Category: Stock Analysis PDFs

Nvidia Premium Analysis

Posted on by io-fund

We have a few years before Nvidia will show the market it’s true earnings potential. When a thesis is not reflected in the revenue segments yet, there are typically lower entry points and ongoing volatility. You’ll see in the technical analysis that although I could not be more bullish on this stock long-term, there is weakness in the semiconductor sector and we hope this translates to a lower entry point for our readers.   

The market is also in a fierce debate between AMD, Intel, and Nvidia and is also distracted by other chips, such as Micron and NXP. In my analysis, I look for growth. How big is the market relative to how big the company is now?

You can ignore Nvidia’s gaming revenue and other segments for the main trajectory that we are focused on. Gaming is great for stability and earnings reports, but the growth will not be from gaming (a market where Nvidia is already a mature, market leader). I’m also not focused on PC sales or the CPU-powered cloud, as the first is not a growth market and the second is not the piece in the cloud stack that will accelerate future technologies. 

I’ve written at length about the Mellanox acquisition and it’s a great reference for Nvidia’s long-term strategy. In this report, I’d like to break down what the GPU-powered cloud is capable of and why it’s important to differentiate Nvidia’s strategy from the competitors (and some competitors to keep an eye on).

0e2c95a4-828b-4858-bbee-199b8f618cb4_Nvidia-Premium-Analysis-1.pdf

Nvidia Premium Analysis

Introduction:

I’ve covered Nvidia a few times on my free blog, however, it would be a disservice to my premium members to not formally initiate coverage and provide critical updates to the GPU-powered cloud and AI economy as it’s built out. I believe Nvidia will be on my short list in a decade from now.

To be bold – I believe Nvidia will be one of the world’s most valuable companies by 2030. The research below organizes my investment thesis for the GPU-powered cloud and why I believe Nvidia will emerge as a clear leader. 

The question is how long can you have your money in a stock? This is a long-term play that requires a 10-year hold for the full return. Like Amazon, Google and Netflix, it requires ten years before emerging technology goes from a moonshot, to a viable company, to a less volatile company – and finally, to a profitable machine. Nvidia is a viable company that is volatile, proven during the crypto surge. Investors should see the crypto bust as an opportunity as the issues were not based on Nvidia’s core business. The trade war certainly hasn’t helped the stock price, either. 

We have a few years before Nvidia will show the market it’s true earnings potential. When a thesis is not reflected in the revenue segments yet, there are typically lower entry points and ongoing volatility. You’ll see in the technical analysis that although I could not be more bullish on this stock long-term, there is weakness in the semiconductor sector and we hope this translates to a lower entry point for our readers.    

The market is also in a fierce debate between AMD, Intel, and Nvidia and is also distracted by other chips, such as Micron and NXP. In my analysis, I look for growth. How big is the market relative to how big the company is now? 

You can ignore Nvidia’s gaming revenue and other segments for the main trajectory that we are focused on. Gaming is great for stability and earnings reports, but the growth will not be from gaming (a market where Nvidia is already a mature, market leader). I’m also not focused on PC sales or the CPU-powered cloud, as the first is not a growth market and the second is not the piece in the cloud stack that will accelerate future technologies.  

I’ve written at length about the Mellanox acquisition and it’s a great reference for Nvidia’s long-term strategy. In this report, I’d like to break down what the GPU-powered cloud is capable of and why it’s important to differentiate Nvidia’s strategy from the competitors (and some competitors to keep an eye on).

SECTION 1: Artificial Intelligence

Artificial intelligence is a collection of categories, including computer vision, natural language, virtual assistants, robotic process automation and advanced machine learning. The AI impact will not be linear, rather adoption will resemble an S-curve pattern with a slow start due to the substantial costs and investment required for applications. The slow start will be followed by an acceleration that is driven by competition across capabilities and innovations. The penalty is steep for laggards, as pointed out below.

The slow start to AI will cause many investors to become complacent, not realizing the artificial intelligence boat will quickly leave the shore, metaphorically speaking, once it is closed to new entrants. If you add in the inevitable recession that will follow this long bull market, we could see many investors rotate back to growth stocks too late to realize the full gains from AI.

As noted in the graph below, we should see an AI acceleration around 2022-2023. The last call for decent gains in AI will be in 2025, although by then, the gains will be somewhat diminished compared to investors who choose their AI stocks by 2021/2022. 

Basically, weigh the costs adding artificial intelligence to your portfolio earlier as opposed to later in the tech cycle as it’ll be one of the biggest economic growth drivers in history (more on this below).  

source: McKinsey

Nvidia’s acceleration may happen one or two years earlier as they are the core piece in the stack that is required for the computing power for the front-runners referenced in the graph above. There is a chance Nvidia reflects data center growth as soon as 2020-2021. 

Between the years 2025 and 2030, the stage after AI infancy, artificial intelligence is expected to add $13-$15 trillion to global economic activity, or 1.2 percent additional GDP growth per year. Compare this to the spread of information technology (IT) in the 2000s, which added 0.6 percent. Also, compare this to 5G technologies, which are expected to add $2.2 trillion over the next 15 years. 

McKinsey points out that front-runners, who are currently investing in artificial intelligence, will reflect an increase in positive cash flow of up to 120% from their AI investments. The capital required to invest in AI, however, is negatively affecting cash flow right now and will continue to do so throughout the next year or two. Laggards are expected to lose at least 20% of their cash flow from the negative impact of investing in AI too late (or not at all). 

Most investors today are well aware of what mobile and cloud did for tech stocks. These gains will seem minor in comparison to what artificial intelligence will do for your portfolio by choosing the right companies. 

Today, Nvidia is my top pick for AI. I will also be providing more AI stock picks throughout the next 1-3 years to ensure my readers are well prepared for the massive gains AI will deliver by 2030. I believe this report is being delivered before at least one more pullback in Nvidia’s future due to broader semiconductor weakness. 

It is too early for the data center to make an impact and this trajectory (data center) is what we are targeting. When I deliver information well before momentum, it helps to be patient with an entry and one of the main benefits of my reports is to give you that time, when possible.

SECTION 2: Competitive Positioning

Desktop GPUs is not the growth category that I am targeting for this investment thesis, which is why many oftcited statistics are irrelevant. For example:

“AMD shipments increased 9.8%, Nvidia was flat and Intel's shipments, decreased -1.4% as indicated in the following chart.” -John Peddie Research  

Many financial analysts and authors on Seeking Alpha (etcetera) are quick to think this means AMD is the better investment, whereas this statistic refers to a mature market. To cut through the noise, it’s important to remember this thesis is about the GPU-powered cloud. 

I’ve already covered why AMD is not as big of a threat to Nvidia as Wall Street believes. AMD has its hands full competing with Intel on the CPU-powered cloud and does not have the CUDA programming platform (more on this below). The two are competing in other segments (gaming, PCs) but those are less of a concern to the buyand-hold thesis in this report (data center). I can’t stress enough to separate these segments if Nvidia is of interest to you as a growth story.

Competitors to watch for at this layer in the data center stack are: 

•       Xilinx’s FPGAs, 

•       Intel’s FPGAs (through the acquisition with Alterra), 

•       Google’s TPUs (essentially an ASIC on the efficiency/flexibility spectrum). 

FPGAs have distinct advantages over GPUs as they offer a higher amount of on-chip cache memory to help reduce the bottlenecks from external memory, and are flexible enough to be reconfigured for various data types, such as binary, ternary, and custom data types, whereas GPUs must be modified at the vendor level. 

FPGAs are also known for power efficiency and test at 10x better in power consumption than GPUs and also 4x better than GPUs for general purpose compute. Reconfigurability for FPGAs help provide efficiency beyond deep learning for a large number of end applications and workloads. 

The architecture of FPGAs are very adaptable as the chips allow a user to address all of the needs of a workload with the resources provided by FPGAs. Meanwhile, GPUs are restricted as the architecture is a Single Instruction Multiple Thread (SIMT), which provides an advantage over CPUs but can result in lower performance efficiency.  

Today, FPGAs require knowledge of machine learning algorithms at the hardware level, in addition to the software development, and this is the barrier to entry for FPGAs. 

As readers of mine know, I like Xilinx and this will be a stock I cover in the future with a full-length report. The company operates in a niche, is the inventor of FPGAs and has the ability to attract developers to its ecosystem. The challenge with FPGAs is they are hard to program as most software developers are not able to program hardware. Xilinx is working on becoming more of a platform company to solve this issue, and if the company succeeds, it’ll be a worthwhile investment. 

Intel will face headwinds with developers, who are the ultimate decision makers for any ecosystem. Even now, you will be hard pressed to hear much discussion on developer forums and news feeds about Intel/Alterra’s FPGAs. Developers tend to avoid overly-corporate companies and cultures, and Xilinx has a serious shot of overcoming Intel if they execute correctly. 

AMD also has a decent chance of eating away at Intel’s market share on the CPU-powered cloud. Overall, I prefer pure play options, when possible, and most of my tech stock coverage focuses on this. In my opinion, Intel is not the growth story in these categories.  

This brings us to Google’s TPUs. TensorFlow is rising in popularity as a machine learning language and TPUs primarily run TensorFlow models. This is one of Google’s more successful experiments. They are cheaper and use less power than GPUs and are specifically focused on machine learning. 

TPUs train and run machine learning models and power Google Translate, Photos, Search, Assistant and Gmail – i.e. image recognition, language translation, speech recognition and image generation. TPUs do not compete with GPUs in other areas of artificial intelligence. 

It’s also important to remember that Nvidia and Xilinx are hardware companies that offer platforms for software developers. This is a distinct advantage compared to software companies (Apple, Google and Facebook) trying to release hardware chips. The market is so valuable, that they will most certainly try, but I think there are a lot of technical hurdles for a software company competing in the chip space other than Google. Workday’s cloud financial management solutions have less traction with 8 companies in the Fortune 500 and 530 customers overall.  

SECTION 3: Developer Ecosystem

In November of 2018, I wrote about Nvidia’s developer ecosystem as a primary moat. GPUs are hardware which require software to write applications and utilize GPUs. Nvidia has a special language called CUDA that is universally known due to a first mover advantage in GPUs. 

This ecosystem is not apparent to the public markets right now because new technology is developed in waves, and funded by venture capitalists in cycles. We are seeing the last of the mobile era of venture-funded companies with the IPOs of Uber and Lyft, — which began with Twitter, Yelp, Spotify — and was also reflected in Facebook’s epic rise from mobile native app revenue. 

We are in the later stages of the venture-funded cycle for cloud software, hence a string of newly public companies over the last two to three years with some runway to go in this category before the majority of use cases are claimed. For artificial intelligence, it is so early that it’s essentially invisible right now to the public markets as development teams are beginning to form. 

The strength of the developer ecosystem is what propelled Apple to become a $1 trillion company. While many investors look at iPhone sales, and Mac sales, the ecosystem that created by application developers is why Apple had an impenetrable moat. If the iPhone only had applications from Apple on the device (iTunes, iOS Maps, Safari browser), then many device manufacturers could have competed with Apple. The moat that Apple has enjoyed was created by the third-party developers who created iPhone applications in C and C++ with XCode, which made the device more attractive due to the mobile app ecosystem. 

Android then became the second operating system in the mobile duopoly. Due to the friction of learning too many languages, the mobile ecosystem did not entertain any further competitors. This is despite there being 5 billion smartphones globally (i.e. it’s certainly feasible from a consumer supply/demand view point to entertain more operating systems and app stores), yet the limitation came from the number of languages developers are willing to learn. Microsoft Windows failed because it launched too late, and developers had already chosen the two languages they were willing to work with. 

This is what is meant by developer ecosystem. Devices themselves do not have moats. The developer ecosystem creates the moat as third-party developers favor developing on certain operating systems and there is a limit to the programming languages they will learn before it impedes progress for the developer and the company the developer works for. 

This is what is happening with Nvidia’s CUDA. The chips themselves do not create the moat. The compute platform creates the moat. Due to the need for a universal language to build GPU-accelerated applications, universities are teaching CUDA, and students are graduating knowing Tesla/Volta chips over competing chips, such as AMD’s Radeon or FPGAs or TPUs. 

Here’s a quote from Marc Andreessen of Andreessen-Horowitz, one of the most successful venture capitalists in Silicon Valley: “We’ve been investing in a lot of startups applying deep learning to many areas, and every single one effectively comes in building on Nvidia’s platform. It’s like when people were all building on Windows in the ’90s or all building on the iPhone in the late 2000s.”

Here's another quote from a developer on Reddit:

“Nvidia, thanks to the CUDA software stack (which AMD cannot match), has a much more unassailable position than does Intel with Xeon CPUs (where an X86 application just runs on either a Xeon or an Epyc).” 

– software developer on Reddit

SECTION 4: Financials

In this case, I began with the investment thesis rather than the financials as the two do not sync up today. Gaming is Nvidia’s strongest revenue segment with $1.3 billion per quarter. Data center revenue has been flat to declining for three straight quarters, ranging between $634 million and $679 million.

The market is encouraged, yet cautious, with revenue of $2.58 billion in the most recent quarter fiscal Q2 2020, up 16.2%, yet down about 17% from $3.12 billion in the year-ago quarter. 

GAAP earnings was $0.90, compared to $1.76 a year ago, and $0.64 in the previous quarter. Non-GAAP earnings of $1.24 in the current quarter, compared to $1.94 a year earlier, and $0.88 in the previous quarter. 

Similarly, net income was down 50% year-over-year but up 40% quarter-over-quarter at $552 million. 

Next quarter, Nvidia is expecting $2.90 billion, plus or minus 2 percent, with gross margins of 62%. 

The bigger story this quarter was Nvidia’s gaming growth, which reflected 24% growth sequentially, with revenue of 1.31 billion compared to estimates of 1.29 billion. There is also evidence that inventory is normalizing with an inventory ratio of 50% and on track to lower to around 40% in fiscal Q3 compared to the previous ratio of 71%. 

As stated, the current financials do not reflect the growth expected from AI. 

SECTION 5: Technical Analysis

By Knox Ridley

5.1 Trend Lines and Internal Strength

Focusing on the black trend lines, you’ll see three sets. The upward trend in price, which coincides with the upward trend in momentum in the RSI, tracks two recent topping patterns in Nvidia’s price action. 

The trendlines coincide with each other. When both momentum and price roughly trend together, it can show a healthy trend in place. Using these corresponding trends can also offer reasonable warnings, as well.    

By following the approximate time at which both the RSI trend and price trend broke to the downside together, we can see safe and effective exits that allow you to side-step pull backs.  

Further information can be found by looking at the set of green and red arrows. Notice that just before the last top in Nvidia, before the May correction, as the price of Nvidia climbed higher, the momentum in the RSI was decreasing. So, when I see a divergence like this coupled with trendlines being violated, it’s a warning of a correction on the horizon.

This exact pattern is unfolding today if we look at the last set of trend lines in the price and RSI. With Nvidia’s RSI closing just below oversold levels and pointing down towards the black trendline, this same negative divergence pattern is unfolding in real time, signaling a weakening of momentum. A break in this trend on both the RSI and price, and we can expect more downside to follow.  

