Category: Stock Updates (Blogs)

Market Report: June 7th, 2020

Posted on by io-fund

In this report we analyzed: LRCX, AMD, ROKU, ATOM, MDB, QCOM, DOCU

Lam Research (LRCX)

SummarySummary

  • Lam broke-out and has held above the upper breakout target around $282.
  • The internal indicators are either weak or overbought, which supports the potential for a false breakout.
  • We went long on Friday and put a stop just under $259 (closing price).

Key Price Levels to WatchKey Price Levels to Watch

  • First support: $282
  • Key Support for continued uptrend: $265 (don’t want to break below here).
  • Key Resistance: $309 (above here is bullish).

Lam is a position we have been tracking. The structure of the stock appeared weak, and suggested that the ascending triangle pattern would give to the downside. However, last week, LRCX broke to the upside and held for 3 days. In fact, last Friday it gapped up and held just below the $309 resistance, which is a key level LRCX has to take back going forward.

My concern is the possibility for a false breakout. The internals are not supporting a sustained move. The MFI is in overbought territory as well as the CCI. The MACD histogram is showing a divergence from price, suggesting that the momentum is fading.

Also, the Accumulation/Distribution Line (A/D) is a key leading indicator that helps us gauge what the pros are doing. When it’s making new highs ahead of price, usually, price follows. It’s staying subdued, not reaching a new level while price does, which is not what we want to see.  

These indicators help mold our probabilities of making a good trade. However, no indicator is more important than price. Because the indicators are relatively weak, we will use a stop on LAM for this trade with a close below $265. This is a stock we want to own, so if we do get stopped out, we will look for the next setup.

AMD (AMD)

SummarySummary

  • AMD has been in a consolidation pattern since April, sandwiched between the 55-day EMA (in red) around $51.50 and the downward sloping trendline in blue.
  • The internal indicators are strong, and suggest a resolution to the upside.
  • We are placing a stop at $47.40 (closing price).

Key Price Levels to WatchKey Price Levels to Watch

  • 55-Day EMA is the first support: $51 – $52
  • Below that is $47.75
  • Then the blue upward sloping trendline that started in 2016 (below here and things get bad).
  • A break above $57 is bullish.
  • A break above $61 is very bullish.

This is a stock we want to own for a long time and we are starting that process now. We picked up shares of AMD from a technical perspective for a few reasons. For one, the 55-day EMA (in red), has been solid support for AMD in the recent uptrend. The price is getting bought each time it approaches this level. Furthermore, note how the selling volume is decreasing, suggesting that the sellers are drying up.

The Accumulation/distribution line (A/C) and the CMF, which are fantastic leading indicators, are suggesting that money is flowing into the stock. The MACD is in a classic coiling position, which is when it rises at a 45-degree angle after an uptrend, then settles above the 0 line in a predominantly horizontal fashion. We typically see this before a breakout.

Once again, these indicators help our probability of a making a good trade that can potentially turn into a great buy and hold. AMD is approaching a key inflection point. The 55-day EMA is just below it, and below that is a trend line that AMD has respected since 2016.

Above the current price is the confirmation of cup & handle pattern that began forming at the March high. We will know soon what AMD will decide and we thought it was worth a chance that we get a resolution to the upside.

We will place a stop at $47.45 (closing price). We do not want to be in this stock just before the 4-year trendline breaks, so we will protect ourselves with the stop just in case.

Roku (ROKU)

SummarySummary

  • Roku is following our outlined plan perfectly, so far.
  • We are targeting sub-$100 and above the $79 region for shares.
  • The structure suggests that after the stock bottoms in this retrace, we should be on a path to new highs.

Key Price Levels to WatchKey Price Levels to Watch

  • Below $102 and we will look to add at key supports $96, $89, $86, $79
  • Below $79 and things get complicated.
  • A break above $125 and things get very bullish.

Roku is beginning to fall out of favor with the public. This will be the 3rd time since we began trading Roku in 2017 that sentiment has shifted away from Roku, and this will be the 3rd time that we accumulate shares during weakness.

We have covered demand drying up with ad tech in a global deflationary environment. Ads are usually one of the first items to go when a company needs to tighten its operating expenses. We believe Roku will make It through this process. Because of this, we are comfortable acquiring shares of this stock without a stop due to our time horizon being 5+ years.

I have written extensively about Roku’s long term price structure. I believe we are in the middle of a B-wave retrace that should take us sub-$100 to $79. This is a large price range, but we will look to be buyers within this region once we get signs of bottoming.

The internals are all weak and hanging right above support. Once these supports break, we could get a sharp move down. The MFI is showing positive divergence, which is usually a sign of an impending reversal. If this plays out, I will view it as the b-wave within the larger B-wave, and it should halt below the upper trend line on the chart before reversing to the C-wave down.

If Roku breaks above this trendline as well as the 200-Day SMA, which is around $125, we will look to add into strength. If Roku breaks down further into our target region, we will look to add into weakness slowly.

Atomera (ATOM)

SummarySummary

  • ATOM is completing a corrective (A,B,C) uptrend.
  • It can extend if we break above $10.
  • The internal indicators are all diverging, suggesting a pullback.

Key Price Levels to WatchKey Price Levels to Watch

  • Above $10 and we can extend the uptrend.
  • Below $7.80 and the green target box comes into play.

Atomera is a small cap that needs one or two deals in the pipeline to close in order to be a viable product. Initiating once a deal is announced may leave some gains on the table, but this scenario also carries less risk.

The structure appears to be tracing an A,B,C uptrend, which is close to completion. This has kept us on the sidelines for now. Also, notice the trend of the indictors from the March low compared to the trend in price. Note how they were in lockstep, increasing with price. Then, at different times, the indicators began trending down as price continued up. These divergences are also suggesting that price is close to topping.

Furthermore, on Friday, we got a bearish engulfing candlestick pattern, which usually precedes some level of correction. If we do break down below $7.80, my targets are in the green box. These targets are based off of Fibonacci ratios and common targets for a pullback following a C-wave uptrend.

However, ATOM still hasn’t broken its 8-day EMA (in green). So, even with divergences showing and the structure suggesting a pullback, it can still extend further to higher levels. If we do get a break above $10, we could easily extend to $10.35, $11.50, $13.50 before getting a notable pullback. We will keep updating you with any changes.

Mongo DB (MDB)

SummarySummary

  • It appears that MDB is in a 4th wave consolidation.
  • We will use the outlined supports coupled with the RSI hitting the 40-35 region for an entry.
  • We will look to go long with a relatively wider stop just in case we get a break below $144.50.
  • As long as the $144.50 holds, we expect the final 5th wave to take us to new highs.

Key Price Levels to WatchKey Price Levels to Watch

  • Supports levels for a likely bottom of a 4th wave:  55-Day EMA + $185 (likely target), $170, $155.
  • Key support for a continued uptrend: $144.50

The price structure suggests that we just completed the 3rd wave off the March low. The standard retraces for a 4th wave pull back is in the green target box, ranging between $185-$155.

There has been a sharp trend change as noted by the MACD cross over as well as Friday’s price gapping down below the 20-day EMA in blue. I would look the 55-day EMA in red as support, which will coincide with the 38.2% retrace level of the entire 3rd wave for a potential buy.

If we do go long, we will place a stop just under the 1st wave at $144.80 (closing price). Below this level and things get complicated. However, as long as this level holds, we project new highs for the 5th wave completion.

Another clue will be the RSI. The green line indicates a likely bottom for price, which is around $40-$35.

Qualcomm (QCOM)

SummarySummary

  • QCOM had a strong breakout in price with mixed internals supporting the move.
  • If this is a 5-wave move off the lows, we should see a healthy pullback in a 4th wave consolidation between $82-$76.
  • Below $72 is bad.
  • Above $98 is really good.

Price Levels to WatchPrice Levels to Watch

  • Support levels for possible 4th wave bottom: $83, $97, $76.
  • Key support for a continued uptrend: $72.
  • 5th wave top (projected): $95 region.
  • Multi-decade resistance zone: $93-$98.

Qualcomm is a 5G play on the semi-conductor side of the equation. This is a well-known thesis, which has accounted for the stock’s rise in price over the years. We have moved away from it as a 5G play and instead put our allocation for this trend into Marvell, Boingo, Inseego. However, Qualcomm is a solid company that we have been tracking for an entry.

It’s worth noting for anyone watching this stock that we have a clear breakout. The 200-day SMA (in black) has kept this stock in check until recently. Note the strong break above the black moving average, which is the 200-Day. Furthermore, QCOM closed the downward gap from March by gapping up above it. This is also a strong sign that should be encouraging to anyone long QCOM.

The internals are mixed, so price is king for now. The structure suggests that QCOM is completing or will soon complete a 3rd wave off the March lows. There should be a retrace, assuming price has topped on Friday into the green target box between $83-$76.

