I covered my top tech predictions recently with an opening statement that we are in an earnings recession as the aggregate S&P 500 is expected to fall 2.6% for the fourth consecutive quarter of year-over-year net income declines. Compare this to 2018’s 23% increase in EPS.

I won’t comment too much on the coronavirus other than to say that Knox is very good at finding bottoms. Please follow him in the forum and he will be writing blog updates to keep you in the loop on what he sees for targets. Right now, based on the information the market has given us, he sees this pullback taking us to 3170-3050 with a small bounce before we hit this target. He will be writing a full-length update by Thursday on technicals when he has more data to work with.

Purpose of this update

My goal is to help our premium readers navigate the upcoming year as best as possible. Especially as we now have a catalog of research, this update will be geared towards organizing my thoughts around the research we’ve published in a more conversational tone.

In the 8 Predictions for Tech Stocks in 2020 column, I covered eight points. I plan to expand on these for my premium readers with specific stocks starting with this blog.

My two favorite growth trends in tech right now are connected TV advertising and hybrid cloud. Cloud productivity is a strong trend, as well. You can definitely squeeze a few more drops out of mobile (Apple, Facebook and some Google) — but just be aware that tech industry verticals don’t lead in tech for typically more than a decade. We are a hype industry and the way people and businesses interact with tech waxes and wanes in a fairly predictable pattern.

For instance, despite every person on earth using the internet many times every day, the hype faded. We still use the internet every day, but it’s not a driver of growth like it used to be. (Even Amazon needed cloud this past decade to drive operating income). Other examples include mobile gaming, which had a big boom and faded. PC CPUs still drive profits but the boom is over, etcetera.

Over the next two months, I’ll be going to a Deep Learning and AI conference, RSA security conference, Nvidia’s GPU conference and will add more conferences as we go along into Q2 – maybe SaaStr and Programmatic I/O.

RSA at the end of February should deliver some excellent intel on cloud security – so look for a detailed update on companies like DDOG, DT, ZS, CRWD, ESTC, SPLK, CYBR, FTNT, PANW, and QLYS.

Some leading stocks that I’ve covered:

Quick overview of important stocks that are not in the categories below. We’ve hyperlinked the research for easy access.

• Nvidia has my highest conviction for the next ten years, although Roku is a close tie for second place when considering size of company relative to addressable market.
• I am watching for breakouts from Xilinx and Marvell. One of these should capture the market alternative to CPUs/GPUs whether it be FPGA or ASIC market – Right now, my understanding is ASICS are winning out. Here’s a good write-up if you want more info.
• AMD is a great product too and I fully believe Intel has its hands full with AMD as a competitor.
• Alteryx and Twilio are safer bets in cloud software as the market likes these companies and they meet a few of the fundamental benchmarks with above average forward EPS growth and above average forward revenue growth (the combo is good to have)
• Alibaba has been my China pick throughout the trade war and it hasn’t let me down or our readers as we continued to encourage this stock through the rockier trade war spots. This company is centered in many big trends (B2B ecommerce and China’s soon-to-be burgeoning cloud market) so keep an eye on it if you’re not invested.
• Shopify is an excellent stock with very strong forward growth guidance. As I mentioned in the PDF, by serving the merchants, Shopify has a bright future ahead. Follow Knox for TA on this one bc it’s volatile (and that’s a good thing for anyone not in the stock yet).

Connected TV

Connected TV advertising is in a sweet spot because it opens up the multi-billion dollar vault of brand dollars. This is distinguished from direct marketing dollars that favor mobile or desktop.

Please reference the following premium coverage for Connected TV ads:

Roku/TTD PDF
Telaria PDF
Premium blogs here and here.
Premium blogs here and here.

I’ll provide a quick summary:

• Despite mobile devices far exceeding the number of televisions globally, ad spending on television continues to thrive with 34% of ad dollars in 2018 compared to mobile’s 33%.
• Television ads are favored by brands who have large budgets as they prefer these impressions.
• Connected television delivers the optimal form of advertising as you can combine data on the viewer with television impressions.
• Prior to connected TV, or over-the-top TV ads, the only method of audience measurement was Neilson. These are surface-level insights, such as gender, age and income.
• Connected TV ads now offer data comparable to mobile, which cracks open a lot of brand dollars
• Average revenue per user on ad platforms like Roku is $20 ARPU compared to Twitter at $9 ARPU. It took Facebook over a decade to surpass $20 ARPU while Roku did this very quickly (1-2 years).