5.2 Elliot Wave Analysis

If we are forming a double top pattern, and Nvidia fails to break out above the $200 barrier, we can look at the retrace levels and expected extensions to gauge the likely targets for entry. First, if we zoom into the internal structure of Nvidia’s 3-month drop, which is highlighted by the light blue roman numeral count, you’ll see a very clear 5-wave drop.  

It’s hard to see anything other than 5-waves in this move, all of which line up with internal Fibonacci ratios. The first pattern in a correction being a 5-wave drop is a strong indication of a 5-3-5 corrective pattern, which is highlighted in purple.  

So, the Purple A was a 5-wave drop, while the purple B was a 3-wave correction, which touched the 50% retrace of Wave A before falling.  If this count is correct, we are just now completing the 2nd wave in the final 5-wave pattern. 

It’s always worth noting how the stock price reacts to these extensions.  The stock found major support at the 61.8% retrace, testing this level before meeting heavy resistance at the 38.2% retrace.  If Nvidia cannot break through the 38.2% retrace, the analysis is suggesting that we could see the final C wave play out, which will have Nvidia retest the 61.8% retrace level and likely make new lows.  

However, I want to be clear with our convictions in this position. Anywhere between $125 to $160 is a great entry. Even though the analysis in this count is suggesting that we could see lower lows, and correction will be welcomed for a long-term entry. Thus, we will update any entries if the pull-back scenario takes hold.   

Due to Nvidia’s fundamental strength, we will now look outside the individual stock for the cause of a sentiment shift.  Please also refer to the bullish scenario below.

5.3 Global Semiconductor Sector

Like most semiconductors, Nvidia is a global company that is manufactured overseas (mainly from Taiwan) with 44% of its sales coming from China.  Semiconductors are cyclical and sensitive to economic cycles. This is why we must look holistically at this sector when guiding an entry. 

The Korean KOSPI Index

South Korea is an economy that is fueled by some of the world’s largest semi-conductor companies, as well as many mid-level players.  Companies such as Samsung, and SK Hynix supplied over 60% of the components used in memory chips sold globally in 2018.  So, the KOSPI can provide more information about the global health of semiconductors.  

Since 2011, the index has been in a long-term uptrend, which it respected until very recently.  

The KOSPI broke through this trendline, highlighted in black, which coincides with the 61.8% retrace.  This level is now acting as resistance as the KOSPI is showing a negative RSI reversal pattern, which is indicating more downside is likely to follow.

This pattern is highlighted by the blue circles.  In short, as the price makes lower highs, the RSI is making higher highs, indicating that the buying pressure is not sufficient to reverse the trend as it reaches oversold levels.  This chart is anything but encouraging.  

Philadelphia Semiconductor (PHLX)

The Philadelphia Semiconductor index (PHLX) will have some international exposure, such as NXP Semiconductors and Taiwan Semiconductor Manufacturing Company, but it is populated with mostly US companies. Nvidia accounts for nearly 9% of its total value.  

Looking at the weekly chart, we can get a glimpse of the bigger patterns at play, which I believe are pertinent for where we are. If we start with the first long term trend from 2013 – 2015, you’ll notice that the price respected the first long-term trend line in magenta.  

The black arrows indicate the moment when the RSI and price broke their respective trends. This trend broke first on the RSI, then fell to a lower long-term trend highlighted in black. Once this trend broke along with the black trend in the RSI, the index gave way to a significant correction.  When these long-term trends break together, both in momentum and in price, it’s a warning to step aside.  

Further evidence can be found by the descending red line in the RSI leading up to the drop.  There is a negative divergence with the price and momentum.  As the price action increased leading up to the sell-off in 2015, the RSI made significantly lower highs, failing to break out multiple times.  When you see negative divergence that is followed by the RSI and price trend lines breaking, this is where technical analysis can help you avoid downside risk.  

Today, the price has managed to find a bottom, and has resumed a new trend, which is also highlighted in black, and appears to be trading in a diagonal pattern. The RSI is showing a divergence between the RSI, making lower highs while the price makes higher highs, just like we saw leading up to the 2015 correction. Furthermore, just like in the prior run-up before the correction, the RSI’s momentum keeps failing to break out of the descending trend highlighted in red.

Taking what we are seeing today, the evidence is leaning towards a more cautious stance.  The intermarket divergence we are seeing between the KOSPI and the PHLX, coupled with the weakness we are currently seeing in the PHLX, leads me to conclude that the KOSPI is a possible leading indicator of the semiconductor sector.  

Nvidia, being a major global player in the semiconductor space, is not immune to this broad market weakness.  With the weakness we are seeing with Nvidia’s chart as well, I think letting these patterns play out, will allow a safer and more optimal entry price. 

5.4 The Bullish Scenario 

I attempt to approach each chart from a blank slate. I let the data and analysis lead me with as little bias as possible. However, especially in a late cycle bull market, I always ask myself where I could be wrong, and what it would take for me to invalidate my primary thesis. The below chart is my alternative invalidation thesis.

From an Elliot Wave Count, the primary Wave 4 correction, which is highlighted in yellow, unfolded in an A-B-C pattern, highlighted in purple, and ended at the December low. This would mean that we are currently in the final 5th Wave push of the larger yellow count. This final 5th Wave will be an impulsive move, so its structure will have its own 5 waves.  This means that we have completed the Wave 1 and Wave 2, highlighted in purple and are currently in Wave 3.  If we look one degree lower into Wave 3, we have completed waves 1 and 2 of 3, and are about to breakout to the upside.

I have some issues with this count.  Specifically, when you zoom into the lower degree structure, we can see a 5wave structure down, who’s ratios line up like we want to see, and we can also see 3-waves up.  However, if we see a break above $200, this strongly implies that the Wave 4 in yellow is over, and that the bull trend can continue.  

I will need to see the RSI divergence forming to be invalidated by the RSI breaking through the red trend line as well as the price of Nvidia break through the $200 level. At $200, we may have left some minor gains on the table, but it is a much safer entry than where the stock is trading right now and worth the insurance. 

 

 

Market Update: September 2019

Posted on by io-fund

We have a very thorough market update for you that covers the rotation in cloud stocks, bullish broader market scenarios, bearish broader market scenarios and an update on the stocks we've covered over the last 60 days or so.  

We had quite a few inquiries in our inbox and also a few on the forum and thought it best to consolidate our thoughts for reference. We will issue market updates at minimum every quarter. 

 

bfea4257-d8aa-4b4a-aaf5-c2f3247fd004_Market-Update-Sept-2019-Premium-Analysis.pdf

Market Update: September 2019

SECTION 1: Shifting Leadership 

The orange line is a cloud computing ETF that holds around 60 positions, all of which dominate the cloud space. The lite blue line is an ETF that tracks the Consumer Staples sector, which consists of your big, boring companies that are, in theory, impervious to recessions. These have historically been the laggards in this long, growth driven bull market.  And, the dark purple line is the S&P 500.  

You’ll notice before the June correction we had this year, the growth names within the cloud space were the clear leader within the market, while the staples were lagging.  However, since that first correction, and into today, the staples have become the leaders of this market, while cloud, and growth have sold off.  

Over the last week we have seen the high growth leaders in this bull market, mostly cloud, take significant hits.  

Workday – down 25% from high

Twilio – down 26% from high

Okta – down 22% from high

Zoom – down 27% from high

Netflix – down 23% from high

Mongo DB – down 29% from high

Roku – down 8% from high

Shopify – down 13% from high

The question remains – is this a much-needed correction before making new highs, or is this the beginning of a much larger shift?  

What we will need to watch is how the generals perform – i.e., Microsoft, Apple, Amazon, Facebook, Google.  If the cloud players are thought of as the infantry, they can take a beating, and the generals can hold up the market.  However, if we see funds rotate out of the generals, that is a major warning that the market is beginning the process of aligning with the negative divergence of economic indicators, as well as the bond market.  

This pattern played out in late 2018, which preceded the swift sell-off into December, so it’s worth watching as the market proceeds. 

SECTION 2: Big Picture         

Long Term RSI and what it’s telling us ….                           

2012-2015           2012-2015           

This chart shows the S&P 500 (SPX) going back to 2012.  It’s a weekly chart, so that you can see the long-term trend as well as the slower moving momentum behind this trend in the RSI.  In 2012, you’ll notice the RSI moved into a bullish range.  

The green arrows show that the pullbacks during the 2012-2015 trend were shallow, and never crossed over the 50 line, while the peaks regularly crossed over the 70 line. However, notice the negative divergence between the RSI’s peak, highlighted in the descending red line in the RSI, which coincides with the price of SPX increasing, highlighted by the green line.  

This is a warning of deteriorating momentum; however, the trend of negative divergence, in this case, lasted for over a year before the price finally gave way to the downside.  It’s worth noting how long this pattern can play out before giving way to a larger correction.

2015-2017           2015-2017           

In 2015, the RSI broke through the 50 line and continued through the 30 line, which is an initiation move into bearish momentum. When the RSI enters a bearish range, it spends most of its time below 40 and will not cross the 60 line. This is what we saw while the market pulled back.  You’ll notice that the RSI in 2016 made a higher low, while the market made a lower low.  This is an important indication of a trend change, known as positive divergence, which occurred when the RSI broke through the red trend line, and into a bullish range through-out 2017.

2018-2019            2018-2019           

Today, what should be noted is the red trend line in the RSI is pushing momentum down.  Eventually, it will collapse into bearish momentum, like we saw in 2015, or it will break the trend line and push price back into a new uptrend.  

You’ll notice the red arrows show that 3 times the RSI attempted to break to the upside, and each time it failed.  Furthermore, the price of SPX is trending up, while its internals are slowing down.  As noted before, this negative divergence trend can last for quite some time, but eventually, the price will give way, or the pattern will invalidate by the RSI punching through to new highs.  

Today, until proven wrong, I take this as a warning rather than an established downward trend. We expand on both bearish and bullish scenarios below and revisit the stocks that have been covered over the past 60 days.

SECTION 3: Bullish Scenario      

Elliot  Wave Count

In the bullish scenario above, the market hit its primary Wave IV in the December 2018 lows.  Thus, we are currently in the beginning stages of Wave V, which would lead to a S&P 500 of 3800, at minimum.

In this scenario, we have completed Waves 1 and 2 within this larger degree Wave V, and also just completed Waves 1 and 2 of Wave 3, within a larger degree Wave V. If the market can break 3120, and close above this position, we will likely see the market take off, which is typical on the final leg of a bull market.  My minimum target for this will be 3800, and we will likely see growth take over once again to lead us up.  

Even though the market has taken back the short-term moving averages, indicating strong momentum, you’ll notice that it has broken the trend line in dotted black.  It’s still trading below this trend line, and I’d like to see this trend retaken to further validate this scenario.

Remember, price is king. Today, the price in the market, though a shift in leadership is underway, has us trading to near all-time highs. If we close above 3120, that will be an indication that a final surge is underway.  This can, and usually does, happen when the fundamentals in the economy and market are deteriorating, so it’s a final euphoric push that’s driven by sentiment.  

Sentiment at bullish lows  

Furthermore, what supports this thesis is the CNN Fear & Greed Gauge, which has been a fantastic contrarian indicator. Right now, we are not seeing any extremes, with a tilt towards the fear range. However, note the extremes we saw last week – 23.  This typically does not precede a bear market. In fact, the sentiment is recovering from levels we typically see towards a bottom.

It’s worth noting, sentiment was at a bearish extreme in early 2008, as well as a bullish extreme in early 2017.  Just because sentiment is at an extreme doesn’t always mean that it’s a contrarian indicator. However, more times than not, especially over the last decade, it has been a fabulous contrarian indicator. 

With the level of fear we saw in August, and just about every analyst/talking head predicting a recession and market crash, we could, in fact, get the opposite. This is a possibility our readers should carefully weigh.

A Bullish Anomaly      

Also, we are witnessing a very rare anomaly in the market.  Currently, the 30-year treasury is yielding less than the yield on the S&P 500.  This has only happened two other times in just about 40 years – in late 2008 and 2016.  

Both times, we saw the market explode higher over the following year.   Here is an article by CNBC explaining this further. 

There is a saying in finance that money will flow where it is treated the best.  Currently, with over $17 trillion in negative yielding sovereign debt, and the yields on US treasuries unable to keep up with inflation, there is a probability (worth mentioning) that we could see a sizable flow into US equities. 

Based on the history of this long bull market, I favor giving it the benefit of the doubt by staying long for now. However, it would be foolish to ignore the weakness and warnings that are also out there.  That being said, we recommend that you increase your insurance by shorting weak companies, while maintaining/building positions in beaten down high-flying growth companies, just in case the bullish scenario plays out.  

Keep a stop on these positions – we recommend 25%, considering how far they’ve already retraced. We will look to add to our positions in strength or as the market bottoms and begins a new uptrend.                 

SECTION 4: Bearish Scenario      

Elliot  Wave Count

The weight of evidence within the economy, is leaning towards this being the higher probability scenario, which has us currently in Wave 4 from the 5 Wave push off the March 2009 lows.  Here, we have completed the A Wave, had an exaggerated B Wave to new highs, and are just beginning the C Wave down.  This C wave will unfold in 5 waves, and the green count has us completing the 1-2, just before the 3rd wave begins.  

As you’ll notice, the market is trending in an expanding wedge shape pattern.  If this pattern holds, then we can see the market trade as low as 2200 before finding a bottom. If we see the market close below 2700, this scenario will become much more probable. 

I consider 2700 the first line in the sand, with the 2600 region as the final limit before closing winning positions. It should be noted that this is a Wave 4 pull back, which will give way to a larger degree Wave 5 push before this primary trend completes from the 2009 lows ends. So, I will look to be a buyer on any significant drawdown.

It’s worth noting, the market has repaired the technical damage from the most recent selloff.  We are trading above the 21 and 8-day exponential moving averages, and closed above the 2955 region, which is a show of strength.  The likelihood that we will trade to the 3100 range is increasing, and how the market reacts here will determine if we are going to witness a bull trap, or if the market will punch through the 3120 range, and begin a blow-off top to the 3800 region. The takeaway being, don’t get too exuberant if we hit the 3100 range – rather watch this region closely. 

Intermarket Divergence             

Here, we can see the S&P 500’s performance against multiple risk-on assets – oil, rates on the 10-year treasury, and the Japanese Yen to US Dollar exchange rate. You’ll notice how there is currently a wide separation, showing noticeable divergences amongst the risk-on assets and the market.  

In short, all of these metrics are signaling, while the market keeps rising. This is a warning for the market. However, keep in mind, divergences can last for a long time. This chart is something I watch daily, and until the economic indicators reverse up to join the market, I stay hedged and hold my positions with tight stops.  

SECTION 5: Market Updates       

Zoom, one of our highest conviction stocks, has blown threw the 50% retracement and is holding steady at the 61.8% retrace level, around $78. This completes the 3-step correction, and we suggest buying a small position, which we will add to based on the decision the market makes. We are due for a bounce, and the structure of that bounce (5 waves vs. 3 waves) plus whether we can make new highs will determine if we have more downside vs. a new uptrend.  

Below $78, and we will target the 76.4% retrace around $69-$68.  We recommend holding a 25% trailing stop on this position.