A break below $72 complicates the picture. Furthermore, QCOM has a lot of work to do overhead. The red band highlights a resistance region that has halted QCOM going back decades (yes, decades). This will be a tough challenge for QCOM to overcome; however, a break above $98 and we could see the price really take off.

Docusign (DOCU)

SummarySummary

  • DOCU is tracing a large degree leading diagonal pattern.
  • It is due for a 4th wave consolidation.
  • The internals are fading and price has reached the upper end of the channel.
  • The $112-$107 region is a likely target. However, $126 would be a shallow consolidation while $94 would be a deep one.
  • Above the recent high, and DOCU can continue to extend to higher levels, which would change the targets for a pullback.

Key Price Levels to WatchKey Price Levels to Watch

  • Above $153 and DOCU can extend to higher levels: $162 and $173 will be resistance levels to watch.
  • A break below $126 and the $112-$107 region will be a reasonable target.
  • Below $107 and $94 comes into play.

The above chart shows the weekly candlesticks of Docusign since it went public. The weekly trend cuts through a lot of the daily/hourly noise to help gauge what’s really going on. The color of the bars are based off a momentum indicator I like to use on weekly charts: red indicating a period of weakness, blue being neutral and green being a notable uptrend. The lack of red bars is what’s intriguing. Docusign is an incredibly strong stock right now, and as long as their growth remains intact, this trend should continue.

Like many high-flying stocks, its structure is tracking a leading diagonal, which we’ve talked about several times in relation to other stocks, like Roku, for example. This pattern is a 5-wave pattern that tracks a trend channel. Each wave is comprised of an internal 3-wave pattern.

This would put DOCU at the peak of its 3rd wave. We will look to pick up shares on the 4th wave pullback.

Now, if we zoom in to the daily chart, we can get a more granular idea of what price is doing. The internals are all diverging from price, suggesting that the momentum is fading.

DOCU has broken its 8-day EMA in green and found strong support on the 20-day EMA in blue. A break below $126 will confirm a likely top for the 3rd wave, and we will watch for the target areas for entry. A shallow B-wave correction would be between $126-$112. A deep B-wave would be between $110-$94. However, there is a notable cluster of Fibonacci levels between the $112-$107 region.

5G Update

Posted on by io-fund

Global supply chains are looking to move out of China. Last week, Taiwan Manufacturing announced plans to build a $12 billion factory in Arizona. The plant will focus on 5 nanometer chips and will take nine years to build. TSMC is a major supplier to Apple, Qualcomm and also generates 14% of sales from Huawei. The story is evolving with TSMC halting new orders from Huawei per the Nikkei Review. 

Although TSMC produces chips that power iPhones and consumer products, the main takeaway here is that the United States government is ramping up investment in 5G and artificial intelligence. The more advanced chips needed for defense can’t be made in China for obvious reasons.

Since last summer, we’ve been looking at when the Huawei tensions would fully play out and what companies would stand to benefit. Primarily, I was (and am) looking for companies that solve critical 5G infrastructure issues because it is incredibly costly to overhaul the 4G systems. There are also inherent issues to 5G with millimeter waves traveling short distances.

5G PDFs:
Overview
Semis
List of Stocks

HEROES Act: $1.5 Billion for Wi-Fi Hotspots (INSG, WIFI)

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

Regarding hotspots, Inseego has prioritized working closely with the U.S. government. Here’s what Inseego said on their last earnings call:

Turning to our strategic initiatives. We mentioned in our prior earnings call that we began efforts to deepen our relationships with the U.S. government to increase awareness of Inseego as a U.S. supplier to the administration’s objective of a secure 5G network ecosystem.

Given the scale of potential opportunities, we wanted an executive to lead that effort and have recently appointed former Inseego senior executive, Chris Lytle, as head of government affairs, including our initiatives in the education sector. Now I’ll turn the call over to Steve to discuss our financial results.

Boingo also has experience working with the United States government as a preferred hotspot on military bases. In fact, one of Boingo’s revenue segments is dedicated to military bases and they have contracts through 2038 with the Air Force. From the PDF we published: “Boingo solves a substantial limitation to 5G, which is the inability for higher frequencies to penetrate buildings and walls. Eighty percent of all cellular traffic occurs indoors. Essentially, the high speeds that cellular 5G will become known for are not operable indoors at this time.”

One thing to note is that Huawei had outpaced Boingo on DAS systems with a new digital indoor system (DIS). The population and size of indoor spaces in China drives a greater need for an improved indoor cellular connection. However, with Huawei being cutoff, this puts Boingo in a critical place to supply this piece to not only the United States but potentially to other Western countries.

As noted in the PDF, the fundamentals are not very good on Boingo whereas the product is very promising for 5G purposes. I believe the Huawei cutoff will benefit Boingo and strengthen this story.

Inseego PDF
Boingo PDF

I also recommended Marvell in December for similar reasons. It could take some time for Marvell to make up for the loss as 14% of revenue comes from Huawei. However, Marvell is in line to supply Huawei’s competitors – Nokia and Samsung.

Huawei is building base stations without components made in the United States and this impacts Marvell as Huawei is the current leader in 5G infrastructure. The storage business was down 1% sequentially at $275 million due to the export restrictions on Huawei. Samsung is increasing their orders, which helps Marvell. Nokia also uses Marvell’s chips.

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

Marvell PDF

There’s also a small cap breaking out that we had highlighted on our short list for the 5G report. The company is Atomera (ATOM). The company did a secondary last Wednesday at $5 per share. I’ve heard that in the discovery there was information on Phase 4 deals that may be coming to fruition. I’m still digging around on Atomera and any connection the price movement could have to the announcements on Friday (being a 5G play). Knox will be updating this on the forum for anyone interested.

Atomera was mentioned briefly in this PDF

Regarding F5 Networks and Telco Networking/Network Functions Virtualization (NFV), there was another acquisition announced in this space by Microsoft last week. You can read about it here. As you’ll see, this is an important space for cloud-native telecommunications.

Basically, I am betting that F5 can maintain its lead in a space where it has the superior solutions (according to Gartner and partners like RedHat and Datadog). As stated, revenue growth is mid-single digits and there’s a chance F5 can’t maintain a moat. On the other hand, F5 has owned the space in the hardware equivalent for a very long time and has this singular focus. I think F5 is making the right acquisitions with NGINX and security (as outlined in the PDF). This is a very new space, however, and will require some patience for the right entry.

F5 Networks PDF here.

May Convictions: Blog Update

Posted on by io-fund

The May spreadsheet will be out soon. The spreadsheet will reflect the information in this blog update.

In September, when many cloud software stocks sold off in the so-called value rotation, I wrote the following: How to pick long-term stock winners in cloud computing

“My prediction is this may be one of the last cycles when tech is considered less safe than value stocks. As the market will find out (the hard way), cloud software is actually very safe. It is insulated from trade wars and overseas manufacturing issues. It reduces costs for enterprises, which is ideal for a recession. Lastly, cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech — such as mobile, e-commerce and advertising — which are reaching saturation, are finding themselves in the cross hairs of anti-trust and are susceptible to consumer spending changes.

The best companies in the category of “cloud software” will continue to post rapid growth regardless of economic conditions, and the investors who run from this sector will suffer bigger losses from missed opportunities than investors who know their winners.”

The reason that cloud is more insulated is that it reduces costs and improves efficiency. Basically, things happen quicker for businesses and are cheaper to run when workloads are in the cloud. Therefore, the idea there would be a value rotation away from cloud didn’t make much sense to me as it was my prediction cloud would perform/grow like value stocks during a time of uncertainty. (Valuations are another matter which I plan to cover this month at a detailed level for my premium readers.)

The main thesis of the article quoted above is that you should know your winners because the market is telling you it does not know who the winners are when it goes through phases of indiscriminate selling. You can also say this is the case when the market goes through indiscriminate buying. To me, the market has been playing the game pickle; rushing in and out of cloud. My goal is to position you with the winners for 2020 but also in any beat-up stocks that will soar in 2021 (and beyond) once the economy resumes.

Most of you know that I don’t trend follow or trade on prices. Meaning, I don’t recommend stocks based on their price movements. This is the major advantage to this website because the gains are much higher if you can get in before the quants are turned onto a stock. I’d say the majority of my recommendations (80-90%) on the premium site are written while the stock price is near a low. It also helps to keep a steadfastness when the market panics and sells out of a promising company.

After solidifying my convictions with you in May, and getting you set up to weather the storm that has become 2020, I am going to turn towards emerging technologies again in the second half of the year. This is 5G, artificial intelligence, blockchain and various small cap stocks. I had only just begun to do this before covid-19 broke out and we very quickly had a top performing stock in our coverage (INSG) plus some nice returns on (WIFI) and (TLRA) if you followed Knox’s entries/exits.