When a company is centered in an important trend, short-term quarterly earnings are not something that I care too much about. With that said, I don’t foresee revenue being a problem for the companies below. Earnings could miss at times, if a company is attempting to grow very quickly.

If the market wants to sell-off over a short-term miss, then this will open up opportunities for any readers who are not invested in this trend yet, and it will allow those who are invested to increase buy and hold positions.

Roku:

Roku continues to be a high conviction stock as the company owns the tech stack from hardware to operating system to ad platform. Hardware is very low priced and is ad-supported for lower GDP geographies. eMarketer came out with a report in November predicting Roku will continue to lead the market in hardware at 44.2%. (Please reference the razor/razor blade model I cover in the PDF for why hardware matters despite contributing very little to profits)

As stated, one of Roku’s strengths is that it’s more agnostic compared to big tech competitors. We saw this with Apple’s launch (Roku was present), and Disney buying many ads from Roku. There are some rumors that Roku could have a better earnings report than expected because of Disney’s ad spend.

This agnosticism will help Roku with global expansion. It can be quite threatening to invite Google or Amazon into your hardware if you’re a mid-size manufacturer of smart TVs or OTT equipment (even big brand behemoths like Disney and Apple don’t want to strengthen Google or Amazon).

On that note, Roku expanded into Brazil recently. Here’s a write-up on the announcement. If you read my Roku coverage, then you know my conviction is based on the company doing well in international markets.

A reader had asked me about Vizio entering the market. On their own, Vizio doesn’t have enough of a market presence to scale and target audiences (about 13 million devices). The accuracy of data increases quite a bit when you have more scale.

This consortium is something to keep an eye on but it may be more focused on linear, traditional television. Either way, as the article points out, television advertisers aren’t early adopter types who care to explore new platforms or ad formats, such as what Vizio is proposing.

Telaria:

Telaria is especially interesting due to their partnerships with Nielson and the executive team coming from Nielson. This is a selling point for advertisers as measurement is a common complaint and Nielson is a trusted name for TV advertisers.

I like supply-side platforms and have encouraged my readers to consider the strengths of working from the publisher side of the transaction. Rubicon brings a little bit of baggage to the deal as the supply-side platform adjusts to new ad standards. I covered this and the M&A in the PDF.

Rubicon/Telaria will face competition, as the ad-tech market has a low barrier to entry. However, the revenue growth and high margins from ad exchanges are typically very attractive to investors. This is more of a side note as I will monitor the competitive market as we go along.

The Trade Desk:

The Trade Desk’s strength is programmatic omnichannel. They work with advertisers on connected TV ads, but most importantly, they also deliver those ads across all mediums so the advertiser has a one-stop shop.

Programmatic and omnichannel are not unique or new, but TTD’s advertising ID is a differentiation that helps the company rise to the surface as one of the best in the industry. This is because you can track the campaigns independently from Google/Facebook/Amazon’s blackbox.

One reader had asked if Google’s Chrome cookie changes will affect The Trade Desk. This change won’t occur for two years and will give The Trade Desk plenty of time to adjust.

Similar to Telaria/Rubicon, The Trade Desk will face competition due to low barriers to entry in ad-tech. Not all of The Trade Desk’s revenue is Connected TV ads, of course. But it should help the growth trajectory quite a bit that they are a leader in CTV ads. We will monitor any changes here, as well.

More on ad companies

Cardlytics broke out this quarter. This is a company that could be very interesting on a pullback. They reach banking customers and have signed Chase and Wells Fargo.

Adobe has their hat in the ring as a data management platform for connected TV ads. Read more here. The company’s fundamentals aren’t bad either. Keep an eye on Adobe as a leading ad-tech competitor.

A few notes on Snap and Pinterest …

We covered Snapchat in July. The company will need to figure out how to monetize the data outside of their monthly active user base if Snap plans to earn it’s keep with a market cap that matches Twitter (right now, Snap has about 50% less revenue than Twitter and same market cap at the $25-$26 billion mark).