Slack, also a high conviction position that wall street does not fully understand (i.e. we are ahead of momentum on this stock), is trading and holding around the $25 support.  This puts Slack at a $12 billion company, which falls in the high range of our fair value – ideally, we’d like to cost average around the $10 billion market cap range, which is around the $20 range. We are comfortable with pre-momentum (this can take 1-2 years to play out yet has more gains than post-momentum), and have added 1/3 of Slack to our portfolio at the $12 billion market cap. 

Now is not the time to build your entire Slack position. Start small with wide stops – 25% – and add as the company reaches mile markers. There will be a minimum of 6 months before the market sees the potential here. With positive divergence in the RSI, we believe Slack is due for a corrective bounce at minimum.  

Mongo DB: MDB has shot through the $135 support, making lower lows and confirming an intermediate downtrend. I have exited my position, and will regroup as we enter a new uptrend.  If MDB continues its downtrend, I see the $90-$85 region being strong support.  This coincides with the 31.8% retrace as well as the 161.8% extension.  

Wday:  Wday is witnessing a slower bleed than the above, yet it still trades in a weak spot. The lowest I see WDAY trading is between $140-$120, which would be a gift, based on expected future growth. The market is unlikely to understand the machine learning story at this time. 

If you have a position around $180-$170, hold with stops and look to add.  However, WDAY has entered the upper region of my expected pullback region – $168.  If you have not opened a position in WDAY, a recommended scenario is to buy a small amount at these levels. 

Alibaba, is having trouble breaking through the $180 resistance. If it cannot break through this price, the $165 support will be crucial for a continued uptrend.  Below this support and we can see Baba trade to $130 rather quickly. We could see a deeper pullback based on geo-political events, but not based on cloud growth.  

Bitcoin: BTCUSD broke its wedge pattern down, and entered an even tighter trading range.  Our expectation is to see it trade in the low $8,000 – high $7,000s.  We currently have 1/3 of our position as $10,000 cost basis, and will look to go all in as we retrace deeper to the above targets. (Beth has been in bitcoin since circa 2015).  BTC is volatile, and can shift on a dime, so make sure you have an exit strategy in place. 

ChainLink: Link broke through the $1.95 support and has entered the upper region of the targeted trading region – $1.70-$1.25. We recommend adding to your position at $1.70, and layering in as we approach $1.25, if we even go that low. So far, Link has confirmed the next leg in the downtrend, and should find strong support just above the region it is currently trading.

Snap: We believe Snap will surprise to the upside. As long as it remains below $16, we consider it a buy. Put a stop in at $13.35. 

Roku: This is the stock that Beth has written about the most, preceding nearly every other analyst on the market. We try to be pre-momentum. When the momentum shifts and sell-side analysts pile in without fear of losing their job over a bad recommendation, like what happened with Roku when a herd of analysts went from claiming the stock had too much competition and not enough IP, to a sudden reversal and steady string of buy recommendations after the last earnings report, we see the stock shoot up. I personally own Roku at $29 from December 2018 from following Beth’s early analysis, which occurred after the stock hit $60 (50% drop), and am holding without stops. The price points in the current PDF have an ideal target of $88. Due to the sell-side analysts piling in, something that could not be foreseen prior to the last earnings report, this target has to be adjusted. We will update you on the forum once we have more trading history in the region where Roku is currently trading.  

Uber and Lyft: Starting pre-IPO, Beth covered the weak financials of these companies on her free blog. One of the risks she stated was the classification of the drivers. We believe these companies will continue to bleed with a new labor law that is close to passing in the State of California. You can read about this here. 

Due to the sheer number of immigrants and H-1 visas in the state (who are easily exploited), California is historically very tough on companies who hire contractors that are treated as employees. This is a common loop hole that is exploited in California, forcing the state to pay for the health care of the uninsured individuals. There is also no social security tax being taken out, and state taxes are often evaded in these situations, weighing very heavily on the state as a whole. California has a long history of pursuing the misclassification of contractors, and this is not ride-share specific. 

Quick note: 

Historically, central banks react to bear markets, which mostly precede a recession.  Today, they are reacting globally to prevent a recession.  Their commitment to keeping the expansion going is something to watch closely. 

The chart below shows how the market performs one year after a rate cut in two scenarios. The light blue shows how the market performs one year after a rate cut, and within that year after a recession hits. The dark blue line shows the market performance one year after a rate cut, and when within that year, a recession does not hit. In short, the market has had a 100% win rate after a cut where a recession is avoided. 

However, with that said, we leave the Federal Reserve commentary and political discussions to the slew of analysts who take this on. We prefer to not get bogged down in the headlines and rather to be solely focused on a combination of strong fundamentals and the predictive guidance of technical analysis. We have found it incredibly hard to perfectly time a crash, or a bull market surge, and there are many losses on both sides of the fence when engaging in this (i.e. losing gains by staying on the sidelines or becoming too exuberant). 

It’s always a good idea to have positions in companies you believe in and to short companies that are egregious in their financials or too early/too late in their tech market positioning and product development.  In the event of a downturn, we will provide PDF reports on short hedges as you can make money on the down, as well.

As you know, we don’t control the state of fiscal policies or market sentiment. The scope of our analysis is to provide best of class tech industry research and to provide information on recommended entry/exits that we use for our personal portfolios. We are not financial advisors. 

Thanks for your readership! 

Zoom Video: 2019 Analysis

Posted on by io-fund

Zoom Video Communications is a company with a valuation where logic is ignored, and any investor in the stock would need to get comfortable with this. The current valuation of $25 billion comes from a company with $546 million in revenue and EBITDA of $39 million this year. Zoom is expecting revenue of $129 million to $130 million with non-GAAP income of $2-$3 million. Q2 non-GAAP EPS is expected to be $0.01 to $0.02. One reason Zoom is demanding a high valuation is that the rapid revenue growth coupled with achieving profitability should create the perfect storm over the next few years.

According to Gartner, by 2022, 65 percent of meeting solutions users will take advantage of SIP/VoIP-based audio-conferencing tools. This is up from 20 percent in 2017 while 40 percent of meetings will be facilitated by virtual concierges and advanced analytics. The exact size for the video communications market varies considerably depending on the source – this is because the market is very new. According to research from Markets and Markets the video communications market is expected to grow an average of 8 percent a year to nearly $20 billion by 2023 with another report expecting that the industry will register a CAGR of 9.2 percent from 2018 to 2025. IDC, however, pegs Zoom's future addressable market much higher at $43 billion, as cited in last quarter’s earnings call.

SECTION 1: Financials   

Zoom Video Communications is a company with a valuation where logic is ignored, and any investor in the stock would need to get comfortable with this. The current valuation of $25 billion comes from a company with $546 million in revenue and EBITDA of $39 million this year. 

Compare this to Square with a similar market cap, yet revenue of more than $2.27 billion. Zoom’s enterprise value/sales of 50 is the highest of EV/sales of any U.S. tech company valued at more than $500 million, according to FactSetData. With free cash flow of $15.3 million, Zoom trades for 450 times forward free cash flow. 

Revenue in the most recent quarter grew 103 percent to $122 million, surpassing estimates of $111.7 million. This was the eighth straight quarter of triple-digit top line growth. Zoom is profitable with EPS of $0.03 quarter and $15.3 million in free cash flow. 

Zoom is expecting revenue of $129 million to $130 million with non-GAAP income of $2-$3 million. Q2 non-GAAP EPS is expected to be $0.01 to $0.02. 

One reason Zoom is demanding a high valuation is that the rapid revenue growth coupled with achieving profitability should create the perfect storm over the next few years. 

To get an idea of growth over the past few years, Zoom’s S-1 Filing showed $60M in revenue in 2017, $151M in revenue in 2018 and $330M in revenue in 2019 with an estimated $540M in revenue for the upcoming fiscal-year. The 100%+ revenue growth has been accompanied with gross profit margins in the high 70% to low 80% range. I would not be surprised if Zoom exceeds expectations on revenue in the current fiscal-year.

Zoom became profitable in the year ending January 31st, 2019 with $7.58 million in net income or 3 cents EPS. The year prior, Zoom reported a net loss of $4.8 million. 

Analysts are currently seeing more downside with a median target of $83 and a low estimate of $55 with a high estimate of $115. 

SECTION 2: Growth & Addressable Market         

According to Gartner, by 2022, 65 percent of meeting solutions users will take advantage of SIP/VoIP-based audioconferencing tools. This is up from 20 percent in 2017 while 40 percent of meetings will be facilitated by virtual concierges and advanced analytics. 

The exact size for the video communications market varies considerably depending on the source – this is because the market is very new. According to research from Markets and Markets the video communications market is expected to grow an average of 8 percent a year to nearly $20 billion by 2023 with another report expecting that the industry will register a CAGR of 9.2 percent from 2018 to 2025. IDC however, pegs Zoom's future addressable market much higher at $43 billion, as cited in last quarter’s earnings call.

At the end of first-quarter fiscal 2020, the company had roughly 58,500 customers (with more than 10 employees), up 86 percent year over year. Zoom has a strong partner base that includes companies such as Salesforce, and these partnerships will be instrumental in future growth. 

Additionally, the company announced that its U.S Federal Risk and Authorization Management Program (FedRAMP) authorization has been approved, with the sponsorship of the US Department of Homeland Security. This authorization allows US Federal Government agencies and contractors to securely use Zoom for video meetings, API integrations, and more. The nod to Zoom over competitors Cisco and Microsoft is an important clue for Zoom’s future potential.

Some analysts claim the domestic market is close to saturation, and Zoom will have to look for more opportunities in overseas markets. This is unlikely as video communications is incredibly nascent. However, looking at the first quarter, APAC and EMEA revenue grew a combined 127 percent year-over-year and Zoom sees international expansion as a major opportunity. As such the company plans to add local sales support in further select international markets over time and also use strategic partners and resellers to sell in international markets

Revenue from APAC and EMEA collectively represented about 20 percent of Zoom’s revenue for the quarter and management noted that it could be the beginning of a sizable opportunity to bring the Zoom platform to other regions.

SECTION 3: Product Analysis       

Founded in 2011, Zoom describes itself as a leader in modern enterprise video communications. The CEO states that Zoom is enabling greater effectiveness in human-to-human interactions over a distance with use cases that are not possible with legacy systems. 

The translation here is that Zoom is a much easier-to-use video conferencing application with very little friction in downloading the app before you’re ready to join a video call. Zoom is an example of the “sum of its parts is greater than the whole.” Its success is based off many micro improvements to video conferencing that adds up to a serious advantage over the competitors. 

Cisco is the main competitor that Zoom is disrupting as CEO Eric Yuan was a former engineer at WebEx before it was acquired by Cisco. 

Zoom has a “bottoms-up” viral customer base, which means junior employees evangelize the service at the company. These are often some of the most loyal customers. For instance, 55% of $100,000 or higher revenue customers were started with a single employee’s free trial. This is an important insight to the traction of the product.  

The secret sauce to Zoom is that the business model has a viral mechanism. Some of the best growth in tech products occur when the product multiplies across users exponentially. This is why social media reported incredible growth – one user invites many users to the platform with a simple link. 

“Viral mechanic” means the spread of growth across users as a built-in mechanism to the product. The first Zoom user in an office naturally evangelizes the product by inviting more people to a conference with a simple link. The users who are invited do not need to sign up for Zoom, and the experience is much better than other conferencing solutions that require many steps to join a conference and are not in HD. 

Teams are increasingly mobile, switch between many devices and need to join meetings very quickly. The competition does not allow for this as software needs to be installed to join a meeting. Zoom’s easy access URLs to join meetings are essentially going viral in every office where they convert one free user. This is the foundation to Zoom’s success. 

SECTION 4: Key Metrics         

Software-as-a-service (SaaS) has unique key metrics that venture capitalists look for when privately funding a SaaS startup. Subscription revenue run-rate is one metric used, although it can be overly simplistic

Annual Revenue Run Rate = Monthly Revenue * 12 months  

ARR does not account for churn or growth. Zoom’s ARR likely looks better than the more mature companies on the public markets (which are contrasted below) because Zoom is a smaller company and has gone through periods of hyper growth. 

For this chart to be completely accurate, you would have to compare growth from the same year of a company’s inception as Zoom is going public early compared to the other companies in this chart, and therefore, demonstrates hyper growth compared to a more mature company that files to go public. 

Regardless, this snapshot of annual recurring revenue shows the company not slowing down anytime soon. 

Private investors typically calculate the monthly recurring revenue, which calculates the amount of revenue you have in the beginning of the month + the revenue you gain during the month – downgrades or customer churn.

TECHNICAL  ANALYSIS:   

By Knox Ridley

After an upward trend following the IPO, and a gap-up after its last earnings report, Zoom has completed what appears to be its primary uptrend, and is currently taking a breather.  The first move down corrected to the exact 50% retrace of initial IPO uptrend, while the next move, pushed back up to the 78.6% retracement prior move down.  

We are currently trading at the 38.2% retrace of the initial IPO uptrend, and this area is providing strong support for ZM.   Zoom is a stock that regularly swings from overbought to oversold, so when I see it range bound, which is narrowing while leading up to earnings, we’re likely to see a strong move in the near future.

If we look at the 200-day moving average in orange, you’ll see ZM has been trading just below this average up until yesterday.  The 200-day is currently pointing down, and through its slow shift down, ZM has traded in the same direction as this average.  Furthermore, if we attach a Volume Weighted Moving Average (AVWAPs), anchored to the beginning of the IPO uptrend and another one at the all time high, just before Zoom’s correction, you’ll notice an additional dimension to this trading range.  These 2 AVWAPs can be seen in dark purple, and they are also compressing ZM into a tight range. 

These AVWAPs show who is in control.  In terms of the primary upward trend, you’ll notice that ZM is trading just above this average, indicating that the bulls are still in control of the primary trend.  However, the AVWAP from the all-time high shows who is in control of the correction we are currently in.  Even with the move up today above the 200-day, the price is still trading just below this AVWAP.  This tells us that the bears are in control of this correction for now.  Zoom will remain in this trading pattern until one of these AVWAPs is broken, which we should see in short time.    

CONCLUSION:           

There’s no reason to believe that Zoom Video will miss on the top line or bottom line. The company is centered in a major shift from audio to video for enterprise communications. The company is overpriced by most standards; however, the product’s strength is likely to defy the bears with the product winning out over time.

However, a $25 billion market cap with $546 million in revenue may be too outsized of a valuation for a buy-andhold. To initiate a long buy-and-hold, I’d like to get Zoom between $78-$83. With that said, I personally like Zoom enough to be in the game for these earnings and in the short-term. I believe the triple-digit revenue growth should continue to excite the market in the near term and makes a decent momentum play. 

The primary risk to Zoom Video is a broader market pullback (which would drive pricing down across growth stocks). In my opinion, the tide “for all boats” will have to recede for Zoom Video’s valuation to come down.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Download This Analysis in PDF Format:

1b31fcdc-22b6-47a1-af9d-e27bb3c7a239_Zoom-Video-Communications-Premium-Analysis-2019.pdf

Zoom Video 2019 Analysis

Posted on by io-fund

Zoom Video Communications is a company with a valuation where logic is ignored, and any investor in the stock would need to get comfortable with this. The current valuation of $25 billion comes from a company with $546 million in revenue and EBITDA of $39 million this year. Zoom is expecting revenue of $129 million to $130 million with non-GAAP income of $2-$3 million. Q2 non-GAAP EPS is expected to be $0.01 to $0.02. One reason Zoom is demanding a high valuation is that the rapid revenue growth coupled with achieving profitability should create the perfect storm over the next few years.