For anyone joining us recently, here is our plan and an introduction to how we enter/exit stocks:

  • We have core holdings that will not be traded or sold under any conditions. These are MSFT, ROKU, NVDA, ZM, WORK, BABA, DDOG, DT, BTCUSD.
  • Up until the market sell-off in March, we held the stocks listed on the spreadsheet until we stopped out with gains. You can access the prior spreadsheets here and here.
  • For any stocks we stopped out of, we plan to build more core holdings this year with buy and hold entries that we believe we will see at some point in 2020. These are on the March and April spreadsheet.
  • We will buy at the upper end of these price ranges for any data center stocks (see below) and in the mid to lower region for stocks that may see headwinds from the current economic situation.
  • In an effort to stay open to all possibilities, including that the market may go up before it goes down (and to buy insurance against all scenarios), we will continue to look for entries and trade stocks. This also helps us to serve various styles on the site. Please note that we only recommend stocks that make great buy and holds. We don’t trade into stocks that we wouldn’t want to own long-term.
  • Although we believe valuations will eventually settle down from 2019 and 2020 pricing, we still look for break outs with stops where we can participate in momentum.
  • Knox enters and exits stocks via real-time updates on the forum. It’s essential to subscribe to his chat room and my chat room if you want real-time updates as we can’t fill your inbox with blog updates for every instance of communication. Please also subscribe to the stocks you are interested in on the forum as we have chat rooms set aside for each stock. This will help you get the most value from the site.
  • Knox posted on Pinterest yesterday on the forum prior to earnings, as well as Roku and Alibaba

Below, I break down my ongoing high convictions around the Data Center, Productivity Tools, and other Outliers for May. This is in an effort to come full circle on companies I’ve covered in the past and my plan moving forward. Please also keep in mind these aren’t earnings calls as we have some earnings this week and in the near future.

 

Data Center

This earnings season showed serious strength in the data center with Microsoft beating pre-coronavirus earnings. I like Alibaba here, as well, as the trajectory of their data center growth will surprise the market. This is because China is going from 0 to 100 on their data center growth as a country that has lagged the United States yet has aggressive ambitions to catch up. I’ve been forecasting this for quite some time now (published on FATrader and pre-dating my premium site) and I believe this analysis is currently in play.

Looking beyond Microsoft and Alibaba, Nvidia and AMD are even stronger choices for the data center but will take time to play out. This is because you’ll see companies reduce capex this year and tighten their budgets, which will affect Nvidia and AMD. Don’t be discouraged by that. Our plan is to use this as the final opportunity to lock-in our ten-year position on these companies.

The next layer of the data center is security and monitoring. For every enterprise that moves over to the cloud, especially the hybrid cloud which I’ve covered in great detail for my premium readers, there will need to be endpoint security and network/application/infrastructure monitoring. This is where it can get tricky as the field opens up and there are many competitors in each area. My favorite companies — relative to the competition — are Datadog, Dynatrace and Okta. This means that even if these companies miss earnings that my conviction will remain.

Also downstream from cloud infrastructure is MongoDB and Elastic. I like them both. I’m not sure exactly when the revenue will show up as these are not essentials for all businesses but they should see a boost from the ongoing cloud migrations at some point this year.

PDFs for reference:

 

Productivity Tools

When I wrote out my convictions for the premium site this year, I talked about productivity tools being a hot space. These tools, especially, save time and reduce costs. Therefore, don’t be surprised if Zoom, Slack and DocuSign continue to climb this year. I do believe valuations will come down at some point across the board as economic data and Fed stimulus battle it out. With that said, I believe these three will continue to break out as their revenue should grow at a clip and you can expect them to have higher valuations than their peers. If you believe there are others that will sustain high valuations this year, feel free to ping me on the forum to discuss.on the forum to discuss.

Knox especially thinks there is strength in Slack’s chart. I think the market is still confused on the company. That’s a good combo to have.

One thing I’d like to make very clear about Slack is that it has one of my favorite components across all tech stocks which is a strong developer community (even though Slack is not open source, there are many custom APIs being developed).

Investors may not realize that Apple’s success is due not only to the iPhone but also the developer community that supported the iPhone/iOS operating system and developed third-party applications. This created a robust ecosystem that was impossible for any competitor to shake. Design played a role too, of course, however Microsoft’s Windows mobile OS got shut out because it did not have the developer following to develop apps. In the beginning, Facebook also had a large developer community that propelled the platform forward which is how Zynga became popular.

In the S-1 Filing, Slack stated there are over 450,000 third-party applications or custom integrations. The number is likely much larger now. What is important to understand is that it’s nearly impossible to envision where Slack will end up in five years from now because the level of iteration and creativity that comes from these customizations is impossible to predict. The forward innovation will come from technologists who are not employees of Slack. They are in need of a messaging system they trust and that can be customized.

For instance, security professionals are now using Slack for anomaly notifications. When there’s a breach, or anything suspect, the security team is notified on Slack. Wall Street investors can set up price movement alerts on stocks. I’ve seen others use Slack to program robots and control commands.

With that said, Slack is following a popular maneuver for monetization that confuses the financial industry and will require a bit of patience before the profitability unfolds. Slack is choosing to scale while being underpriced and then will convert down the road to being priced more in-line with the value of the platform. For now, this means there will be questions around the path to profitability.

Shopify is an outlier that we covered with a prediction that the company would outpace the market due to the focus on merchants rather than customers. Perhaps with covid-19, the emphasis on merchants is more important than ever as many will lose brick-and-mortar sales. I do want to point out that Shopify released a new application. This was something I had predicted they’d do as it was the next natural step after the fulfillment center (an aggregated store front). I thought it might be a website but a native app makes perfect sense. This product announcement is very important for the long-term trajectory.

From the Shopify PDF in October:

“The question many investors ask about Shopify is whether it can compete with Amazon — or even Alibaba? Today, this is not a possibility as Amazon and Alibaba drive traffic to products and take a premium for helping secure the sale. They own the domain website, so customers are loyal not to the merchant, but to Amazon and Alibaba.

I believe this could be where Shopify will end up, eventually. If the fulfillment center is a success, which will take some time to test and gather traction, then the back-end will be set up for the front-end development of a website or some kind of product aggregator – whether that’s a website domain or another recommendation engine.

For Shopify, it makes sense to first build out the fulfillment center for their point-of-sale software in order for a successful pivot.”

Although I have not written a formal PDF on Docusign, the company fires on a lot of cylinders. The addressable market the company will (finally) be able to serve can become quite large as industries shift towards work from home policies. I will try to write something up officially soon although I’ve favored covering others, such as Lam and Micron, as most know/understand the Docusign story. Regardless, it’s worth repeating that I think their story has improved and is strengthened beyond 2020 by the work-from-home trends.

PDFs/References:

 

Downgrades For Q2-Q4

Alteryx priced at $5000+ is steep and I pointed this out in previous reports. I would never suggest someone sell a winning position; however, you may want to determine how much downside you’re willing to stomach if the market were to go red. I’m pulling AYX out of the pack as an example because unlike other cloud software, the price is not cheap. If the economy goes back to normal tomorrow, this won’t be an issue. If there are tech layoffs announced in Q2 and Q3, you might want to keep it in mind.

From the Alteryx PDF:

“Alteryx primary risk is the high pricing. The company will have to continually iterate to demand its current pricing while staving off competitors. At over $5,000 per user for the Designer product (and much steeper across other products), economic headwinds could affect Alteryx if companies seeks to reduce costs.”

And …

“Designer costs $5,195 annually per user with optional add-ons, such as location insights for $11,700 and business insights for $33,800. Server expands the offerings from Designer to include APIs and applications for more customized and automated analytic workflows. Enterprises especially have a need to improve internal server architectures for multiple employees and cross-functional teams with custom options. Server costs $58,500 per user per year with add-ons, such as Connect for $39,000.

Connect allows for data cataloging and the discovery of data with the goal of accelerating productivity. This is not a core product for Alteryx at this time, rather it provides an end to end pipeline for a full range of needs. There is indication from the Server add-on pricing that the cost is in the $39,000 range.”

We’ve also seen initial reports that human resources software is not holding with SAP expecting a decline this year and analysts downgrading similar companies, like COUP, PAYC. (The market has not taken notice). This means Workday could be exposed. Workday also carries over $1 billion in debt and may need to borrow more in the future.

PDFs:

 

Ad-Tech

As you know by now, I’m concerned about ad-tech for a few reasons. The peak to trough that occurred between Jan/Feb and March has been hard to quantify as company executives provide fairly vague overviews of “single digit declines” or “double digit declines” or “approximately flat” or “stabilized” while avoiding hard and fast numbers. Those that gave more specific numbers sold off (PINS and TWTR). All around, guidance is being pulled for the year, which is unique to ad-tech within the industry of tech. Meanwhile, ad-tech is trading at all-time highs.

I’ve covered this in great detail already as to why I began the year with ad-tech as one of my top trends and changed my position on this for Q2-Q4 2020 and maybe early 2021. For me, there is too much risk with stocks trading at all-time highs that are going through a major readjustment in supply/demand. I’d need more information on forward revenue this year and next year before committing to these valuations. Considering companies can’t provide this, then I’d want a discount in valuation.