Twitter makes its revenue from brokering its social media data on MoPub, an ad exchange the company bought in 2013. Twitter’s revenue is not driven solely from its monthly active users on the social feeds.  Neither is Facebook’s revenue. Facebook also brokers data on an ad exchange they own called Audience Network (this launched in 2014 and has the same name as what Snap proposed in April).

Snap will need to figure out a way to broker the data outside the social app to become a stellar advertising stock. Snap’s Audience Network announcement in April has not materialized yet. This would help put Snap on par with Twitter/MoPub and Facebook/Audience Network. I’d like to see an update on Audience Network before joining the crowd on this recent Snap rally.

Also, TikTok is a very real threat to Snap as they share the same demographic. This is another reason I’d like to see more discussion on an earnings call about Audience Network or a new press release.

There are a few risks to Pinterest that I have pointed out since the IPO and in our premium PDF, including the international ARPU and (formally) the high price-to-sales. The positives here is that Pinterest offers a new method of advertising that is very popular from a discoverability standpoint. The niche demographic doesn’t bother me from an addressable market standpoint – Lululemon has done quite well. Snap also has a limitation with its demographic and more competitors.

The price to sales is in better shape now at 11 with forward price to sales of 6.3. I like Pinterest long-term because it solves a real issue for advertisers, which is product discoverability. I cover this in the PDF. Follow Knox for TA updates on Pinterest.

Hybrid Cloud

Hybrid cloud is a trend wrapped inside of a trend. This is helpful because the market will be trading on financials rather than understanding the microtrend that is occurring.

Microsoft is the bellwether for hybrid cloud but there will be many more companies downstream that we plan to capture and build a foundation on.

The concept of hybrid is counterintuitive to anyone who reads the headlines on the popularity of cloud computing and cloud software. We’ve seen rampant success from cloud companies, such as Amazon’s AWS and Salesforce, plus 2018 and the first half of 2019 was a stellar year for many cloud companies.

This would have you believe every SMB and enterprise is moving to the cloud. But, this is dead wrong … especially for big-budget enterprises.

To illustrate my point using statistics:

• Spiceworks is a well-respected community of over six million IT professionals and 3,000 technology vendors. Their 2019 State of Servers survey reveals that 98% of enterprises will run on-premise server hardware this year[1].
• According to IHS, the number of physical servers is expected to double in 2019 across 151 North American organizations that were surveyed.

But here’s why there’s so much buzz about cloud …

• 83% of enterprise workloads will be in the cloud by 2020.
• 91% of businesses will use the public cloud and 72% will use a private one.

Yet, the budgets don’t match up …

• According to Forbes, 30% of IT budgets were allocated to cloud computing in 2018.
• According to Spiceworks, this is actually 22% of IT budgets this year
  (I would place slightly more weight on Spiceworks as a resource).

[1] For simple definition purposes: On-premise means physical servers owned by a company. Cloud means servers owned by third-party, such as Amazon or Microsoft, that is rented. Cloud can also mean software or platforms owned by another company and offered as a subscription service (Salesforce for instance).

How can cloud be so popular yet have less than 1/3 budget allocation?

The answer to this problem is hybrid cloud. Hybrid cloud allows enterprises to keep their on-premise servers while leveraging public and private clouds for specific workloads. This is an important trend because enterprises have very large budgets. The 20-30% you’re seeing equals out to $3.5 million spent on cloud per enterprise. This means an enterprise IT budget can easily surpass the annual revenue of some small businesses who are cloud-only.

Despite the security and intellectual property needs that drive on-premise, these enterprises are well aware they will be left behind if they don’t send real-time workloads to the cloud.

Regarding gains in the stock market, this is why Microsoft has been able to compete with Amazon’s AWS as Microsoft decided to build solutions that cater to the on-premise enterprises while Amazon (and Salesforce) were cloud-only. Cloud-only worked for awhile as SMBs signed up, but the bigger bag of gold comes from the enterprises who have these on-premise needs.