According to Gartner, by 2022, 65 percent of meeting solutions users will take advantage of SIP/VoIP-based audio-conferencing tools. This is up from 20 percent in 2017 while 40 percent of meetings will be facilitated by virtual concierges and advanced analytics. The exact size for the video communications market varies considerably depending on the source – this is because the market is very new. According to research from Markets and Markets the video communications market is expected to grow an average of 8 percent a year to nearly $20 billion by 2023 with another report expecting that the industry will register a CAGR of 9.2 percent from 2018 to 2025. IDC, however, pegs Zoom's future addressable market much higher at $43 billion, as cited in last quarter’s earnings call.

SECTION 1: Financials   

Zoom Video Communications is a company with a valuation where logic is ignored, and any investor in the stock would need to get comfortable with this. The current valuation of $25 billion comes from a company with $546 million in revenue and EBITDA of $39 million this year. 

Compare this to Square with a similar market cap, yet revenue of more than $2.27 billion. Zoom’s enterprise value/sales of 50 is the highest of EV/sales of any U.S. tech company valued at more than $500 million, according to FactSetData. With free cash flow of $15.3 million, Zoom trades for 450 times forward free cash flow. 

Revenue in the most recent quarter grew 103 percent to $122 million, surpassing estimates of $111.7 million. This was the eighth straight quarter of triple-digit top line growth. Zoom is profitable with EPS of $0.03 quarter and $15.3 million in free cash flow. 

Zoom is expecting revenue of $129 million to $130 million with non-GAAP income of $2-$3 million. Q2 non-GAAP EPS is expected to be $0.01 to $0.02. 

One reason Zoom is demanding a high valuation is that the rapid revenue growth coupled with achieving profitability should create the perfect storm over the next few years. 

To get an idea of growth over the past few years, Zoom’s S-1 Filing showed $60M in revenue in 2017, $151M in revenue in 2018 and $330M in revenue in 2019 with an estimated $540M in revenue for the upcoming fiscal-year. The 100%+ revenue growth has been accompanied with gross profit margins in the high 70% to low 80% range. I would not be surprised if Zoom exceeds expectations on revenue in the current fiscal-year.

Zoom became profitable in the year ending January 31st, 2019 with $7.58 million in net income or 3 cents EPS. The year prior, Zoom reported a net loss of $4.8 million. 

Analysts are currently seeing more downside with a median target of $83 and a low estimate of $55 with a high estimate of $115. 

SECTION 2: Growth & Addressable Market         

According to Gartner, by 2022, 65 percent of meeting solutions users will take advantage of SIP/VoIP-based audioconferencing tools. This is up from 20 percent in 2017 while 40 percent of meetings will be facilitated by virtual concierges and advanced analytics. 

The exact size for the video communications market varies considerably depending on the source – this is because the market is very new. According to research from Markets and Markets the video communications market is expected to grow an average of 8 percent a year to nearly $20 billion by 2023 with another report expecting that the industry will register a CAGR of 9.2 percent from 2018 to 2025. IDC however, pegs Zoom's future addressable market much higher at $43 billion, as cited in last quarter’s earnings call.

At the end of first-quarter fiscal 2020, the company had roughly 58,500 customers (with more than 10 employees), up 86 percent year over year. Zoom has a strong partner base that includes companies such as Salesforce, and these partnerships will be instrumental in future growth. 

Additionally, the company announced that its U.S Federal Risk and Authorization Management Program (FedRAMP) authorization has been approved, with the sponsorship of the US Department of Homeland Security. This authorization allows US Federal Government agencies and contractors to securely use Zoom for video meetings, API integrations, and more. The nod to Zoom over competitors Cisco and Microsoft is an important clue for Zoom’s future potential.

Some analysts claim the domestic market is close to saturation, and Zoom will have to look for more opportunities in overseas markets. This is unlikely as video communications is incredibly nascent. However, looking at the first quarter, APAC and EMEA revenue grew a combined 127 percent year-over-year and Zoom sees international expansion as a major opportunity. As such the company plans to add local sales support in further select international markets over time and also use strategic partners and resellers to sell in international markets

Revenue from APAC and EMEA collectively represented about 20 percent of Zoom’s revenue for the quarter and management noted that it could be the beginning of a sizable opportunity to bring the Zoom platform to other regions.

SECTION 3: Product Analysis       

Founded in 2011, Zoom describes itself as a leader in modern enterprise video communications. The CEO states that Zoom is enabling greater effectiveness in human-to-human interactions over a distance with use cases that are not possible with legacy systems. 

The translation here is that Zoom is a much easier-to-use video conferencing application with very little friction in downloading the app before you’re ready to join a video call. Zoom is an example of the “sum of its parts is greater than the whole.” Its success is based off many micro improvements to video conferencing that adds up to a serious advantage over the competitors. 

Cisco is the main competitor that Zoom is disrupting as CEO Eric Yuan was a former engineer at WebEx before it was acquired by Cisco. 

Zoom has a “bottoms-up” viral customer base, which means junior employees evangelize the service at the company. These are often some of the most loyal customers. For instance, 55% of $100,000 or higher revenue customers were started with a single employee’s free trial. This is an important insight to the traction of the product.  

The secret sauce to Zoom is that the business model has a viral mechanism. Some of the best growth in tech products occur when the product multiplies across users exponentially. This is why social media reported incredible growth – one user invites many users to the platform with a simple link. 

“Viral mechanic” means the spread of growth across users as a built-in mechanism to the product. The first Zoom user in an office naturally evangelizes the product by inviting more people to a conference with a simple link. The users who are invited do not need to sign up for Zoom, and the experience is much better than other conferencing solutions that require many steps to join a conference and are not in HD. 

Teams are increasingly mobile, switch between many devices and need to join meetings very quickly. The competition does not allow for this as software needs to be installed to join a meeting. Zoom’s easy access URLs to join meetings are essentially going viral in every office where they convert one free user. This is the foundation to Zoom’s success. 

SECTION 4: Key Metrics         

Software-as-a-service (SaaS) has unique key metrics that venture capitalists look for when privately funding a SaaS startup. Subscription revenue run-rate is one metric used, although it can be overly simplistic

Annual Revenue Run Rate = Monthly Revenue * 12 months  

ARR does not account for churn or growth. Zoom’s ARR likely looks better than the more mature companies on the public markets (which are contrasted below) because Zoom is a smaller company and has gone through periods of hyper growth. 

For this chart to be completely accurate, you would have to compare growth from the same year of a company’s inception as Zoom is going public early compared to the other companies in this chart, and therefore, demonstrates hyper growth compared to a more mature company that files to go public. 

Regardless, this snapshot of annual recurring revenue shows the company not slowing down anytime soon. 

Private investors typically calculate the monthly recurring revenue, which calculates the amount of revenue you have in the beginning of the month + the revenue you gain during the month – downgrades or customer churn.

TECHNICAL  ANALYSIS:   

By Knox Ridley

After an upward trend following the IPO, and a gap-up after its last earnings report, Zoom has completed what appears to be its primary uptrend, and is currently taking a breather.  The first move down corrected to the exact 50% retrace of initial IPO uptrend, while the next move, pushed back up to the 78.6% retracement prior move down.  

We are currently trading at the 38.2% retrace of the initial IPO uptrend, and this area is providing strong support for ZM.   Zoom is a stock that regularly swings from overbought to oversold, so when I see it range bound, which is narrowing while leading up to earnings, we’re likely to see a strong move in the near future.

If we look at the 200-day moving average in orange, you’ll see ZM has been trading just below this average up until yesterday.  The 200-day is currently pointing down, and through its slow shift down, ZM has traded in the same direction as this average.  Furthermore, if we attach a Volume Weighted Moving Average (AVWAPs), anchored to the beginning of the IPO uptrend and another one at the all time high, just before Zoom’s correction, you’ll notice an additional dimension to this trading range.  These 2 AVWAPs can be seen in dark purple, and they are also compressing ZM into a tight range. 

These AVWAPs show who is in control.  In terms of the primary upward trend, you’ll notice that ZM is trading just above this average, indicating that the bulls are still in control of the primary trend.  However, the AVWAP from the all-time high shows who is in control of the correction we are currently in.  Even with the move up today above the 200-day, the price is still trading just below this AVWAP.  This tells us that the bears are in control of this correction for now.  Zoom will remain in this trading pattern until one of these AVWAPs is broken, which we should see in short time.    

CONCLUSION:           

There’s no reason to believe that Zoom Video will miss on the top line or bottom line. The company is centered in a major shift from audio to video for enterprise communications. The company is overpriced by most standards; however, the product’s strength is likely to defy the bears with the product winning out over time.

However, a $25 billion market cap with $546 million in revenue may be too outsized of a valuation for a buy-andhold. To initiate a long buy-and-hold, I’d like to get Zoom between $78-$83. With that said, I personally like Zoom enough to be in the game for these earnings and in the short-term. I believe the triple-digit revenue growth should continue to excite the market in the near term and makes a decent momentum play. 

The primary risk to Zoom Video is a broader market pullback (which would drive pricing down across growth stocks). In my opinion, the tide “for all boats” will have to recede for Zoom Video’s valuation to come down.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Download This Analysis in PDF Format:

1b31fcdc-22b6-47a1-af9d-e27bb3c7a239_Zoom-Video-Communications-Premium-Analysis-2019.pdf

Workday: 2019 Analysis

Posted on by io-fund

SUMMARY: Workday began to pivot from software-as-a-service (SaaS) to a platform-as-a-service model in 2018. The company is becoming a leader in machine learning and AI in the HCM market, and a PaaS model will assist platform-level ML capabilities. This also helps to leverage the Adaptive Insights acquisition by combining the insights from business planning across the other segments, such as financial management, HCM and analytics.

Market Research Future estimates the global human capital management software market will reach $24 billion by 2023 at a CAGR of 9 percent during the 2017-2023 forecast period. Workday not only is the leader in Gartner’s magic quadrant from a product standpoint, but had led the category in year-over-year growth of between 30-40%.

It is reasonable to believe Workday will control the majority of the $24 billion market if the company executes globally.

 

4ae9da06-c5a9-4965-b999-90042cd5af9d_Workday-Premium-Analysis-2019.pdf

Workday: 2019 Analysis

SECTION 1: Fundamental Overview    

As with many cloud stocks on the market today, Workday has solid revenue growth yet is not profitable on a GAAP basis. Workday carries debt on its balance sheet of $1.22 billion.  Net losses last quarter were $116 million. 

In the previous quarter, Workday’s revenues grew 33% to $825 million, which beat forecasts of $814 million. Subscription services grew 34% to $701 million, exceeding expectations of $692-$694 million. 

In the upcoming quarter, Workday expects to earn subscription revenue of $746 million to $748 million and services revenue of $124 million. Zack’s consensus states Workday is expected to report revenues of $872 million, up 29.9% from the year-ago quarter. This is in line with the company’s guidance on the last earnings call. 

Unlike other cloud stocks, Workday is profitable on a non-GAAP basis. The company is expected to post quarterly earnings of $0.35 per share for a year-over-year change of 4 cents. Notably, expectations are lower than last quarter’s reported adjusted EPS of $0.43 per share.

Cash Flow is negative due to a streak of acquisitions, such as Adaptive Insights for $1.5 billion last year. In total, Workday has acquired 13 companies; many small startups which hurts its operating efficiency and overhead. 

Last quarter, Workday raised its full-year outlook for subscription revenue a hair from $3.03 to $3.045 billion to $3.045 to $3.06 billion. The company states there is a subscription revenue backlog of $6.80 billion, up 30% yearover-year.

SECTION 2: Product Overview    

Workday offers tools for enterprises to manage human resources, payroll, and finances. The company is a software-as-a-service company with over 85% of revenue coming from cloud subscriptions. 

The company serves the human capital management (HCM) and financial management ERP markets with applications that expand its cloud-based system to include analytics and business planning. HCM allows an organization to staff, pay, organize and develop its workforce. Financial management ERP provides core finance functions, such as general ledger, accounting, accounts payable and cash management. 

According to the fiscal Q2 2019 earnings call, more than 35 percent of the Fortune 500 and 50 percent of the Fortune 50 companies use Workday HCM for core HR. The product was placed as a leader in the Gartner Magic Quadrant for Cloud HCM Suites for midmarket and large enterprises in August 2018, with no update released since.

Workday’s cloud financial management solutions have less traction with 8 companies in the Fortune 500 and 530 customers overall.  

The acquisition for Adaptive Insights, which is a provider of business planning and financial modeling tools, will help to strengthen Workday’s presence in Enterprise Resource Planning (ERP). At time of acquisition, Adaptive Insights also had 3400+ customers compared to Workday’s 450+ customers due to Adaptive Insights strength in the small-to-medium business (SMB) base. 

Workday began to pivot from software-as-a-service (SaaS) to a platform-as-a-service model around 2018. The company is becoming a leader in machine learning and AI in the HCM market, and a PaaS model will assist platform-level ML capabilities. This also helps to leverage the Adaptive Insights acquisition by combining the insights from business planning across the other segments, such as financial management, HCM and analytics. 

Machine learning and graph analysis applications were launched in April with Skills Cloud, which discerns team and candidate skills to offer hiring recommendations, team building and training. The newly launched Discovery board will uses ML, graph and pattern-detecting, and natural-language processing (NLP) generation to provide unified reporting. 

Looking into the future, Workday’s ML capabilities may be able to reduce employee headcount. Although Workday prefers to not advertise the fact their product enhanced by machine learning can replace jobs, this is an understood benefit of Workday’s product that is presented at conferences. 

SECTION 3: TAM and Competitors           

Market Research Future estimates the global human capital management software market will reach $24 billion by 2023 at a CAGR of 9 percent during the 2017-2023 forecast period. Workday not only is the leader in Gartner’s magic quadrant from a product standpoint, but had led the category in year-over-year growth of between 3040%. Ceridian and Ultimate Software have posted the next highest growth levels. Ultimate Software is also in Gartner’s leader quadrant, yet was founded in 1990 and has been usurped by Workday. It is reasonable to believe Workday will control the majority of the $24 billion market if the company executes globally.

In my opinion, Workday’s competitors are a strength as Workday is without an attractive alternative. Both Oracle and SAP tend to be overpriced and clunky, which means they require too much software for the desired task. 

In Oracle’s case, the company is distracted with data management, and sales and marketing. HCM and financial ERP are not Oracle’s core revenue segment, and this helps Workday standout as Workday invests more into newgen applications. Notably, Workday was spun out of a “hostile takeover” by Oracle of the company PeopleSoft in 2005 for $10.3 billion. After the acquisition, over half of PeopleSoft’s workforce was laid off, totaling 6,000 people. The former CEO of PeopleSoft and chief strategist went on to found Workday approximately two months later. Today, Oracle’s PeopleSoft is known for having security issues with several cases reported between 2010-2016 including social security numbers. 