I want to follow up on Roku specifically. The difference between Roku and the other ad-tech companies is that it’s situated in the center of an important micro-trend as a pureplay. This means it’s a gamble as to when the true breakout occurs because the trend is so strong.

On one hand, Roku may have a tough year as a company that is not profitable and relies on advertising. On the other hand, Roku may have a breakout year as a company that sees record adoption at a time when connected TV is already one of the best trends in technology. Knox will do his best to provide for both situations but I want to emphasize we are long on Roku and it’s one of my highest long-term convictions even with advertising headwinds. With that said, it’s likely Roku misses earnings or negatively surprises the market in some fashion this year. Follow Knox on the forum if you’re building a new position here.

For Q2 through Q4, I have changed my viewpoint on The Trade Desk. I think Snap is weak too (I understand the market doesn’t think this right now). The market beating up Pinterest and not Snap is interesting to me on many levels (and the lack of response when Snap raised debt immediately following earnings).

I personally feel that Facebook and Google are somewhat saturated and will need new growth markets but that’s counter to the market (I’ve felt this way about Apple too for most of 2019 and into the near future). Those three have enormous amounts of cash so micro-trends/growth markets are irrelevant because of traditional DCF analysis.

 

5G

Our 5G coverage was primarily focused on business cases. I believe the government will continue to push for 5G and that INSG and WIFI are solid choices as they require little to no capex. In fact, they lower capex depending on the situation.

I also like Twilio as a very early 5G play. Twilio is exposed to many different industries and we will find out in the earnings report tomorrow if retail/ecommerce and health care offset any of the others (such as Lyft and Uber) plus the decreased marketing budgets that SendGrid likely saw.  

PDFs:

 

Outliers & New Coverage

Lam Research, Micron and Qualcomm are solid choices to keep an eye on. Knox will update in the forum if he sees something interesting here price wise.

I’m still very bullish on Chainlink for reasons that are not obvious right now. I believe Chainlink will jump from being a crypto to a reputable form of collateral for blockchain smart contracts. I want to emphasize that Google and Oracle are early backers.

Bitcoin is also going through the four-year halving this month. I’ll write up an editorial in advance.

Regarding blockchain, I had written an article about how blockchain and health care will one day merge in order to make data more available for cures. This is an area that should take off with the pandemic. I’ll be hunting for breakthroughs here.

PDFs:

Checking In and Earnings Update

Posted on by io-fund

Quick note: Of the best five performing tech stocks during the pandemic, three of them were featured on this site with a low cost basis: $ZM, $INSG and $SHOP. 

I’m publishing a premium report on Micron tomorrow. This is a stock forecast to have a nice sized cyclical comeback.

You’ll get a May spreadsheet and convictions update blog early next week. By now, you know the bear thesis. We will now continually work towards a bull thesis as a backup option. This will look like our 2019 strategy with good trade set-ups and reasonable stops.  

With that said, I still believe we will see many of the buy and hold targets we set out on the spreadsheet but this will take patience. In case we are wrong, you will now see an ongoing effort to spell out an alternative scenario with Knox primarily focusing on bull trades.  

You can read my thoughts on a few stocks we cover in Forbes including Slack (bullish), Roku (bullish despite ad-tech headwinds) and The Trade Desk (short-term bearish Q2-Q4). 

From this week’s earnings reports, I’m still quite keen on Datadog and Dynatrace. You can access the PDFs published previously on Datadog here and Dynatrace here. They remain favorite products due to the migration to hybrid cloud. Microsoft’s impressive earnings report this week should help these two companies. This is what I said in my April convictions overview: 

“Cloud at the infrastructure level and cloud at the platform level should do well. One of the reasons I focused on cloud for the premium site during the sell-off is that it’s insulated from trade wars and recessions. My article at the time said, “My prediction is this may be one of the last cycles when tech is considered less safe than value stocks. As the market will find out (the hard way), cloud software is actually very safe. It is insulated from trade wars and overseas manufacturing issues. It reduces costs for enterprises, which is ideal for a recession. Lastly, cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech — such as mobile, e-commerce and advertising — which are reaching saturation, are finding themselves in the crosshairs of anti-trust and are susceptible to consumer spending changes.”

I’m also interested to see what Alibaba reports with the re-opening of the Chinese economy while being positioned in the middle of major trends, like Amazon. 

AMD’s earnings report was strong, in my opinion. I detail this below.

I wish I could be as bullish as the market is on ad-tech but unfortunately the delta between Jan/Feb and March could not have been expressed more clearly. As stated in my convictions update: “To recap, ad-tech companies could have a positive earnings surprise but it’s not probable they will get through the three long months of Q2 unscathed. Patience here is going to pay off. Usage going up well over double digits and revenue being flat to down is not something to get hasty with.”  

To be clear, I would never suggest anyone sell a winner but I think it’s important for me to make forecasts at current pricing and point out the story is changing this year for ad-tech. 

Earnings Overview:

 

Microsoft:

Microsoft had the best earnings report of any tech company, thus far. The company beat pre-coronavirus expectations. This matches my thesis that the data center would be a safe haven this year as spelled out in this blog post. This is not only due to work-from-home trends, which were well reported, but also the microtrend of hybrid cloud slated to do well this year. 

Perhaps the more important question to ask is what companies are downstream from hybrid cloud and the data center segments. As stated, I’m favoring Datadog and Dynatrace this year as cloud infrastructure counterparts. 

MIcrosoft earnings came in at $1.40 EPS compared to expectations of $1.27 EPS. Revenue of $35 billion beat expectations of $33.76 billion. 

“We’ve seen two years’ worth of digital transformation in two months,” Satya Nadella said. 

Google:

Google especially focused on direct response having “substantial year-on-year growth throughout the entire quarter.” The other positives to Google’s report is the traffic, which peaked “at four-times maximum activity during the Super Bowl.” 

Android app downloads were another plus with a rise of 30% from February to March. 

Sundar Pichai noted that search is expected to recover quickly due to a clear sense of ROI. He referenced the quick recovery in 2008. 

Note: eMarketer published an analysis of search ad spend with the conclusion it will drop about 20% in Q2. published an analysis of search ad spend with the conclusion it will drop about 20% in Q2. 

Perhaps the more ironic part is that while Google is giving an upbeat earnings report on advertising, they themselves are cutting marketing and reducing their ad budget (even while being in one of the more insulated non-consumer industries with a huge cash pile). 

According to a leaked internal memo, Google is cutting costs by about 50% through the rest of the year. 

This was based off the following memo: “Just like the 2008 financial crisis, the entire global economy is hurting, and Google and Alphabet are not immune to the effects of this global pandemic. We exist in an ecosystem of partnerships and interconnected businesses, many of whom are feeling significant pain.”

Google had the following to say about the dichotomy of: Jan/Feb and then March … “Q1 was in many ways the tale of 2 quarters. For our advertising business, the first 2 months of the quarter were strong. In March, we experienced a significant and sudden slowdown in ad revenues. The timing of the slowdown correlated to the locations and sectors impacted by the virus and related shutdown orders.” 

Ruth Porat, the CFO, reiterated there was “an abrupt decline in March.” She also offered the following: “In March, revenues began to decline and entered the month at a mid-teens percentage decline in year-on-year revenues, although, users’ search activity increased, their interest shifted to less commercial topics. In addition, there was also reduced spending by our advertisers.” 

Regarding YouTube, Porat stated, “As a result by the end of March, total YouTube ads revenue growth had decelerated to a year-on-year growth rate in the high-single-digit.” 

Porat stated similar for network revenues – that revenue growth had decelerated in the high-single-digit by the end of March.

The company also focused on the strength of Google Cloud as a means of diversification to advertising. 

Facebook:

Similar to it’s ad-tech counterparts, Facebook discussed “facing a period of unprecedented uncertainty’ as of March, yet Wall Street viewed the earnings report as favorable for a surge in price. 

The company beat on revenue but missed on earnings. Q1 numbers came in at $17.74 billion and $1.71 EPS compared to analyst estimates of $17.33 billion with $1.74 EPS. 

Similar to Google, Facebook’s CFO, Dave Wehner, stated, “we have a really cautious outlook on how things are going to develop” due to a broad-based pullback. The market rallied on the CFO’s comment, “Ad revenue has been approximately flat compared to the same period a year ago, down from the 17% year-over-year growth in the first quarter of 2020.” The April revenue accounts for a 39% increase in ad impressions.

Perhaps one of the most important comments across all of the ad-tech earnings calls was when the CFO pointed out that ads follow GDP growth, “We are understandably cautious given that most economists are forecasting a global GDP contraction in Q2, which if history were a guide, would suggest that the potential for an even more severe advertising industry contraction.”

Sheryl Sandberg stated, “Our total ad revenue for Q1 was $17.4 billion, which is a 17% year-over-year increase. After a strong start to the quarter, we saw a significant impact on our business as a consequence of the pandemic from the second week of March onwards.”