Datadog and Dynatrace

Datadog and Dynatrace are downstream from Microsoft as they help enterprises monitor cloud infrastructure and networks. They either currently offer on-premise or are expanding to on-premise as we speak.

This is why I chose to cover these stocks from the cloud software list (and thanks to the reader who pointed out Dynatrace is now public). Gartner believes cloud infrastructure monitoring can grow as much as 400% through 2021, and even then, this will only cover 20% of all business applications. If this is true, then either both or one of these (Datadog and Dynatrace) should be 4-baggers.

I’d think of these two as an investment pair. Datadog is more agile but Dynatrace already does well with enterprises. I like them both quite a bit better than New Relic or App Dynamics as they can move quickly to answer demand and iterate on the products. New Relic has to shed its image of being a SaaS leader for on-premise and Cisco’s ownership of App Dynamics could hurt in the long run as App Dynamics is not a singular focus.

Rather than choose one, seeing them as a diversified pair is a good idea.

Elastic NV

The reason I like Elastic is because there’s a movement towards “open core” – which takes free open source libraries and improves on them with premium products. Open source and closed source have always been at odds because open source has the larger community improving the product while closed source can pay the best engineers. (A good example is Android and iOS where Android has 85% of the smartphone market yet iOS has the profits and best engineers; open core sits between these pros/cons).

However, “open core” can be tricky because the open source community does not want to be taken advantage of. For instance, Amazon has attempted to profit from the same libraries as Elastic NV and there was serious backlash.

I believe Elastic NV will be successful at walking that fine line and that’s why I covered the company. Another company called GitLab (private company) does a great job of walking the open core fine line, as well.

There’s also the expansion into SIEM, which will help Elastic expand.

Cloud Productivity Tools

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.

Zoom Video and Slack fit this category. The cost-benefit ratio of cloud productivity tools is important to consider. For the small amount paid for the service, a company saves much more in productivity costs.

Zoom Video clearly has a high valuation. On the other hand, this company will be around for the long haul. Knox trades it well. I’d follow him on the forum if you have interest in a ZM position and look for his TA update blog on Thursday.

I have a high conviction around Zoom Video’s success because the product-market fit is exceptional and there are very few viable competitors in ZM’s path.

It may be contrarian, but Microsoft Teams doesn’t bother me at all with Slack. i.e. Amazon doesn’t bother me with Roku either. There is room for both and Slack’s agnosticism can become a plus. Not only that, but Slack is incredibly popular in San Francisco and Silicon Valley and there are many MS Outlook users who use Slack rather than Teams. I can’t quantify that but it’s still important to share what I’m seeing.

The main issue with Slack is that we are early to this trend. Enterprises and SMBs will eventually understand the benefit of having data to mine across their employees as opposed to siloed email, as well as the cost savings benefit of communicating across a team via messaging as it’s much more efficient. You saw this with consumers, and undoubtedly in your own experience, of how messaging overtook phone calls and emails for communicating due to the efficiency.

Unfortunately, Slack is really bruised up by the market. Knox also trades this stock well as it’s been range bound between $20-$23. Keep an eye on his updates if Slack breaks $24 for any buy-and-hold positions.

5G and Artificial Intelligence …

I’ve covered less than 10% of what I plan to cover on 5G. My plan is to provide more 5G coverage and AI coverage than any other tech analyst on the market. I’ll build this over time with many conferences planned this year including interviews with product people and executives in the field.

In regards to my current coverage on 5G, I’ll expand more on semis soon with Qualcomm being part of the semi coverage. You’ll be getting a lot more on 5G and many AI updates this year.

Boingo is a high risk/high reward choice. It’ll either hit a grand slam by providing indoor 5G coverage to wireless networks or it’ll strike out with someone else answering this demand. I’m leaning towards Boingo hitting a grand slam as they’ve been sitting on this technology for some time but it wasn’t valuable for 4G. As with any small cap, allocation is important. You can always add more when/if it breaks resistance.

In February  …

• We are planning a 5G spreadsheet similar to the cloud software spreadsheet we published and then will break this down into covering individual stocks
• Look for unique intel on cloud companies that are at RSA and SaaStr
• I’ll be starting AI commentary with a Deep Learning summit this week and Nvidia’s AI conference in March (quite a few AI companies attend)