SAP has a similar lack of focus, and is also not entirely cloud based, which makes SAP unlikely to innovate faster than Workday on machine learning. Workday has captured more customers in the United States, as well, where the majority of its customers reside. Notably, SAP will be harder to compete against in its native geo, Europe.

On that note, Workday continues to see global expansion as one of its growth levers, with total revenue outside the U.S. up 41 percent to $184 million, representing 23 percent of total revenue.

See Conclusion Below Section 4             See Conclusion Below Section 4            

SECTION 4: Technical Analysis:      

By Knox Ridley

4.1 Moving Averages:          

Workday is currently trading below its 50-Day Simple Moving Average, and just above the 200-Day Simple Moving Average. The 50-day is a generally accepted measure of determining the uptrend’s primary support, to where the 200-Day is considered the last stand for the uptrend. Workday is trading well below its 50-Day and has been riding the 200-Day. 

Simple Moving Averages can seem arbitrary in their time frames, and in a way, they are. The 50-day and 200-day do not really align with any significant accumulation of time other than they are round numbers and are commonly accepted as indicators by the investing community. Because of their popularity, they are powerful tools that any chartist must factor into their analysis.  

However, to get a better idea of who is in control of the price for a deeper insight other than popular moving averages, I prefer to use Anchored Volume Weighted Moving Averages (AVWAP).  These averages factor in volume to the price, and we can anchor the average to any time we want.  

I anchored, in green, the AVWAP, to the November lows in 2018, just as this renewed uptrend began.  You can see that it sits just below the 200-Day.  

This is a more accurate portrayal of who is in control of this trend.  If this average is breached, and the price trades below, then Workday’s pressure will trend down and a larger retrace could be in its future.  However, for now, the price is respecting this average, indicating that the uptrend is still intact.

4.2 Retrace Target:         

In short, if Workday breaks this average, as well as breaks the current support range it is trading in, we can expect a deeper pullback.  My first target is around the $172.5 support.  This coincides with closing the gap, and will likely remain at this support for some time.  

Below this level, and I will target the 38.2% retrace, which also coincides with the 168% extension. This range has also been a strong price cluster for the Workday’s price action, so it will be a likely target for any deeper retrace, which is around the $142-$140 region.   

4.3 Internals:    

The RSI was indicating negative divergence leading up to the sell off at all-time highs.  This is evident with the red and green arrows going in opposite directions.  The RSI has broken through the 40 line, and is attempting to climb back, while price stays flat.  

The RSI is now turning back down before even hitting the 50 line. The momentum has faded from Wday, and the RSI is in a selling range.  However, looking back at its 3-year trading history, you’ll notice that it’s hit the bearish zone numerous times, and each time it was a short stay. 

Until Workday meets resistance multiple times at the 50 line and punctures the 30 line with force, it’s very possible that it could regain its momentum and continue in an uptrend.

Conclusion: 

Quite a few stocks are showing weak price action, and are pointing to continued weakness, likely due to broader market issues, such as the inverted yield curve, trade war, etc. – rather than due to factors in the individual stock.

Workday is fundamentally strong with low competition and good prospects for future growth from machine learning, as indicated in the fundamental analysis. Ideal buy-and-hold from technical analysis is in the $142-$140 region. If the earnings report is weaker than expected, I’d see that as a buying opportunity – especially if the price breaks the $172 support and we get a deeper correction. 

Short-term, Workday can make a good trade with call options at or near $190 and/or a small position with 10% trailing stop. Less than a month ago, Workday was at $212 and was at $195 less than a week ago. A strong earnings report could renew these prices. I personally like the end of September $190 call options. Per the paragraph below, any calls may need some time as this week has been a little choppy for cloud stocks. 

This week, we are seeing mixed reactions to cloud earnings. Veeva Systems beat earnings Tuesday, received analyst upgrades, yet the stock price has dropped a few percentage points today. Anaplan also beat earnings, yet stock price dropped a few percentage points today. Okta, as well, is down after-hours despite an earnings beat. Therefore, there’s a chance, even with an earnings beat, that Workday’s price doesn’t withstand the broader market. 

Please refer to the forum for updates. 

Bitcoin: 2019 Analysis

Posted on by io-fund

This PDF will help guide entry and predicts that 2020 will be an important year, and thus to establish a bitcoin position in 2019. Below is background information on why the newly-launched Lightning Network is key to bitcoin’s success – something that has not been widely discussed. We also cover the halving of bitcoin to occur in 2020 (and how this affects price), and the potential market cap for bitcoin to help put our price target in perspective.  

 

197b8b43-ad29-447b-a1fc-8eabe54277e5_Bitcoin-Premium-Analysis+%281%29.pdf

Bitcoin: 2019 Analysis

INTRODUCTION:

Bitcoin has been covered on my free blog to make the following points:

•       SEC-regulated institutional trading is on the horizon

•       Global unrest will help establish bitcoin as a safe haven 

•       The Bitcoin protocol is too important for the development of all cryptocurrencies for the United States to take direct action against the token and/or protocol. If the United States wants a Fed coin, preventing further development on bitcoin would be counterintuitive.   

My previous series provides a good base for understanding the potential for bitcoin. 

This PDF will help guide entry and predicts that 2020 will be an important year, and thus to establish a bitcoin position in 2019. Below is background information on why the newly-launched Lightning Network is key to bitcoin’s success – something that has not been widely discussed. We also cover the halving of bitcoin to occur in 2020 (and how this affects price), and the potential market cap for bitcoin to help put our price target in perspective.   

SECTION 1: August 2019  Update         

Since writing on bitcoin in July, Bakkt has made progress and is slated to launch bitcoin futures on September 23rd. Here is an excerpt from my original coverage on what Bakkt is and why it’s important to track:

“Jeff Sprecher, the Chairman of Intercontinental Exchange (ICE) and Founder of the New York Stock Exchange (NYSE) and many other exchanges internationally, aims to create a federally-regulated crypto ecosystem. The consortium includes Microsoft, Starbucks and the Boston Consulting Group, who are working together to help leverage ICE’s trading infrastructure and to cater to retail investors, institutional investors, and consumers. This could help baby boomers put their 401K into bitcoin, and pave the way for bitcoin-backed ETFs or mutual funds.

Bakkt plans to launch its physically-settled bitcoin futures products for testing in July, according to the company’s blog post. At the core of Bakkt is the custody of digital assets for institutional clients. The first solution will be physical-delivery bitcoin futures traded on a federally regulated exchange and clearing house. 

The trades will happen on ICE Futures US (IFUS) and will be cleared on ICE Clear US (ICUS). Bakkt will provide regulated custody as the company has filed with the New York Department of Financial Services for approval to become a trust company and to serve as a Qualified Custodian for digital assets.”

Bakkt will also store bitcoin for institutional investors as an in-house custody solution with insurance of $125 million, which has been another missing piece for institutional interest. 

Notably, Starbucks’ payment app has more users than Google Pay or Apple Pay, which paints a bright future for Bakkt to open up a separate arm for digital payments in the future. 

China’s yuan also made news recently as China was accused of being “a currency manipulator.” Bitcoin’s price went up during the volatility and the economic uncertainty around foreign currencies (and perhaps someday, the dollar) was proven to be a catalyst for bitcoin. We saw more evidence that crypto, which is a non-sovereign, and highly secure digital store of value, will likely be leveraged during future recessions.

SECTION. 2. Lightning Network & Market Cap    

2A. Lightning Network      

Perhaps the only thing more turbulent than bitcoin’s price is the acceptance of bitcoin as a payment currency. During the most recent bitcoin selloff in Q3 2018, bitcoin payment volume dropped 80% from a high of $427 million to a low of $96 million, according to a survey of 17 bitcoin payment processors. 

To help stability, bitcoin payments need to be faster and cheaper. The lightning network was recently launched to address the issue around how many transactions per second the bitcoin network can handle. Prior to the lightning network, bitcoin was capable of processing about 7 transactions per second. This creates a serious lag, and transaction fees are prohibitive for frequent payments. Visa, for instance, processes about 24,000 transactions per second with a peak capacity of up to 50,000 transactions per second.

The Lightning Network is a “Layer 2” payment protocol that operates on top of cryptocurrency blockchains, and enables fast transactions. The users of the Lightning Network dedicate a funding transaction to the base blockchain, known as Layer 1.

Instead of keeping a record of every single transaction that occurs, the Lightning Network enables users to log records only when a payment channel between two parties is closed. This two parties to create a multi-signature wallet and conduct numerous transactions outside of the main blockchain and record them as a single balance when the payment channel is closed. 

Once the Lightning Network is more built out, you will be able to pay people you are connected to without setting up dedicated channels. This network will be used for small transactions that don’t require the security of the bitcoin network. Large transfers that require decentralized security will continue to take place on the original layer.

The final iteration for the Lightning Network will be the cross-chain atomic swaps, which will exchange crypto tokens between different blockchains without the need for a crypto currency exchange. 

Benefits  of  the Lightning  Network:                            

•       Transactions will take place on the Lightning Network channels and outside of the blockchain:

•       Fees will be minimal to non-existent for small payments like coffee, dinner, and local stores. 

•       Quick transactions no matter how busy the network is. The transactions will be instantaneous and able to keep pace with Visa, MasterCard and Paypal. 

•       Cross-chain atomic swaps will eliminate the need for separate crypto exchanges. The first tests of crossblockchain transactions functioned well and this is currently undergoing more testing.

•       The Lightning Network can reach 1 million transactions per second. 

As of now, the Lightning Network is very new to the market with the first white paper published in 2016 and interoperable test transactions performed in late 2017. By 2018, The Lightning Network concept was endorsed by Jack Dorsey of Square and Twitter, and the network had a growth rate of about 15%. The number of nodes increased from 1,500 to 3,000 and the number of channels increased from 4,000 to 11,000.  

The concept of the Lightning Network (LN) has been proven, however, the technology is undergoing development and not ready for deployment yet. Bitcoin’s transaction fees could rise, causing the cost of LN to rise. For instance, if one billion people use LN, the fees will rise to cover the scale. 

Additionally, the funds must be stored online, which is considered to be less secure than off-line cold storage. There’s also the potential for Fraudulent Channel Close, which occurs when one party closes the channel and pockets the funds while the other party is offline. 

The remaining hurdles that the Lightning Network must overcome will likely be solved through the pool of developers working on the network. This phase, when bitcoin moves beyond being an investment and becomes a currency used for transactions, will greatly increase its value and market cap. 

2B. Bitcoin’s Potential Market Cap    

It’s hard not to miss the headlines that predict bitcoin will reach $100,000 or $250,000. These numbers are hardly fathomable considering bitcoin was worth less than $1 about a decade ago. The problem with these headlines is that the growth may seem appalling (to anyone not invested), but the market cap projected by 6-figure bitcoin values is in line with what bitcoin is setting out to achieve. 

•       Priced at around $10,000, bitcoin has a market cap of $200 billion, or the size of Oracle or Salesforce. 

•       Priced at $50,000, bitcoin will have the market cap of Apple, Microsoft, Amazon and Google. 

•       Priced at $250,000, and bitcoin will have the market cap of gold, a safe haven asset that protects against inflation and economic uncertainty. 

My prediction is that once the Lightning Network is built out, bitcoin will surpass the market cap of Apple, Google, Microsoft and Amazon to reach a minimum of $50,000 per token. This is because the protocol solves critical needs for global populations, including the reduction of financial fees for 7 billion people, and offers a need to store money during times of inflation. 

Bitcoin is based on the most secure network in the world, and this solves a very real need for the financial system – which cannot be automated without a decentralized blockchain solution. Technically speaking, bitcoin is also the world’s most secure financial network. The transfers eliminate 3% in processing fees and hedges against inflation. This can, and should be, worth as much as a search engine, enterprise software, a social media network, warehouse fulfillment (AMZN) or iPhone hardware. 

Apple, Google, Microsoft and Amazon reached market caps of $1 trillion because their products scale to global populations and are required on a daily basis. Bitcoin not only scales to the global population but it also protects their livelihood – a necessity rather than a convenience. In fact, we see populations who are not necessarily tech savvy most enthusiastic about bitcoin, and this is a strong signal that it will scale beyond the reach of $1 trillion market cap.  

Once bitcoin hits our target price, we will take some gains while remaining invested through a minimum of 2025 until digital payments are popularized.

SECTION 3. Bitcoin’s Halving        

This is a preliminary report on bitcoin halving. A blog update will be released in Q4 2019.

Bitcoin is limited algorithmically to 21 million bitcoins, which makes it a deflationary asset instead of an inflationary asset. Every ten minutes, a “block” of bitcoin is added to the blockchain. Miners are rewarded with bitcoin and the new distribution of bitcoin is known as a “block reward.” The block reward in the beginning of bitcoin’s existence was 50 BTC. Now it is 12.5 BTC. This was due to bitcoin halving which occurs every four years and will continue until the last bitcoin is mined until approximately 2140. 

To date, 17.6 million bitcoin have been created, representing 84% of the total supply.

In May 2020, bitcoin will go through another halving and the block reward for miners will decrease from 12.5 to 6.25. This will be the third halving event in the network’s history. One of the main purposes of halving is to preserve the economic principle of scarcity for bitcoin, which with a peer-to-peer financial network, reinforces bitcoin’s potential.

According to recent surveys, 32% of bitcoins in circulation have remained in the same wallets since July 2016, and therefore, this is new territory for many holders of bitcoin. Historically, the last two halvings produced returns of 81x from the first halving and 3x from the second halving in the one-year period that followed. 

The trick to bitcoin halving, historically, is that the price becomes extremely volatile. We saw from the first halving that bitcoin went from $11 to $1,100 and back down to $220. The second halving went from $230 to $20,000 and back down to $4,000.  extremely volatile. We saw from the first halving that bitcoin went from $11 to $1,100 and back down to $220. The second halving went from $230 to $20,000 and back down to $4,000. 

Prudent investors will recognize the potential here as the new support levels that follow halving are much higher than prior support levels. 

CONCLUSION:     

If you’ve read this far, then the question on your mind is likely entry. This is by far the most important question for bitcoin (rather than the viability). This is due to the painful volatility of cryptocurrencies. Even with Bakkt’s announcement, bitcoin met resistance in the high $10Ks and dropped back down to support to the low $10Ks in the matter of a couple of days.

As you’ll see below, putting a very small amount into bitcoin now is good insurance (10-20% of your position). We believe there is a high probability that bitcoin’s price will retreat one more time, and this will the final opportunity for reasonable entry (80-90% of position). This scenario comes from scouring many technical analysts on this topic and being very diligent in our scenario recommendations. 

We realize we could be wrong and bitcoin could rally – which is why some insurance keeps you in the digital asset. If you are concerned this could be the case, consider buying 20%-25% insurance now.

Recommended     Reading:             

Bitcoin Futures & Custody: Bakkt’s differentiated Approach

Lightning Network: Wikipedia 

The Next Bitcoin Halving – Grayscale Insights 

SECTION 3: Technical Analysis       

Provided by Knox Ridley

BITCOIN UPDATE:     

Bitcoin is currently in a correction off its June high around $13,880. The price is currently below the volume weighted moving average, which is anchored to the June high, noted above in black. This tells us that the bears are in control for now, and will remain so until broken. However, the 200-day simple moving average is in purple, and tells us that the long-term bull market for bitcoin is still in-tact and healthy.    