AMD:

AMD had a decent earnings report IMO yet the market did not respond accordingly. The company was one of a few that provided forward guidance at all, let alone forward guidance that is close to pre-coronavirus levels. 

The forward guidance provided was 20% to 30%, or 25% at the midpoint, down from 29% at the midpoint. Meanwhile, the company maintained its forecast for adjusted gross margin of 45%. 

AMD was in-line with reported revenue of $1.79 billion and EPS of $0.18 while analysts expected revenue of $1.78 billion on EPS of $0.18. This represents a 40% increase from last year with AMD’s highest gross margin in eight years. 

Positives in the report included a 73% increase in computing and graphics chips to $1.44 billion, up from an expected 58% growth. 

In the earnings call, Lisa Su noted a “very nice acceleration of the cloud business as [AMD] went through the quarter.” 

The launch of Milan is also scheduled for this year (reference PDF for more information).

“In terms of where we believe demand will be versus 90 days ago, it’s pretty similar. And the way I would say it is, we see cloud being strong. What we see is not just putting on more capacity, but really the ramping of new platforms and so we view that as a positive. We have strong enterprise adoption as well. When we look at our pipeline in enterprise, it’s continued to grow, and continue to grow in the first quarter and continue to grow in sort of the first month here of the second quarter.” -Lisa Su

AMD reported a 21% decline in enterprise embedded and semi-custom chips which AMD said was due to a drop in gaming console sales. Sony and Microsoft have plans to release next-gen consoles in Q4 of this year and this segment will regain ground when this occurs.   

The forecast for Q2 is set at 21% growth year-over-year to $1.85 billion with a 4% increase sequentially. Ryzen contributes to YoY growth while Epyc processors will drive quarterly growth. 

AMD did mention a potential slowdown in infrastructure spending. This matches Google’s decision to slow down Capex this year.

Market Update: April 26th

Posted on by io-fund

Broad Market Levels

The broad market is currently range bound between 2900 and 2700. The last couple of weeks has been a notable back and forth between the bulls and bears in an attempt to breakthrough this range. From a purely technical perspective, this is what I’d want to see before saying which way this will go:

  • For a bullish trend to resume, I want to see the S&P 500 break above 2950 and then finally 3150 for me to believe that we are in a new bull market. If this is the case, that will likely be the end of 1 of 5 large degree waves off the March low. So, I will look to add to my longs in the wave-2 drawdown, which I see taking us back to the 2800-2600.

Wealth is built in bull market, and if this scenario plays out, we will likely have several years of an uptrend to profit from.

  • For the bears, they will need to break below 2630 for me to believe that what we have witnessed over the last month was in fact a bear market rally. If this is the case, my initial target will be between 2250 – 2050. If 2050 breaks, expect a prolonged bear market.

If 2630 is broken, expect tech to be the leaders down this time around. There has been an extraordinary concentration of new assets both directly from retail as well as in passive strategies in tech, which has made the top 6 mega-cap tech names account for over 20% of the S&P 500. With such narrow leadership, the direction of these names will lead the market. As of now, we are positioned for both scenarios.

The below chart offers a visual of the above outlook

Stock Updates

Roku (ROKU)

The above chart shows the long-term structure of Roku since its IPO. It has clearly been trading in a larger degree “leading diagonal” pattern. This pattern is a 5-wave pattern that travels within a trend channel (in gray). Furthermore, each of the 5 waves has an internal structure of 3-waves (A, B, C).

With Roku’s fall in March, it tagged the bottom of the lower channel, and began a 3-wave move up. Once it broke above the 200-day SMA (in red), the probability shifted that the low is in for Roku.

If this is true, it should give way to a B-wave correction back to the $102-$86 region. If the correction holds above this region, and begins a 5-wave pattern up, it is likely that we will no longer see this price range again with Roku. However, if Roku breaks below the $86 region, we will retest the lower end of the gray trend channel and possibly the lows from March.

This chart shows a close-up of where we are. The price is currently at an inflection point. It’s trading at the 200-day SMA, bouncing below a trend line and also trading between key Fibonacci price clusters.

If Roku can break above this region with heavy volume, I’d consider it a buy with a stop just below the $120 region. However, the internals are suggesting that the momentum is weakening while at this key level. I will look to add to Roku on the next pullback if it can hold the blue price box between $102-$86.

One final note – the Accumulation/Distribution line tracks, loosely, what “smart money” is doing. In other words, it factors in the closing price vs. the highs, assuming that the smart money makes allocations in the final hour of trading. As Roku’s price collapsed, notice how the Accumulation/Distribution line held up. The $102-$86 price region seems to be an area that smart money is accumulating, so it should act as strong support.  

Slack (WORK)

Slack is forming a head and shoulders pattern as it continues to attempt a breakout above $30.50. However, until this is confirmed with a breakout on heavy volume, the pressure is still down.

The above structure is suggesting that two scenarios could be playing out:

Red count: WORK is stopping out in a B-wave, and about to give way to the final C-wave down, which should take us to the $17-$14 region. I will want to see the RSI break below 35 and price break below the $19.50 region with force, before making this scenario the most probable. Regardless, we consider Slack within this target zone a buy and hold for many years to come.

Green count: This count has Slack pulling back to the $24-$20 region, holding and then breaking through the $31.50 region to confirm the head and shoulders pattern. If this is confirmed, Slack will be in a larger degree wave-3, which I will target between $60-$70 before completing. We will want to see the RSI break above the 50 line to suggest this scenario is in play.

As of now, if the green count is active, we are in a wave-2, which could be shallow like Zoom’s wave 2 before breaking out over $70. So, if you want to go long, a good stop would be under the $19.50 region. If price closes below $19.50, the red count is in play.

Zoom (ZM)

Zoom has clearly bottomed in its wave-4 and is actively in the final 5th wave (in blue).

Considering this 5-wave impulse has been a textbook impulse, I’m expecting the 5th wave to top out between $195-$225.

We’re starting to see some divergences in the MACD histogram, which is very common in the 5th wave. The MFI, on the other hand, still has room to go and is not showing overbought conditions yet. So, even though we have enough in place for the final 5th wave to be complete, I think it’s likely we tag at least the $195 region.

This will complete the large degree wave 1, and give way to a large degree 2nd wave pullback, which I believe should hold the $100 region. We are now holding our position with no stops.

Datadog (DDOG)

Our trade, so far in Datadog is up about 20%. The structure of DDOG is suggesting that we are in a corrective, larger degree B-wave (in green on the chart). If the price can break above $44.50 on heavy volume, I will be leaning towards the low being in for DDOG and scrap the B-wave count for a more bullish one.

The momentum in the MACD histogram is weakening as price increases. It will be difficult for Datadog to break this resistance on the current attempt with weak momentum. The RSI is also showing a clear trend in green. If this trend fails, and falls below 39, we will likely hit the $37 region.

If price breaks below the $37 region, the green box will be in play, and we will look to add to our position between the $32-$22 region.

Okta (OKTA)

Okta’s price has broken out to new highs. However, we have not initiated on this move. The reason being is that the internal indicators are suggesting a false breakout.

The divergence in the MFI, and MACD are quite large. These 2 indicators act as leading indicators for price on the hourly chart. Also, the volume is not increasing with price, so there is low participation at current prices.  I’m expecting price to either retest the $146 region, hold and then move up with more healthy internals, or it will breakdown, beginning a new downtrend.

If price breaks below $138, the green target boxes will be in play.

We have Okta as a high conviction play, so we will not be too picky with the price we get. However, we do believe that a breakout is premature right now.

Inseego (INSG)

Inseego has had a tremendous run off the March low. The March low tagged the lower level of the wave 4 target we were tracking prior to the sell-off in prior market updates. It has now moved rapidly into the final 5th wave. I can see this 5th wave topping anywhere between $14-$23 before we see the larger degree wave-2 pullback. This pullback should respect the March lows when it plays out.

Dynatrace (DT)

Our position in Dynatrace is currently up 25%. Like Datadog, DT is moving in a clearly corrective pattern. The internals on the hourly chart are diverging sharply as it approaches the $30 resistance region.  If DT breaks below the $23.20 support in red, the (C) wave target boxes will be in play.

On the other hand, if DT can close above $34 with heavy volume, it will signal that the bottom is likely in for this stock. As of now, we are holding our position without a stop, and will look to add in strength or weakness.

Shopify (SHOP)

Shopify is in an interesting position. After falling back to the $296-$280 support zone in March, a region that has held 3 major tests over the last year, it has moved in what appears to be a clear corrective uptrend – i.e., 3-waves and overlapping. However, a 3-wave pattern can turn into a 5-wave pattern, especially when the 3-wave tags the 161.8% extension of wave-1, like Shopify has done. So, to keep it simple, there are two scenarios I see playing out:

Green count: SHOP pulls back to $517-$460 region and holds. It will then move up in a 5-wave pattern to new highs. If this happens, we will be in a renewed 5-wave uptrend, and it will signal that the lows will likely be in.

