e. our “Active Portfolio”). Our cost basis for “long-term” positions is set with a series of trades (these are noted on the Active Portfolio as “open-trades”). Some of our positions have a low-cost basis and others are trading near our entry.

Regardless of when you build a tech portfolio, these stocks are high beta and the sell-offs can happen quickly, especially because momentum traders are attracted to the high revenue growth in tech names. Beth covered some of this in her H2 2020 Cloud PDF. 

We have been working on a hedging strategy that allows us to remain in our long-term/buy and hold positions even when the market goes through drawdowns. In our industry, this can happen a couple of times a year regardless of the economic backdrop.

Picking the stocks is half the challenge. The other half is holding onto the company once you have a position. For example, if you had the foresight to grab Amazon near its IPO, you had to withstand six drawdowns that gave up at least 30% each time. Two of these drawdowns were greater than 50% and one of them was greater than 90%. Today, the position is up around 1800%.

This is the reality you face even with great tech companies that have massive addressable markets, little competition and are diversified across multiple growth segments (i.e. Amazon as the example). Emotions are difficult to manage and our goal when testing a hedging strategy is to not sell prematurely.

We are developing hedging strategies that will allow us to remain long. The first is a trend following strategy that is rules based. This strategy was inspired by Puru Saxena on Twitter, who is a must-follow. We watched him navigate the March 2020 sell-off and it was flawless.

We reached out to him for permission to test his hedging strategy especially because he also invests in high-beta tech stocks. He gave us the green light and we are grateful for the “FinTwit” community where everyone can continually learn and improve their craft. 

We made a few tweaks on the strategy to fit our portfolio. This is because we cover a broad range of names including semiconductors, digital media, small caps and big cap stocks.

PLEASE NOTE: You will be notified of when we our hedge is on and when our hedge is off. You will not need to incorporate this directly. We will simply let you know when our hedge is on and off and you can choose to follow or not.

Please always consult with a financial advisor for any stock trades or strategies you wish to purse. Beth is a technology industry analyst only and I am a technical chartist and someone who manages my portfolios only who discloses my personal trades.

Trend Following Hedging Strategy

The first step is to find the ETFs that correlate with our portfolio. For semiconductors, this would be SMH. If we are overweight mega-cap tech names, our system could pick QQQ. Due to to the run-up in cloud software, we are more closely correlated to the Russell 2000 growth ETF under symbol IWO.

The following are rules to determine if we should be hedged or not: We will follow three exponential moving averages to track two trends: (please review the glossary of terms):

• Short-Term Trend: when the 5-day EMA > 13-day EMA, the short-term trend is up. When the 5-day EMA < 13-day EMA, the short-term trend is down.
• Long-term trend: when the price of the ETF is above the 150-day EMA, the long-term trend is up. When price goes below the 150-day EMA, the long-term trend is down.

When the long-term trend is down AND the short term-trend is down, we will short the dollar value of our tech portfolio. For example, for every $1 we have in long positions, we will take out an equal $1 short position in IWO. This means the short amount will be equal to our allocation in technology stocks.

While the long-term trend is down, we will follow the 5-day EMA/13-day EMA crossover to tell us when to short and when to cover that short. When the short-term trend is down with the long-term trend, the hedges will be on.

When the short-term trend is up and the long-term trend is still down, the hedges come off. Also, when the price of the ETF we are tracking goes above the 150-day EMA, the hedges come off.

The pros: you will have some segment of your portfolio that is long volatility in case of a deep sell-off. This should counter balance the losses we will experience in our buy and hold tech portfolio. This will reduce our drawdowns and help us comfortably sleep at night during times of immense volatility.

The cons: In a market like 2015/2016, there could be a number of whipsaws, causing minor losses and erratic signals. In this situation, we may sacrifice gains on the upside in order to protect our downside.