Typically, during the first retrace off the first initial push into a new bull market, I’ll target the 50%-61.8% retrace of the initial move higher as entry.  However, based on the strength of this bull market, I’ve moved my target between $8500-$7700. When we hit this target, we will update you on the probability of a 50% retrace to $6,600, although right now, the probability of hitting this retrace and the $6,000 support is lower than it was in June/July due to the bullish activity.

Finally, Bitcoin is currently trading in a corrective wedge, which is highlighted in the dotted blue lines.  There are 2 possibilities for this move, which are shown with the green and red arrows.  Simply put, either Bitcoin has bottomed, breaking through the wedge and initiating a new uptrend, or it breaks-down below the wedge testing support along the way.

Internal Strength:     

Before we get into the likely scenarios of Bitcoin, I’d like to highlight the strength of this uptrend for context.  The Relative Strength Index is my favorite measurement for the strength of the current price trend.  

I highlighted two increasing trends in the RSI, which coincide with the 2 most recent uptrends in Bitcoin’s price.  You’ll notice the first dotted red line in 2017. The RSI followed this trend until it diverged from the increasing price, signaling weakness, and then broke the trend line. The price immediately broke through the 40 line on the RSI, which initiated the internals into bearish momentum. Through-out the recent bear market, the RSI mostly stayed below 50.  

Today, we have a similar uptrend, highlighted by the second red dotted line.  The price broke through this trend, signaling the current retrace we are still in.  However, instead of breaking the 40 line, the RSI has respected this support level, which is showing that the buying pressure for Bitcoin, though not in a bullish stance, is also not entirely bearish either.  This is signaling strength within this correction.  If we break the 40 line and then go through the 30 line, it will be worth noting. 

Entry Scenarios:   

First, it’s crucial that you adhere to proper position sizing with an asset like Bitcoin. It is extremely volatile asset.  Proper position sizing is crucial, and should lean to the lower end of a portfolio allocation. Because of our conviction in the long-term growth of Bitcoin, we suggest layering your investment starting at today’s prices.  Possibly, 10-20% of your Bitcoin allocation in today, and based on how shallow the current correction is, we will add into support or momentum at key levels.  

Scenario 1: Bitcoin continues lower.  If Bitcoin breaks the $9040-$9,000 support, which is in black on the chart, we will likely see it trade between $8500 – $7700.  There is an open gap around $8500, which, once closed, will likely act as support.  Below this gap, you’ll see a long-term price cluster around $8195 (shown in black).   When you factor in the 38.2% retrace around $7700 as the next level of support, we will have exceptionally strong support between this region. Once again, I think the likelihood that we fall to the 50% retrace around $6600 is unlikely in this uptrend. However, if we do break the long-term price cluster around 6000 (also highlighted in black), I’ll target the 61.8% retrace around $5500.  

For now, I added to my position at $9,000 and look to be a heavy buyer sub-$8000.  However, anything is possible with Bitcoin, which is why we will want to wait for a renewed uptrend to initiate the full position.  Save the bulk of your allocation for when we get a strong bounce off major support levels, followed by a 5-wave impulsive move.  That will signal an end to the correction.  

Scenario 2: Bitcoin breaks-out higher.  If we see a move above $13,880, it would signal that the correction is likely complete, and we are now entering the next leg higher. Remember, we are attempting to get Bitcoin at a reasonable price for a long-term holding.  

We want to be in Bitcoin before the fundamental thesis Beth outlined with Lightning Network and potential market cap becomes a popular view.  So, we don’t want to over think an entry, while at the same time respecting the volatility of this asset and the likelihood of a pullback. 

Technical Analysis is all about probabilities, and it is a snapshot of where we are today.  This can change, which is why we recommend a circuit breaker in the form of a stop.  If your stop. is triggered, look to re-enter in a new uptrend.  However, because of the volatility of Bitcoin, and until we are definitely in the next leg up, I will likely use a deviating stop based on price action and support, which will move up with the price of Bitcoin.  

Blog updates will be provided as we go along.

The Big Picture         

It’s undeniable that Bitcoin (BTCUSD) is in a renewed uptrend.  Earlier this year, Bitcoin found major support around $3,125, and began to make higher highs and higher lows for the first time in over a year.  Even though Bitcoin is a relatively new asset that inherently lacks many of the valuation methods commonly used in security analysis, it still adheres to the laws of human sentiment, which is evident within the decade long price action in Bitcoin.

That being said, Bitcoin’s price over the last 3 years experienced a global focus that road the waves of extreme sentiment in both directions.  The historic bull run and the bear market that followed, succinctly aligned with Fibonacci ratios, typically used in Elliott Wave Theory.  We can thus extrapolate an on-going wave structure, which aligns with these important ratios in order to gauge an approximation of the likely price action going forward.  Because of this, I will lean on Elliott Wave Theory to gauge a long-term framework for Bitcoin’s likely path. 

Once we have a Wave 2 in place, we can then find our Fibonacci extensions as a likely target for future moves.  The red number on the graph above are not random.  They assume a correction to the 31.8% retrace around $7800.  From here, the math takes us to a minimum of $65,000-$75,000 region, with the likelihood of extending higher.  

Elliott Wave Theory is just one tool amongst many used to gauge likely targets, but based on the data we have today, this is a high probability path. Not only does the product research line up, but so do the technical, which is always exciting to see. 

I want to put this graph in front of you so that you can get an idea what we are after.Entry is crucial, but in light of where we both see Bitcoin going, we don’t want to over complicate it too much, and simply want to invest in this opportunity.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

Chainlink: 2019 Analysis

Posted on by io-fund

At the peak of the crypto boom, there were over 1,600 alternative crypto currencies available. CoinMarketCap currently tracks 900 altcoins. These altcoins compete for 30% of the cryptocurrency’s combined market cap with Bitcoin claiming two-thirds. However, the losses altcoin incurred during the crypto winter were much deeper than Bitcoin, with the third most-popular altcoin losing 92 percent of its value and other altcoins losing close to 100 percent of value.

Therefore, to recommend an altcoin is a precarious proposition. However, there is one alt-coin which does not function like the others and fills a much-needed gap in the technological advancement of the blockchain middleware stack – especially as the value extends beyond the realm of currency with the ability to automate trusted computing across computer networks, people and machines.

17629485-f317-4e36-a4c5-3d30f2696253_Chainlink-Premium-Report.pdf

Chainlink: 2019 Analysis

INTRODUCTION  

At the peak of the crypto boom, there were over 1,600 alternative crypto currencies available. CoinMarketCap currently tracks 900 altcoins. These altcoins compete for 30% of the cryptocurrency’s combined market cap with Bitcoin claiming two-thirds. However, the losses altcoin incurred during the crypto winter were much deeper than Bitcoin, with the third most-popular altcoin losing 92 percent of its value and other altcoins losing close to 100 percent of value.

Bitcoin has the majority of cryptocurrency’s market cap. Source: CoinMarketCap

Therefore, to recommend an altcoin is a precarious proposition. However, there is one alt-coin which does not function like the others and fills a much-needed gap in the technological advancement of the blockchain middleware stack – especially as the value extends beyond the realm of currency with the ability to automate trusted computing across computer networks, people and machines. 

SECTION 1: What are Smart Contracts?  

Smart contracts are a more advanced use of blockchain where an exchange between two parties is automated based on conditional provisions. These self-executing contracts are written into lines of code, and the agreements contained exist across a distributed, decentralized blockchain network. 

Trusted transactions are necessary beyond virtual currency. Smart contracts enable collateral for agreements that can be carried out without the need for a central authority. Derivatives trading is an example of a contract that uses computer networks and complex term structures. 

Smart contracts offer a more complete use for blockchain. First discussed in 1996 by Nick Szabo, some claim that smart contracts are the real use case for blockchain as they aim to automate financial transactions, and in the future, can automate machines. 

Financial contracts are omnipresent, and they specify inputs, logic and outputs. Digital contracts are everywhere around you; such as credit card payments, wages (Paypal, Venmo, your employment wages), when paying for an Uber, buying on Amazon, paying Netflix – and on a grander scale, bond payments. 

As Framework Ventures points out in the explanation of why the firm invested in Chainlink, there is high overhead costs due to intermediaries, counterparty risk and potential for fraud.[1] Transactions costs are currently pervasive, they limit output, and are unnecessary with the use of blockchain. 

1.1 The Problem that Smart Contracts Solve 

Centralized oracles are high risk. Automated payments, often up to trillions of dollars’ worth, such as with bond payments, could rely on data that is hacked. This would result in billions of dollars erroneously paid. This is why institutions have not adopted centralized smart contracts – they are able to be tampered with.

Decentralized oracles, such as Chainlink, use reputation scoring to set up and maintain data feeds. This is accomplished with multiple data inputs for smart contract products. Rather than calling data from an API, the smart contract puts the data request “up for bid” on a blockchain marketplace. Several data providers respond and bid with a data reply. Therefore, if a single data source has been hacked/tampered with, there is an effect on data powering the smart contract. 

There are many uses for smart contracts to occur between people and humans, even though it requires a bit of foresight to understand this need. Stealing autonomous cars, for instance, will be challenging with smart contracts as the access control will be verified over blockchain. Land titles, birth certificates, degrees, hospital records, deliveries by autonomous vehicles, accessing digital content, paying landlords or bills, purchasing real estate and purchasing insurance are all ways that smart contracts can be used.  

From a technology perspective, the world is only now getting comfortable with the infrastructure layer of blockchain technology. Chainlink is middleware and this is more advanced stage of blockchain and the use of cryptography for trusted computing and transactions. 

The middleware stage will include tools built on top of core protocols, like Ethereum or Bitcoin’s blockchain, to enable decentralized applications. We will also enter a world where over 25 billion machines must communicate in a trusted manner, and this will be yet another, more advanced stage for blockchain to register and verify the communication and digital transactions across machines.  

1.2 Ethereum Network – Beyond Coins

Ethereum is a platform that was created for creating smart contracts. “Turing-complete” is the term for supporting broader computational instructions. The smart contract code facilitates, verifies and enforces the performance of an agreement or transaction, with decentralized automation as the end result. 

Although smart contracts on the blockchain are self-verifying and self-executing, they lack connectivity from data feeds and APIs that are external to the blockchain. The full potential of blockchain to decrease transaction costs is not being utilized. 

Without Chainlink, Ethereum’s smart contract utility is confined to currency tokens as data cannot be directly fetched from off the blockchain. The only secure input that can power smart contracts is data that exists on the Ethereum blockchain, which is token inflows/outflows.

Chainlink was built for Ethereum but there will be support for all leading contract networks in future development. The system is able to be upgraded across various components as advances are made across smart contract middleware and blockchain infrastructure.

1.3 Are Tokens Necessary? 

In order for a smart contract on a blockchain to use a Chainlink node, a payment will need to be made in the form of a LINK token. The prices will be set by node operators based on demand for off-chain resources that Chainlink provides, and the supply of similar resources. 

The purpose of the LINK token is to pay Chainlink Node operators for the retrieval of data from off-chain data feeds, the formatting of data into blockchain readable formats, off-chain computation, and uptime guarantees they provide as operators. It is a small payment for the data services.

For instance, the token may compensate parties who provide the data by responding to the data requests. Or the token may compensate a banking network like SWIFT for processing the payment after the smart contract is triggered. LINK tokens help to maintain the reputation system for payment oracles/data providers. 

It also penalizes inaccurate or incomplete data by taking tokens away from an oracle and distributes the tokens to accurate participants. Please see below for a competitor who does not require a token for smart contracts.

SECTION 2: FUNDAMENTALS              

2.1 Addressable Market         

Addressable market and potential value for middleware is hard to determine although having an early investment with the right entry price is likely to pay off. Framework Ventures, which has a large holding in Chainlink, believes middleware blockchain technology will have a market size equal to the blockchain platforms, such as Ethereum, as both will be critical for the majority of blockchain applications. 

The distinction between the coin and the middleware is important to note. Typically, using the middleware can occur without necessarily using the coin. Reasons for using the token are indicated above in the section “Token vs. Token-less.” Middleware that does not require a coin is a risk to Chainlink, although Chainlink has a substantial lead and most transactions today require some form of earnest payment or transaction fee. 

The total addressable market for a service like Chainlink is not able to be determined today. We have a glimpse into the market as the application of securities settlement can save up to $7.5 billion per year in actual costs savings from automation. This is only one piece to the addressable market for Chainlink. Data-fetching from off the blockchain will be a larger addressable market, for instance. See below in partnerships for more information.

Framework Ventures estimates the LINK token will be used for data input/output for over 300M messages per year, and will be processing around 820K transactions a day. This is more than Ethereum at 600K transactions per day or Ripple at 200K transactions per day. Again, financial transactions are only one piece to the addressable market as the problem Chainlink solves is fetching data from off the blockchain to be used on the blockchain. 

For application developers, Chainlink is likely to be their first choice for flexibility and agnostic purposes (not tied to one protocal), and developers can often create the tipping point for platform adoption. Chainlink’s value is likely to come from the startup ecosystem as the middleware is blockchain-agnostic. 

Chainlink works across the Ethereum blockchain, Hyperledger ecosystem, and the SWIFT banking system. It is the only protocol that enables Ethereum smart contracts to pay out in Bitcoin and provides an advantage to businesses on Hyperledger or Bitcoin protocols. This is also a major advantage over Ripple which is confined to the Ripple protocol. (These are not direct competitors as Chainlink will be fetching data off the blockchain, but helps to put into perspective its capabilities and potential market size).

2.2 Competitors           

Token-less oracles do exist, however, the customization that these token-less oracles provide comes at the cost of development time. There is also less incentive for participating oracles that may not be compensated for providing accurate data. 

Competing token oracles, such as Streamr, may be able to take some market share as savvy data providers can realize more profits by accepting multiple tokens. Chainlink’s vision is to own the enterprise-grade partnership market with relationships, such as Swift, and focusing on consumer-grade partnerships second. We’ve also seen some evidence that Chainlink is favored by data corporations, such as Google and Oracle (more on this below).  

Chainlink is moving quickly right now and if Google and Oracle deem Chainlink the preferred altcoin for offblockchain data integration, then it’s positioning will be hard to shake.

2.3 Partnerships for Future Growth        

Altcoins are an all or nothing gamble and validation from other companies is essential for picking the one or two winners out of the crowd. Chainlink is distinct due to its larger partnerships. 

•       Google announced a partnership with Chainlink to help place BigQuery data onto the Ethereum blockchain using a Chainlink oracle smart contract. As Google states, the possible applications are “innumerable” with a few having “high and immediately utility,” such as prediction marketplaces, futures contracts and transaction privacy.

•       In June, Oracle announced at the CloudEXPO conference a partnership to “co-develop Chainlinks with 50 qualified startups to prepare them to sell their data to Oracle’s 430,000 customers in 175 countries on the Oracle Blockchain Platform.” 