Red count: if Shop breaks down below the $460 region and holds below this price. Then the prior uptrend to new highs was a very large B-wave, and the C-wave should take down to the prior target box.

The internals on the hourly chart are suggesting weakness, so we should know what count we are in within the next week or two.

Lyft (LYFT)

There is nothing encouraging about Lyft’s chart if you are long. Each up move in the 3-leg uptrend off the bottom is clearly corrective – i.e., overlapping and 3 waves. 

The internals are mixed. For one, the MACD is forming a coiling pattern, which is typically what we see prior to a breakout. It’s building strength for a move up. It’s not always a bullish pattern, but it’s worth noting. The MACD histogram is showing a notable divergence with price. Each time price makes a new highs, it’s doing so with less force.

I see the $33 resistance as the main resistance overhead, and it will also be where we are placing a reduced stop. We’ve made a combined 70% in our two Lyft shorts, so far, and I want to protect those gains. The easy money in shorting is over, so if we get stopped out with a small loss, we will look to reload at higher levels or when the downtrend commences.

Snap (SNAP)

Our short in Snap is currently down about 15% as we speak. We are early to what we believe will be a reset of the ad-tech market’s valuations, but we do believe this will play out. Snap traded just below our stop and then began to trade down. If our stop is triggered, we will close this position and look to reload with further confirmation. I will want to see Snap close above $17.50 before stopping out the following day.

What’s interesting is the symmetry of Snap’s move up. Corrections are counter moves in a larger trend. What we know about corrections is that they tend to be symmetrical in nature, and move in a 3-wave with overlapping pattern. Look at the 3-wave move in Snap’s move off the low. The first leg went up 58.8%. The 3rd leg, or final move up, went up 58%. It doesn’t get more symmetrical than this.

The same trading plan is in place as we last outlined. But, we believe it is likely Snap has topped, and the final C-wave down has just begun.

Q1 2020 Earnings Coverage

Posted on by io-fund

This is an especially important earnings season as we hear from executives for the first time since the pandemic. I’ve provided a summary of the earnings reports from this week and my takeaways.

In this update, I cover Texas Instruments, SAP, Lam Research, and Xilinx and the insights they provide on the data center. I also cover Snap’s earnings report and Netflix. I’ll cover Intel’s report on the forum tomorrow evening.

Main Takeaways:

  • Data center is coming in strong as we forecasted. There are many instances that confirm this below.
  • Despite Snap’s breakout, I don’t see anything that invalidates what I’ve published about ads being weak post-covid. In fact, Snap saw significant drop off between Jan/Feb ad revenue and April. I detail this below.
  • Pay attention to SAP’s guidance around software. I had mentioned that instead of guessing on the various software players that it may be stronger to go to the infrastructure level and SAP could be the beginning of a few reports in weakening software. 
  • I cover Netflix below. Roku will see solid user growth while revenue in Q2 for Roku could go either way.

Texas Instruments:

Per the earnings call, Texas Instruments believes there is a “significant chance for a recession” and is modeling their forward guidance on the 2008 recession. In summary, the 2008 recession snapped back in two quarters time. 

TI plans to run factories in Q2 2020 and Q3 2020 in the same way the company ran in Q1 2020 with the expectation they will be sitting on inventory when the demand returns in an effort to maximize optionality for customers who may not be able to forecast at this time. 

Q1 revenue was $3.3 billion, down 7% from a year ago, with EPS of $1.24 per share. Texas Instruments guided for Q2 revenue in the range of $2.61 billion to $3.19 billion and earnings per share to be in the range of $0.64 to $1.04. 

Although the company did not provide much insight into how Covid-19 affected various revenue segments, TI did confirm that “enterprise systems increased double digits based on strong data center demand.” The company also stated that Industrial and PCs increased while Automotive and Mobile decreased. Communications equipment declined 50% year-over-year but there was an increase quarter-over-quarter. 

SAP:

SAP missed on revenue by about $10 million with Q1 revenue at 6.52 billion Euro. The company stated that cloud revenue is expected to continue with rapid growth in 2020 backed by a 25% expansion in the current cloud backlog. 

Regarding Covid-19, the company stated that a “significant amount” of new business is being postponed and with software licenses revenue most impacted and falling 31% year-over-year. As of now, the company is guiding for revenue in 2020 to be in the range of 27.8 to 28.5 billion Euros down from 29.2 billion to 29.7 billion Euros.

JP Morgan came out with downgrades to software in a similar category as SAP this week.  

Netflix:

Netflix added 15.7 million new subscribers compared to expected 8.2 million. The company reported mixed results, however, with EPS of $1.57 and $5.77 billion in revenue compared to expected EPS of $1.65 and sales of $5.76 billion. Earnings rose 107% and sales rose 28%. Netflix is guiding for new subscribers of 7.5 million compared to estimates of 4.1 million. The second half of the year is expected to be light on subscriber growth. 

Some of Netflix’s strength is the company’s arsenal of content, which interesting enough, the debt load to create this content is what has fueled criticism of Netflix for the past few years. Free cash flow will improve from negative $2.5 billion to negative $1 billion. 

I’ve covered Netflix’s additional strengths in previous editorials. 

Snap:

Snap is up 35% on strong Q1 subscriber growth and a revenue beat. The company reported $462 million in revenue compared to analyst estimates of $428.8 million. Average revenue per user was at $2.02 versus $1.68 per user in the year-ago quarter. Daily active users are up 11 million users to 229 million total. In the past, Snap reported relatively flat DAU growth so the 11 million stands out despite being quite low compared to other social sites from Covid-19 usage. For comparison purposes, Pinterest is expected to add 30 million users from 335 at end of Q4 to 365 million users in Q1.

In the earnings call, management discussed the lower levels of ad demand in more detail. Revenue growth was very strong in January and February at 58% year-over-year before falling to 25% year-over-year in March – essentially slashing revenue in half.

In April, the decline continued at 3-4% per week to 15% year-over-year growth through April 19th and 11% year-over-year growth in the current week. This means revenue growth was slashed by 80%. 

If the decline continues, this will put Snap at negative YoY revenue by May. 

“Like everyone, we’re hearing from advertisers that the global outbreak has dramatically shifted the way that they’re thinking about marketing. Some have paused while they’re rethinking their messaging and others are cutting funding to save jobs.” -Jeremi Gorman, Co-founder and Chief Business Officer, Snap

Meanwhile, Twitter guided for negative revenue in March so it makes sense Snap would join Twitter on this trajectory. 

Despite the weak forecast for Snap based on April growth, the stock surged 35%. Knox will be updating the forum on the chart and status of the short position. We may have been early on this one but I don’t see anything in the earnings report that invalidates the thesis.

Lam Research

Previously, Lam withdrew fiscal Q3 guidance in March stating it may not reach previously announced targets. Some of this was due to factories in Malaysia being shut due to government directives to shut businesses. Lam missed slightly on revenue at $2.5 billion compared to $2.58 billion expected from the December quarter. EPS of $3.98 was in-line with the revised consensus. The company has $5.6 billion in cash after drawing $1.25 billion from its revolving credit facility. 

Most importantly, Lam Research confirmed that cloud and enterprise-demand remains strong while consumer markets are weak. 

“The need for equipment and capacity to support work from home initiatives is causing cloud service providers to increase CapEx, creating the potential for a surge in server demand. Third-party estimates suggest that cloud capacity would need to increase 10-fold to service the peak workloads seen as shelter-in-place rules went into effect. Although these heightened workloads are likely a short-term phenomenon, this event will underscore the need for companies to invest more in infrastructure and business continuity capabilities as the daily economy and our dependence on technology continues to expand over time.”  -Tim Archer, CEO

The company is exiting March with record backlog as the demand environment is strong yet the supply is constrained. 

“And we haven’t seen those plans change and that demand remains kind of at the same level it was in January. And which means that we have a full order book, and we’re – really, our challenge is how to get these tools to customers. And I would say 100% of my conversation with customers right now are about how to get the tools they need to them. And I think that will continue for some period of time. And as Doug said, we will reassess after that period to see how demand is being affected.” -Tim Archer, CEO

Lam is forecasting for June revenues in fiscal Q4 to be higher than March with current operational performance. With that said, Lam is not providing exact financial guidance due to covid uncertainties. 

Xilinx

Xilinx beat earnings but issued soft guidance. Revenue came in at $833 million and EPS of $0.94 cents compared to expectations of $827 million and $0.92 cents EPS. Revenue growth was 12% year-over-year and EPS growth of 8%.

Xilinx guided for revenue of $660 million to $720 million in the current quarter, down 19% year-over-year and down 9% QoQ. This is due to weakening demand for communications products and “macro-related weakness.” Xilinx did note there was strong overall growth in the data center. The company is guiding for full year revenue of $3.21 billion to $3.28 billion compared to previous full-year sales of $3.4 billion. 