•       Chainlink advertises a partnership with SWIFT on its website and in a published case study. Notably, I cannot find any announcement on SWIFT’s end, and this is likely a proof of concept for now. If the partnership is fully implemented, Chainlink will not only enable SWIFT to process smart contracts, but it’s possible SWIFT will enable other external smart contracts to settle through fiat on its network by means of a Chainlink/SWIFT oracle. 

See Recommended Reading below for more information on partnerships. 

2.4: Internet of Things for Future Growth        

Internet of Things, or IoT, has become a common term for machines communicating with machines in an automated method. Smart things is another term for IoT connections. For instance, in the smart home, you have a smart refrigerator, a smart thermostat, and a smart door lock. 

Perhaps the most forward-thinking IoT device will be the fully autonomous smart car, with many critical sensors communicating with one another through data gateways. For instance, the data from a street light will be sent to the sensor on your vehicle for a red light, and this will trigger the vehicle to brake. 

Financial transactions will be the first iteration of smart contracts, however, the internet of things will connect 25 billion machines and this will help smart contracts reach critical mass and full-fledged adoption as a means of securing these connections. However, for this to be realized, data external to the blockchain is required for smart contracts to be verified and executed. 

The automation of trusted computing across machines and people will take time to fully realize and these examples will extend beyond the financial sector. 

2.5 Recommended Reading: White Paper

The founders of Chainlink wrote a whitepaper on September 4th, 2017. Authored by Steve Ellis, Ari Juels and Sergey Nazarov, the team has expanded to include a strong team across crypto, trusted data, finance and security. The founder of DocuSign is on the advisory board, which should help solidify some of the use cases noted in this report.  The whitepaper is worth a read as it lays out the problem that Chainlink solves, which is that blockchain protocols do not support native communication with external systems. The solution that provides access to external systems is called an “oracle,” and these oracles need to be decentralized in order to be secure and tamper proof. Centralized smart contracts can be altered, terminated or even deleted by a privileged party.

“Chainlink offers a decentralized oracle network. Decentralized oracle networks achieve trusted computing for digital agreements, which is important for both human-powered digital agreements and machine-powered digital agreements.”

Example use cases for Chainlink that are provided in the whitepaper include:

•       Securities smart contracts for bonds, interest rate derivatives and other market information  reported via API

•       Insurance smart contracts will require information for liability issues, including if doors  were locked, or flights ran on time.

•       Trade finance smart contracts will need GPS data about shipments, data from supply  chain ERP systems, etc.

Notably, the company is located in the Cayman Islands, likely to escape paying income tax. I prefer companies that are based in the country where they are breaking ground.       

Additional Reading:           

Chainlink whitepaper

FrameWork Ventures: Our Investment in Chainlink

Google in Blockchain

Smart Contracts with SWIFT 

SECTION 3: Technical Analysis       

Provided by Knox Ridley

LINK’s Recent Price  Action:         

Chainlink is currently trading in a downtrend from its June 29th high, making lower highs and lower lows (highlighted in yellow).   The question is: have we bottomed and are in the beginning stages of a new uptrend or is this the midpoint of the downtrend with more to come?  

Chainlink has found strong support at the $1.9 region, where it has tested that region 3 times this year.  It’s currently trading in a tight range between the $1.95 region, which has been a major price cluster for Chainlink (highlighted with the red band), and $2.9 resistance region (highlighted in yellow).  It has tested each region twice, and each time failed to break through.  

Internal Strength:     

In a downtrend, I will often look at the RSI to gauge the internal strength of the momentum.  What I’m usually looking for is positive divergence while in a downtrend – for instance, ideally RSI would be making higher lows while Chainlink would be making lower lows – but this is not happening right now. I look for this because it is a reliable sign that selling pressure is waning, and usually follows a reversal.  

If the RSI is at or below the downward extreme 0, we can usually expect, at the very least, a short-term bounce.  We are not seeing this now.  In fact, the RSI is comfortably below the 50 and 40 line and trending with the price action.  In other words, Chainlink’s price is showing a stable balance between buyers and sellers. 

Conclusion:

Remember that we are dealing with an alt-coin within the crypto space.  You should expect low volume and volatile moves.  Small position sizing to begin with and wide stops are crucial.  We believe in the long-term potential of Chainlink in the smart contracts space, and believe it is worth a lotto ticket.

Scenario       1:  Chainlink finds increased buying pressure, breaks out above the $2.9 resistance, and continues in an upward movement.  

Scenario       2: It is likely that Chainlink will make one more attempt in the coming weeks at support by first breaking the upward trend line and then testing the $1.9 support region.  If it breaks support, we will likely see it find support around either the 50% retrace, around $1.7, or the 61.8% retrace, around $1.25.  This region is highlighted in the green box.  

Chainlink is currently in a correction after starting a powerful uptrend earlier this year, which is similar to all cryptocurrencies.  I believe the body of evidence supports scenario 2, where Chainlink breaks $1.95.  We will look to buy our first tranche at $2/$1.95, and then the remainder based on the velocity and structure of its price action below this region. However, if Chainlink breaks the $2.9 region, we will shift to scenario 1 as the more likely scenario, and begin our position into the momentum with tight stops.  We will offer updates as we progress. 

Please note: the fundamental analysis on Chainlink is early and negative price volatility would be welcomed.

Roku and The Trade Desk: 2019 Analysis

Posted on by io-fund

99574f65-8ab7-4dc6-a844-cc770be96e4a_Roku-and-TTD-Premium-Analysis.pdf

Roku and The Trade Desk: 2019 Analysis

SECTION 1: Connected TV Advertising 

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.  

 

               

               

MongoDB: 2019 Analysis

Posted on by io-fund

910af809-34a0-434f-9da1-62aee604ee76_MongoDB-2019-Analysis.pdf

SECTION 1: What Is NoSQL?            

Data storage is the invisible layer to the back-end that large-scale applications rely on to store passwords, product data, files, content, and accounting information. Website and applications are made of files containing data and this data needs to be stored and easily retrieved. NoSQL stands for Not only SQL, referring to relational databases that define and manipulate data based on structured query language (SQL). 

The drawback to SQL databases, which MongoDB’s NoSQL database competes with, is that SQL databases are restrictive and require you to use predefined schemas. The data must follow the same structure with SQL databases, whereas MongoDB’s NoSQL database allows you to store data with dynamic schema for unstructured data, such as document-oriented, column-oriented, graph-based and as a key-value store. 

MongoDB is a popular and well-supported NoSQL database that offers a database-as-a-service (DBaaS) product to reduce the operational complexity of on-premise databases. As an open source database, MongoDB has many competitors outlined below. The moat, if you will, comes from the time it requires for software developers to learn a new database platform. Platforms that are known universally, like MongoDB, are desirable as it is not a requirement to learn a new platform if a software developer changes employment. The friction in changing databases for companies is also very costly.   

1A:  MongoDB Products:    

MongoDB Enterprise Advanced runs in the cloud, on-premise, and in a hybrid environment.  This subscription package represented between 56-65% of revenue subscriptions over the past three years. In June of 2016, a cloud-hosted database-as-a-service (DBaaS) product was introduced, MongoDB Atlas, which recently represented 23% of revenue up from 7% of revenue in the year prior. 

Community Server is a free-to-download database that has seen over 60 million downloads over the past ten years with 20 million downloads occurring in the last year. 

1B.  Market  Opportunity:          

IDC updated its forecast and expects the worldwide database software market to grow from $64 billion in 2019 to $98 billion in 2023. There are six segments in the big data management space: enterprise data warehouse, NoSQL, Hadoop, big data integration, data virtualization, and in-memory data fabric. 

The NoSQL market is growing quickly and outpacing overall IT, but the market size is small compared to other big data segments. Some estimates place the NoSQL market at $1.6 billion in 2021 while other sources state the near-term opportunity is $4 billion.  

Here’s a glimpse of the growth from natural language processing (NLP), growing from $720 million in 2019 to over $4 billion by 2025. MongoDB is well situated to capitalize on this specific software segment. You can add another $1 billion to the market potential for deep learning. IoT data may also become a driver for NoSQL, adding to the trajectory. 

To complicate addressable market, up to 25% of databases are entirely open source and unpaid without licensing fees, such as PostreSQL. MongoDB is also open source, however, competing corporations must license the code and the company charges for enterprise-level products, cloud database-as-a-service products and analytics.

 It’s important to remember we are in a transition as indicated by the developer survey. Big data has evolved over the last decade and will face more complex challenges that go beyond predictive modeling to include natural language processing, deep learning, IoT connectivity and new methods, such as data lakes. 

1C.  Competitors:    

MongoDB has competitors from all sides. As stated, the moat in software platforms and languages is established by becoming universal as there is a time prohibitive learning curve in switching to new platforms/languages/frameworks which prevents customers from switching frequently. 

Tech companies also need to hire based on universal database skills. There cannot be too much fragmentation or it will impede technological progress.  

This works both ways as MongoDB may be the better product, yet many companies may find it hard to switch from Oracle or another legacy, relational database. 

Due to becoming a universal NoSQL option, MongoDB is in the lead for most wanted database skills as of early 2019. Being agnostic certainly helps, meaning that the competition between Oracle-owned MySQL, Microsoftowned SQL Server and Amazon-owned DynamoDB helps MongoDB because it is neutral and does not compete with these companies across other, more lucrative revenue segments. When Microsoft hires, they will not advertise for DynamoDB experience but they will seek MongoDB experience, helping MongoDB establish itself as a universal database program.

1D. MySQL Still Dominates the Market                     

MySQL is the leading database technology with nearly 55% of developers responding they use it or have used it.

The free and open-source software was bought by Sun Microsystems, which in turn, was bought by Oracle in 2010. The founders of MySQL decided to fork the project and create MariaDB, most likely as a rebuttal against Oracle. MariaDB now competes with MySQL.

The debate between SQL and NoSQL is still very heated, but as we can see from the skills most sought-after, NoSQL has a bright future ahead. The best growth stocks are at the beginning of a trend with future market share dwarfing current market share. Not only is MongoDB the leading NoSQL database (current market), it is also the most in demand database (future market).

“When I joined MongoDB, about 5 percent of all projects were relational (SQL) migrations – now it’s 30 percent as companies look to transform.

Cost can be a factor, but more often it’s development speed and running at scale. It’s not unusual to see developer productivity up 3 to 5x after switching [from a SQL database], coupling MongoDB with a shift to cloud, microservices, and agile/devops.”

– Mat Keep, director of product marketing at MongoDB, 2018

MongoDB’s growth depends on converting developers from SQL databases (relational) and also convincing developers to pay for features when open source is traditionally free. Startups also compete with MongoDB, such as YugaByte, which raised $16 million last year to combine SQL and NoSQL into a single database. 

Within the segment of NoSQL, MongoDB has a few competitors, as well – hence the reason I stated there were competitors from all sides (from free open source, SQL and also NoSQL). MongoDB is the leading NoSQL database although Redis, Cassandra, and Couchbase are competitive NoSQL products that vie for market share. 

According to Stack Overflow, Redis is the closest competitor to MongoDB.  Forrester positions Couchbase as a more serious contender than Statista indicates, although Statista is more insightful as over 80,000 developers were polled on the Stack Overflow survey as opposed to 26 vendors from Forrester. 

Section 2: Fundamentals        

MongoDB has reported solid revenue growth YoY of $65 million, $114 million, $186 million and $267 million in the most recent year. The revenue growth of MongoDB YoY is nearly 70% from a fairly mature company that was founded in 2007. 

 As a percentage of revenue, net losses decreased from 62% to 51% to 38% revenue in the most recent year ending January 31st, 2019. Gross profit margins were lower in the most recent quarter at 68% gross margin, compared to 73% gross margin in the year-ago period.

Free cash flow improved in the most recent quarter to $2.8 million compared to negative $8.4 million in the year-ago period.

Sales and marketing costs are over 50% of revenue and R&D costs are over 30% of revenue; this represents an increase of 36% in sales and marketing costs YoY and an increase of 44% in R&D.

 The company is choosing to not be profitable and instead is going after market share, and this strategy will likely continue over the next few quarters. Dismissing profitability for critical early-trend growth should pay off as we are in an important window of opportunity for AI and ML development. Also, once customers are converted, there is too much friction to switch, and therefore, time is of the essence to win this market. 

 Despite strong earnings reported in June (fiscal Q1 2020) that beat estimates on all accounts, MongoDB stock has dipped from the $165 range to the $145 range, currently, due to revised guidance on expected losses for the full year to $1.04 to $1.11. Wall Street had expected a full-year loss of $1.01 per share. 

 Most notably, MongoDB is courting Google Cloud Platform, which should further its compatibility with Kubernetes, a container system that originated from Google, and Tensorflow, a machine learning framework and language that is rising in popularity.  

I’ve reached out to MongoDB, who stated MongoDB 4.2 will be released in a few weeks, which should strengthen fundamentals with increased Kubernetes functionality and more competitive features for Atlas, including full-text search to take on Elastic. Kubernetes has gained in popularity from 10% of survey respondents using container orchestration in 2015 to over 71% respondents using Kubernetes in 2017. 

For these reasons, I expect MongoDB’s growth to continue its trajectory.

2A. Amazon Endorses  MongoDB  as Segment  Winner         

Amazon has been a leading cause of MongoDB stock dropping two times this year. In January, MDB lost over

15% of its value in one day following the announcement of Amazon’s competing database-as-a-service product DocumentDB.  In March, the news that Lyft was leaving MongoDB for Amazon was enough to shake the stock by 5%. Therefore, further analysis of Amazon is required to forecast the fundamental strength of MDB.

Last week, I wrote a public article about Amazon’s keynote at O’Reilly’s open source conference, OSCON. There was a disproportionate amount of endorsement for MongoDB coming from Amazon, stating “AWS effectively endorses MongoDB Atlas as the segment winner” and that MongoDB Atlas is an “AWS reinvent 2019 top level sponsor.” The speaker also made it clear that Amazon and Microsoft have cloned MongoDB’s Atlas but this has not slowed down growth from Atlas. 

There was a slide that shows MongoDB’s growth from 22% as a percentage of revenue to 35%, despite DocumentDB’s launch in January. This matches the reported 400% growth of Atlas to account for 34% of MDB’s revenue in fiscal Q4 2019 and 35% in fiscal Q1 2020 (reported in June 2019). 

One concern is if the Atlas growth of 34% of revenue in fiscal Q4 to 35% of revenue QoQ in fiscal Q1 was due to DocumentDB. According to Amazon’s presentation, MongoDB is still dominating, and this was welcomed intel directed towards NoSQL and SQL software developers, who Amazon is not likely to lead astray.  

You can read my public article here. Here’s a video of Amazon’s presentation that I attended that was shared on our RS Forum.   

Product and Fundamental Analysis Conclusion:

As of now, customer or competitor statements have a positive outlook on MongoDB. Developers are preferring MongoDB as the most wanted database skills in early 2019, per a survey of over 80,000 developers. Atlas’ growth was light QoQ compared to previous quarters, yet Amazon recently conceded that MongoDB remains the segment winner. Although this endorsement was based on industry insider information rather than from actual fiscal Q2 2020 results, I do not believe this would be in a keynote if Amazon did not truly believe MongoDB is currently the segment winner at the time of the keynote. 