Xilinx is seeing issues with demand. We should know more with Intel’s report if this is a trend across semis or unique to Xilinx. Areas of weakness for Xilinx include Automotive, Broadcast and Consumer. Areas of strength included data center and wired/wireless group.

“The Data Center Group performed as expected with strong sequential growth primarily due to contributions from compute acceleration, driven by a mix of both cloud and high performance compute customers. We saw notable strengths from a hyperscaler deployment of a FPGA-based SmartNIC and our DCG opportunity pipeline continues to grow at double digits, particularly in video, HPC, database and fintech applications.” -Victor Peng, CEO

Okta Technical Analysis and Checking In

Posted on by io-fund

I will be offline for a few days. The website and responses may be a little slower prior to earnings coming in at the end of April. Pablo is our admin and will be checking email if there are any technical concerns. He can be reached: pablo@beth.technology. Knox will continue to be available on the forum and email knox@beth.technology . There will be premium blog updates as we go through earnings and updates on technicals if the market makes any major moves.

The blog post I published for the April spreadsheet sums up my fundamental thesis for Q2.

As published in January, one major thesis for 2020 has been hybrid cloud and and the migration of larger enterprise and B2B budgets. This thesis hasn’t changed and the work-from-home trend will support the growth already being predicted in this category. Behind every Docusign, Slack, Zoom Video, Netflix, Ring Central, etcetra is cloud infrastructure and cloud monitoring. You’ll notice the top 7 or so stocks on the April conviction list are at the cloud infrastructure/data center level. We also added Okta to this coverage recently. 

I believe ad-tech has an adjustment in its future. You’ve seen me cover this quite extensively. The current ad demand is highly unusual and with sports, live events, and travel being slow to comeback, advertising companies have a long year ahead of them. Typically, in the past, ad exchanges feel a lull in ad demand the most (i.e. The Trade Desk and Rubicon). We could get some positive spins on Q1 but look for a withdrawal of guidance as these companies try to get a handle on the situation. I’ve asked Knox to hold out longer on these companies for any new positions and I know he discussed a Snap short. We think Snapchat is particularly weak. We may look at hedging with The Trade Desk.

Regarding tech growth valuations, I would be cautious in thinking that tech will be immune to the current situation. We are seeing significant layoffs across startups. Also, institutional investors who perform channel checks are forecasting for higher software churn rates. Estimates right now are higher churn rates from enterprises of 3%-5% and higher churn rates of SMBs of 20%. Blended would be about 10%-12% higher churn rates. Effects from enterprises will be felt in the cross-sell and up-sell. Net new bookings may see a softening of 30% or more. Here’s some more information from Gainsight about the expected increase in churn. The companies who use Gainsight include Anaplan, Tableau, VMWare, Splunk, RingCentral, Yext, SailPoint, MuleSoft, Workday and Citrix.

Our Coronavirus picks are Zoom Video, Slack and DocuSign for their strength over the long haul. Institutional and funds also like Smartsheets, Ring Central, and Teladoc. 

In the most recent April update, we did indicate that Inseego was getting positive press. It’s due to 4G hotspot demand from governments and schools.

We’ve seen reports that Twilio and ServiceNow are continuing to hire. Zoom Video and DocuSign are hiring, as well. This may be an indication of strength in these companies.

Knox’s technical analysis of Okta is below. Thanks, Beth

Okta Technical Analysis

By Knox Ridley

Looking at the daily chart, Okta has been trading within a range for several months. The $140 range and the $95 range is where the price is bound. The volume spikes give a clear sign at the price at which institutions are liquidating shares and also accumulating shares.

So far, between $100-$90, we see heavy volume spikes, indicating that institutional money is defending this level. On the sell side, we see heavy volume spikes between $120-$145. Until we can get volume spikes breaking through one of these 2 ranges, we will stay range bound.

From the prior lows, we see weaker volume push the stock back up to the upper end of this range. This indicates potential retail investors bidding the stock back up.

Over the last several months, this range has formed a cup & handle pattern. If we can see a breakout above the $146 on heavy volume, followed by a retest and hold of that level, that would be an indication that institutions are willing to pay higher prices and we will initiate a long position.

Furthermore, the RSI is showing weakness. We are approaching oversold levels. If you track where the RSI was last time the price was this high, it was at a lower level. This means that we needed more buying pressure to reach the same price level. Also, notice the RSI trend outlined by the green dashed line. If this breaks, that will be an early tell that we may get a local top and continued drawdown.

As of now, my primary count is that we are in a B-wave, within a larger A,B,C pattern. It would be rare to see a larger degree 2nd wave only tag the 23.6% retrace level off the all-time lows. It usually targets the 50% – 61.8% retrace levels. But, with the potential for growth being minimal in this market, coupled with the runway in front of Okta, we believe a retest of the 23.6% retrace level, which is around the $95 region, is a strong buy.

Weekly Chart

The bigger the pattern, the more significance it holds. The weekly trend is much more ominous than the daily trend, and because it’s a longer length of time, it holds more weight than the daily patterns.

We can see the clear uptrends noted by the green dashed lines on all of the momentum indicators – MFI, MACD.

At the same time, we can see large negative divergences on the MFI and MACD. As the price is making higher highs, the momentum indicators are making lower highs. This is also confirmed by the lack of volume in the current uptrend and shows  that the current rise in price is being built on shaky ground.

This does not support a breakout. In fact, it tends to support a breakdown. I’d be careful buying around the highs as long as we stay below the $146 region without a breakout on heavy volume.

My Elliott Wave count is also present from the all-time low. I see us topping out and completing the larger degree first wave in red. This would put us in the 2nd wave as discussed prior. The price regions I’d look to begin layering in are colored on this chart: $105 (yellow), $96-$90 (red), $72-$67 (green). We do not see the green zone coming into play, but think it likely we see the yellow and red.

Market Update: April 12th

Posted on by io-fund

Last week was eventful. Unemployment rose by another 6 million claims on Friday bringing the estimated unemployment rate anywhere between 10-14%. The Federal Reserve announced an unprecedented program, which included shoring up the high yield bond market. Standard & Poor’s is projecting a default rate in this cycle to be around 10% by year end, with some estimates approaching 13%. This is higher than what we saw in 2008. The SPX also broke the 2750 level, an important level we have been tracking since the expected bounce off the March lows.

We have been tracking a 5-wave pattern down, where the current bounce was the 4th wave bounce. This would eventually lead the final 5th wave to new lows. This was the game plan, as long as the market stayed below the 2750 mark, which failed on Friday.

Please note, we have been discussing more on this topic in the forum under predicting bottoms. predicting bottoms. 

The 4th wave scenario topping out from current levels, and thus taking us down to the 2100 region in a quick fashion is still technically valid below the next resistance price of 2855; however, the probability of this has become much lower than the other potential scenarios at this point, one of which is now the possibility of a renewed bull market.

I find this scenario has low probability as long as we stay below 3150 on SPX. And if we do confirm this pattern, it will not be a straight shot, so there will be plenty of time and room to adjust. However, any responsible technician has to acknowledge this potential.

For one, it can’t be understated the amount of stimulus thrown at this market. Both the treasury and the Fed have and will continue to unload as much stimulus into this event. This event will be the ultimate test for the popular phrase, “don’t fight the FED.”

Considering the record breaking outflows from equities, the large short interest in the market, coupled with the elevated put/call ratio being tilted towards purchasing more puts right now, the “pain trade” for the larger market would be a continued move upward.

We will monitor the market this week and release an update on the technicals once we have more information. However, the scenario I am now tracking has us in a more complex bear market and I personally believe there will be a re-test of the lows. Of course, feel free to invest as you see fit and what matches your investment thesis for this market.

A few things Beth has been watching and wants to make you aware of:

  • She wrote an article for Forbes on weakening ad demand that has similar information that she had published prior on the premium site. Recently, there was a report by Gupta Media that she did not include in the editorial. The report states, “As of data available Tuesday, Facebook’s worldwide CPM fell an all-time low of $1.95, according to data analyzed by Boston-based agency Gupta Media.data analyzed by Boston-based agency Gupta Media.The article comes from MediaPost, a reliable source. Keep in mind, Facebook usage is up so this should help some. However, her concern is for the smaller players in ad-tech, notably TTD, RUBI, PINS, SNAP and perhaps Roku although Roku has licensing fees/commissions from content apps.
  • May is going to be a pivotal month for the tech industry. As of now, we saw startup layoffs increase 4X from 4,000 to 16,000. Per RBC Capital, “We view May as a critical month – if the majority of the workforce is not back to business as usual, we believe significant cuts (of people, not just numbers) are increasingly likely in software.”
  • If the shelter in place continues into May, net bookings for Q2 and Q3 could be cut between 20-50% on average.