MongoDB is spending its resources on gaining market share. The company may not be profitable in the near future as it attempts to cement itself as the universal NoSQL option with a major ramping up in R&D and sales and marketing. I believe you can play this to your advantage as a buy and hold investor as the market is likely to penalize MongoDB for losses now to hold its position for the future. To build a buy and hold position, wait for a pullback. 

I place the addressable market on the high end of estimates as charging for commercial open source software is a new trend that is gaining traction. Enterprises will pay if the tools are faster and cheaper for their teams. Database-as-a-service is a newer category that is also likely to grow faster than current analyst estimates.

MongoDB is a volatile stock as seen from the Amazon news and revised guidance for EPS. From my research,  MongoDB will continue to perform well in the competitive landscape and buying the stock on perceived weakness is a good strategy. 

3. TECHNICAL ANALYSIS    

Technical Analysis provided by Knox Ridley.      

Shortly after its IPO in October of 2017, MDB began an uptrend of a breathtaking 300%. With less than two years of trading, we have enough data to gauge major support and resistance levels, as well as gauge the strength of the current trend, which can give us a reasonable guess at the best entry.  

3A. Internals:    

The MACD is in a very weak state.  It’s made lower highs as the stock has made higher highs, indicating negative divergence, which we usually see leading up to a pullback. You’ll also notice the volume decreasing as the price is rising, which is characteristic of weakening buying pressure.  

However, the biggest warning to me is the puncturing of the Bollinger Bands, which can be seen below:

You can see the move initiated on high volume, broke straight through the bottom band with a widening upper band.  This is followed by 2 days of lower lows on higher than average volume.  This move confirms that MDB is in a downtrend (making lower highs and now lower lows).  

 Also, MDB is comfortably below it’s 50-day moving average, with that average now pointing down. It has respected this moving average through-out its bull run, so to see it break through with force and comfortably staying below it is something to watch carefully.

 It is currently touching the line in the sand support at $141, bouncing around for 3 days.  The more a stock tests the support, the more likely it is to break that support.  Bellow this support and I think we will visit the 200-day moving average, which is around $115.  The 200-day sits directly in the middle of our entry target in the green box between $128 and $95

3B. Scenarios:   

•       The more likely scenario is that MongoDB will break the $141 support and our entry will be between $95 and $128. There is a saying, “The market abhors a vacuum.”  More times than not, the market will attempt to fill a gap up or down.  If we break the $141 support, that will be the target region, which also line up with a Wave 4 (ABC) retrace.  This is the most likely scenario if the 200-day moving average breaks.

•       It’s lower risk to wait and buy MongoDB when/if it reclaims it’s 50-day moving average. Depending on how quickly MDB regains its 8, 21, 50-day EMA, we may enter before the $167 resistance.

•       If MDB breaks $167, we will buy with the assumption of a broader bull market.

Google: 2019 Analysis

Posted on by io-fund

f9dc9f4f-29dc-45a7-a961-cd287b452262_Google-2019-Analysis.pdf

Google: 2019 Analysis

INTRO          

Financial analysts and journalists continue to question why Google missed in Q1 2019. Without properly identifying the cause of the revenue miss, which was the slowest sales growth since Q4 2015, it is nearly impossible to predict how Google will perform in the future. Google executives offered very little on the earnings call.

“Alphabet Inc.’s growth is slowing, and analysts don’t have a clue as to why because executives aren’t talking … After releasing disappointing first-quarter results in late April, executives were vague, if not outright unresponsive, about slowing growth.” -Marketwatch, July 19th, 2019

Deciphering exactly why Google missed is impossible to prove, although we believe the quiet contention between Apple and Google on browser ad-tracking may have played a role. The Safari browser captures 58% of overall mobile traffic in the United States with Chrome capturing 33.3%. In the UK, 45% of users use Safari and Mozilla. Therefore, Google’s revenue is susceptible to Apple’s Intelligent Tracking Prevention (ITP), with tighter restrictions going into effect throughout 2019. 

There is also evidence of weakening fundamentals that extend beyond any one change to the way ads are targeted and monetized. We lay out these details below.

SECTION 1: PRODUCT OVERVIEW

1A. Apple’s Intelligent Tracking Prevention (ITP   2.1 and ITP 2.2)    

Launched in 2017, Apple’s Intelligent Tracking Prevention (ITP) places a limit on how long cookies are available for third-party contexts. ITP restricts cross-site tracking for targeted advertising purposes by removing cookies after 24 hours. Login cookies are available for up to 30 days, however, login cookies do little for targeting purposes as they do not track a user’s activity. After 30 days, the login cookie is purged.

When Apple first introduced ITP in 2017, it did not have an effect on Google as users of Google’s search service and other properties visit these sites daily. ITP 2.0 was aimed towards third-party trackers, such as Criteo and Doubleclick. Some critics state ITP strengthened Google as one of few remaining options to target niche audiences at scale. 

Apple continued to battle data collection on the Safari browser in 2018 by shutting down finger printing, a method of triangulating who a user is through fonts, screen dimensions and plugins. 

We’ve seen statistics from publishers where they get half the CPM value as a result of ITP’s impact. If they can’t have good targeting, some of their sites become less worthwhile for their advertisers.” – Google, CES 2019

In March of 2019, Apple announced ITP 2.1, which prevents third-party cookies from being stored as first-party cookies. This update also puts a limit on how long first-party cookies can be stored of up to 7 days. To put this in perspective, a Google Analytics cookie, in theory, would last for up to two years. Safari can now delete it within 7 days.

The final hammer was dropped in May of 2019, when Apple announced ITP 2.2. This update is intended to limit any workarounds by limiting all tracking to 24 hours. This includes Google and Facebook. The result will be weakened attribution, which in turn, lowers CPMs due to weakened ad targeting.

Here’s a description from Digiday that puts into context how ITP 2.2. works:

 “ITP 2.2 cuts the first-party cookie’s lifespan from seven days to one day. As a result, the first-party cookies that Facebook and Google have introduced in order to continue measuring site traffic and attributing ads will be deleted after 24 hours. As a result, if a person clicks on an ad for a product on Friday and decides to take the weekend to think about buying, then the cookie wouldn’t be around on Monday to register when the person returns directly to the site to buy the product.” -DigiDay, May 2019

 ITP 2.2 will have more of an effect on Google and Facebook than the previous ITP releases. This release will prevent Facebook’s pixel and Google’s tag from using unique identifiers to store information. These tracking mechanisms allow Facebook and Google to track a person’s visits long after they have clicked on an initial link, as the first-party cookie had not expired due to their strong first-party relationships (most people use Google and Facebook every 7 days).

 As DigiDay states, Google and Facebook are the companies most affected by ITP 2.2.    

1B. GOOGLE’S CHROME BROWSER     

The privacy changes implemented to the Safari browser and Mozilla’s Firefox puts Google between a rock and a hard place on the privacy terms and conditions for the Chrome browser. Either Google proactively follows Apple and Mozilla, or Google risks Chrome’s reputation. 

 On April 9th, 2019, an insider leak in Adweek stated Google is “contemplating a number of changes to its consumer and advertiser-facing tools.” The translation is that Google may follow ITP 2.0 by disallowing thirdparty ad tracking software across browsing sessions. The market penalized Criteo with a 30% stock pullback, TradeDesk with a 15% pullback, and Alphabet’s stock was penalized with a 5% pullback. 

 “According to sources, certain Google teams want to placate the growing zeitgeist around the protection of consumers’ data privacy, which has grown ever louder since the Cambridge Analytica scandal last year. These internal discussions also follow the implementation of third-party tracking restrictions on Apple’s web browser, Safari, and similar moves from Mozilla’s Firefox and Brave’s offering in recent months. Although the various businesses within Google advocate similar measures, the breadth of the company’s interests (i.e., the dominance of its Chrome browser and ad-tech stack) make its decision-making process more complex.” -Adweek article Google Mulls Third-Party Ad-Targeting Restrictions:

And as part of that, we will have more changes through the course of this year, be it Chrome — Chrome is super committed to making sure it's best-in-class in privacy and security, and we always put user experience first and follow through. -Q1 2019 earnings call

Privacy restrictions have not been implemented for Chrome, however, we are watching this closely.

PRODUCT OVERVIEW CONCLUSION:        

 Google’s revenue is susceptible to stricter browser ad-tracking policies. Due to some iterations occurring in Q1, this may have affected the decrease in revenue that was reported. Regardless, Apple’s ITP 2.2 is specifically aimed at Google and Facebook. 

We know that ITP 2.0 affected third-party ad companies by reducing CPMs by nearly 50%. If targeting is weakened through ITP 2.2, we will see a decline in click-through rates (CTRs) and CPMs as the people seeing the ads are not as likely to engage with the ad due to a lack of tracking/targeting. There is evidence that ITP 2.0 and ITP 2.1 may have already affected CPMs and CTRs (see below). 

 If this is the cause of the minor revenue miss, the situation should surface by Q3 – and most certainly by Q4. 

 Recommended Reading: Fallout from Apple’s ITP is Severe  

SECTION 2: FUNDAMENTALS   

 2A. Q1 EARNINGS 

Google is transitioning into a slower-growth company across most metrics. Earnings per share are expected to grow 4% to $45.46 although analysts are calling for a rebound of 18% EPS to $53.65 per share in 2020[1]. 

Google on April 29 reported earnings that topped expectations, excluding a $1.7 billion European Union fine. However, revenue fell short of estimates. Google’s advertising revenue rose 18% to $30.7 billion, missing estimates of $31.5 billion. This caused Google’s stock to sell off, falling below 1,236.54. 

Analysts have a consensus of $11.49 EPS for the upcoming quarter (source: NASDAQ). Notably, Google beat on earnings but missed on revenue in the last quarter. 

 ·         Google’s 2019 revenue is expected to grow 17.3% to $160.5 billion from 23% sales growth in 2018. 

·         Revenue is projected to slow to 16.7% to $187.3 billion in 2020.

·         Operating margin fell 21% in the December 2018 quarter, down from 26.5% in the first quarter of 2017. 

·         Capital spending rose to 18% of revenue in December 2018 quarter, up from 10% two years earlier. 

Notably, EBIT, EBITDA and FCF were all stronger than expected, but the concerns around slowing growth in the Websites revenue segment is likely to affect stock price in the near-term.

"As expected, Google ad revenue growth has been slowing amid downward pressure on ad prices, especially for revenue coming from international markets," -Monica Peart, senior forecasting director at eMarketer.

 “We appreciate quarterly results can be volatile and acknowledge the company’s long-term focus, but the magnitude of the deceleration on a constant-currency basis marked the largest sequential move down since 3Q12,” -Deutsche Bank’s Lloyd Walmsley.  

 “Overall, we expect GOOGL shares to be under pressure in the near-term given sub-20% revenue growth & downward earnings revisions. As noted above, the exact drivers of GOOGL’s slowing topline are unclear, & we believe frustration around GOOGL’s lack of transparency will only increase.” – JP Morgan

SECTION 2.2: Key Metrics

Aside from regulatory pressure, Google is already seeing some weakness in its core business with ad click volume rising but cost-per-click (CPC) growth trending downward. According to Marin Software and Merkle, CPC has slowed over the past five quarters. 

Source: Marin Software

According to last quarter’s earnings, paid clicks on Google properties grew 39 percent, down from 66 percent in Q4 2018. The cost of the clicks also declined by 19 percent. 

FUNDAMENTAL ANALYSIS CONCLUSION:

From an analyst’s perspective, it is very difficult to say a debt free company with $110 billion in cash that is growing at a rate of around 17% is at high risk over the next 2-3 earnings seasons. There are plenty of ways the product issues noted above could be alleviated. Placing ads in Google Maps could make up for lost revenue from browser changes, with one estimate valuing ads in Google Maps at $9 billion by 2023.

However, we feel that the changes to Apple’s Safari browser and Mozilla’s Firefox will have an effect on both Google and Facebook. Combined with weak technicals, I am placing a Hold on these two stocks with the anticipation they may enter a Sell recommendation over the next two quarters. 

PART TWO: TECHNICAL ANALYSIS    

Time Frame Comparison             

 Currently, Google’s price action is in a weakened state that warrants caution for longs.  Some have likened Google’s current price movements to 2011, which a case could be made.  I believe its price is eerily similar to late 2014, which is highlighted in the yellow circle in the chart.  

That yellow circle shows where we are today vs. where we were in late 2014.  What you’ll notice is that in both time frames, we completed a double top pattern on decreasing volume (where the yellow circle highlights the completion of that pattern).  The initiation move down then took us below the 50 Day Moving Average.  

Also, you’ll notice the similarity of the internals, as outlined in the RSI.  Google, on higher volume, was in a strong uptrend in 2014, which can be seen in the elevated RSI levels in green.  Then, as volume began to decrease, the RSI suddenly drops below 50 and starts to make lower highs, unable to break back above 60.  In fact, at the double top peak in 2014, you’ll notice the RSI dropped below 50 and began the bearish internal pattern in red.  

There is similarity between 2014 and today.  We have the same double top confirmation with light volume, and very similar RSI changes from bullish in green to bearish in red.   

Today, we have broken the 50 line on RSI, attempted to retest it, and broke below it again. 

Further evidence of weakness in Google is found in the pink arrows.  You’ll notice as the price of Google increased, the RSI was making lower highs, which is negative divergence – and usually indicates weakness in buying pressure and signals a drop in the near future.  

And finally, the blue dotted line indicates long term support, which started at the beginning of this cycle uptrend in March of 2009.  This is very strong support, which did not break in 2015 or 2016.  Today, we are comfortably below this support, which, once again, is not a good sign for the near term.

Elliot  Wave Analysis       

According to Elliot Wave Theory, the 5 waves up/3 waves down framework is fractal.  So, this is happening on multi-decade super cycles to minute moves in the market.  In interpreting where we are, the 5-wave impulsive move up started in March 2009 and has completed its Wave 3 (July of 2018), and we are currently in the 4th Wave retrace.  

Google, being a major part of the broad market, mimics the same movements.  Thus, Google is currently in the middle of an A-B-C, Wave 4 retrace, which began in Late 2018 and appears to end in late 2019/early 2020.  I believe we have completed the B wave and are now beginning the C wave down, which has the potential to take us sub $1,000, and in a worst case scenario, as low as the mid $700 region.

Based on my primary count using Elliot Wave as well as the internal structure of Google, I believe a retrace is likely.  What would invalidate this count, which would force me to reassess a new count, would be if Google makes new highs – around $1300. An update will be provided if this occurs.

Scenarios:   

•      If you are long on Google, put a disciplined trailing stop on the stock and re-enter when the technicals and fundamentals agree on a more bullish outlook.

•      If you want to trade conservatively, wait for Google to miss on revenue a second time between Q2-Q4 2019 and enter a short position or long-dated put. Especially watch for the effects of Apple’s ITP 2.2 as if/when effects are reported in Q2 or Q3, they will worsen over the course of the year.  

•      Higher risk scenario would be to purchase OOM puts that ends in March of 2020 prior to earnings.  

•      Any short positions should be closed if Google makes all new highs around the 1300 mark. Shorting stock is all about timing and discipline. We will update as we go along if support or resistance is broken.