As of now, these are the major points to acknowledge:

  • Now that we have closed above 2750, The next major resistance level will be the 2855.
  • If we clear this zone, look for a topping pattern between 2950 -3100. The 2950 resistance will be the price region that I will look to build up my short positions (if we reach it), with a stop at the 3130 area.
  • If we close above 3130, the probability that we are in a new bull market shifts.
  • If the market closes below 2500, the bear market will continue.
  • The bear market targets are still the same as of now.
  • A final leg in this bear market is still the higher probability outcome.

Stock Updates

Dynatrace (DT)

Dynatrace is a position we recently started to build out along with our hedge in a Lyft short. The structure still suggests that the target box we outlined will likely be hit. We are witnessing weakening internals as outlined by the MFI and RSI, which are both making higher highs while price makes a lower high. We like this company and are raising the price range.

Datadog (DDOG)

We recently went long on Datadog, as posted on the forum. Per reader feedback, we are working on a system that differentiates between trades and buy and holds. Our targets on the spreadsheet are our buy and hold targets.

Like DT, we like this stock for the long haul. The structure of the stock is suggesting that we will retest the lows, after likely failing to close the gap above around $40. We are raising our target entry for DDOG to $30.

Chainlink (LINK)

Chainlink has had another impressive run recently. I offered my recent chart in terms of Elliott Wave analysis, which is still expecting the opportunity to pick up shares sub-$2 once the corrective move we are in completes. However, I wanted to show you what my Gann analysis is suggesting, as well.

Notice how the price reacts to the Gann ratios. We have several tops at various ratios as well as supports. We bottomed on the 8/1 in red, and pushed through the 4/1 in purple. I believe we will test the 3/1 in gold, which will likely mark a top to this move. If we can close above the 3/1 in gold, I will likely look to go long with tight stops.

Snap – short position

On weakening momentum and volume, Snap keeps pushing higher in a clear corrective pattern. It has found resistance at the 61.8% retrace level from the entire drawdown. This level also coincides with the 50% extension of the A wave within the corrective move off the March lows. Another Fibonacci confluence zone is the 100% extension of the C-wave equaling the length of the A-wave, which will also coincide with the 85.4% retrace level around $17.25.

We believe that Snap will find a top within this range, and give way to the final C-wave down. The first target for this drawdown will be $11. Below $11, and the $8 region comes into play. I will look to hold a stop at $17.50. If we close above this level, I will close my position the next day.

With shorts, I target between 20% – 40% as the target gain. Shorts gains can turn into losses in a matter of days while the VIX is this elevated.

Lyft – short position

The setup with Lyft is very similar to Snap. We are in an even more clearly recognized corrective structure, which I believe could push as high as $45 before finally giving way to a new downtrend.

The internals are supporting a weakening uptrend, with less participation as noted by the volume. Like with Snap, once we hit the $23 range, I will look to cover some of the position. If we break below $22, expect the recent lows to come back into play. If we close above $45, the next day I’ll close my position.

April 2020: Spreadsheet

Posted on by io-fund

The link for April’s spreadsheet is below.

Please reference the forum for Knox’s updates and charts to supplement the spreadsheet and also the blog we wrote yesterday to supplement the spreadsheet.

We increased the rank for cloud infrastructure and data center companies while also raising cloud infrastructure monitoring. For now, we adtech is ranked lower as there are too many unknowns as to when demand will return. These are great companies so we will continually monitor as we go along.

ACCESS APRIL 2020 SPREADSHEET HERE

Please ping us on the forum if you have any questions.

Thanks, Beth 

Spreadsheet Update: April 2020

Posted on by io-fund

Please note: April Spreadsheet coming tomorrow! Please note: April Spreadsheet coming tomorrow! 

Nobody knows how the pandemic will play out. Many of our readers have said on the forum that “finding the bottom” is not the goal, and we couldn’t agree more. 

If you were to press me for an answer, my belief is that a recovery in Q3 is being very optimistic. I know that some banks and institutions have forecast this. In my perspective, the demand in tech is unknown – will buyers resume at previous levels? The employment situation in tech is certainly not immune either. A few more cracks appeared this week with a report of 4,000 layoffs in the startup sector. Startups are big consumers of cloud software, so it has a domino effect. 

Our approach is to make educated decisions based on product knowledge/competitive positioning (my analysis) and probabilities (Knox’s technical analysis). We do not have strong bear or bull opinions. I personally get fatigued with the “buy buy buy my portfolio” analysts and the “world is ending” analysts. That’s part of why Knox is so instrumental. He presents the index numbers and the stock movements, uses a methodology to manage risk and remove emotions, and we go from there. 

When looking at the month ahead, our company’s portfolio has this general plan:

  • Buy at the high end of the targets for data center stocks: cloud at the infrastructure level and cloud at the platform level should do well. One of the reasons I focused on cloud for the premium site during the sell-off is that it’s insulated from trade wars and recessions. My article at the time said, “My prediction is this may be one of the last cycles when tech is considered less safe than value stocks. As the market will find out (the hard way), cloud software is actually very safe. It is insulated from trade wars and overseas manufacturing issues. It reduces costs for enterprises, which is ideal for a recession. Lastly, cloud software is at the beginning of a rapid growth cycle compared to its counterparts in tech — such as mobile, e-commerce and advertising — which are reaching saturation, are finding themselves in the crosshairs of anti-trust and are susceptible to consumer spending changes.”

On that note, I think a solid cloud coronavirus portfolio would include: Nvidia, AMD, Microsoft, Alibaba, Datadog, and Dynatrace. I plan to add Okta this month. I’m not a fan of Intel myself as their innovation lags, but I would listen to an argument here. You could make an argument for Amazon too, as the e-commerce, grocery and data center are all strong segments right now. 

We covered LAM recently, which is more on the memory side. I’m looking for cash-cow havens that position well for a renewed trend and can also weather the year ahead. LAM has impressive levels of cash. There is some crossover with the data center but mainly powers mobile and electronics. That last part could be stalled but I’d like to get into the stock during this year’s respite from the semiconductor rally.

  • Buy at the mid-low end of the targets for ad-tech: This may take through next quarter (Q2) to see the full effects. I’ll be listening closely on the earnings calls. This is Pinterest, Roku, The Trade Desk, Snap, Twitter, Google, Facebook, Rubicon/Telaria. Here is some follow up information in addition the premium blog post I wrote recently:
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To recap, ad-tech companies could have a positive earnings surprise but it’s not probable they will get through the three long months of Q2 unscathed. Patience here is going to pay off. Usage going up well over double digits and revenue being flat to down is not something to get hasty with. 

Disney is a great example of a big brand having to furlough workers. You can imagine what this did to Disney’s ad spend, and we know Roku was a favored ad platform for Disney. Basically, whatever we see for Q1, we can expect this impact to double or triple in Q2. 

You’ll see some conviction downgrades across ad-tech for April.

  • Buy at the mid-low end of the targets for consumer related stocks. Apple, of course, falls into the consumer category. On another note, Inseego was on CNBC this past week on seeing an increase in demand for hotspots. This boost could be a one-time event. 
  • Buy at the high end of the target for enterprise stocks with excellent cost-benefit ratios: Alteryx is very expensive, so it’ll be interesting to see if they can maintain the $4500 product cost as we (potentially) face more layoffs in tech.As stated, I plan to look closer at Okta as identity access management is likely doing well in the current environment. They’ve got the special sauce with the product, and in times of stress, companies will go with the brand name that works well rather than undercut with cheaper competitors. Identity management could go under the data center category, as well. 

Cloud work-from-home: As you know, I like Slack. The market will likely question Slack bc the company is bottom heavy with it’s freemium model; meaning paid accounts aren’t offsetting the free accounts. “Will the product monetize?” — this is what financial institutions are unsure of. I am not as worried about this. It’s common to gain as much traction as possible and give up gains in the beginning stages. Monetizing is easier than building a product that works well and can scale. 

Docusign should have some staying power too this year. Really great product for legal, real estate, and finance industries who are now working from home. These industries don’t typically work from home so a true growth opportunity and perhaps a change or reinforcement around documents for digital management. We will be covering Docusign soon and officially adding this company to our coverage and portfolio. 

Regarding Zoom Video, don’t get confused about this company as the press starts to lump it into a Coronavirus fad. The company has a rare combination of strong financials and perfect product-market fit. I also covered the security issues on the forum – not concerned with this and actually quite common (and easily fixable). 

Please subscribe to any chat rooms on the forum where you’d like more information. forum where you’d like more information. 

Regarding Knox’s targets, he is holding fast on the ranges, and will update if he sees a need to raise them. Also, if the market is signaling a potential turn, and our stocks have not hit the respective targets, we will update you in a blog post. 

Our goal is utilize this opportunity to setup great long-term positions. However, due to the uncertainty in the global economy, we will lean towards being cautious. What this translates to, is that we feel the 2300-2750 region in the S&P 500 carries too much risk. If a vaccine hits the market tomorrow, we will get back in with more confirmation of an upward trend. Please keep in mind, if we do re-enter a bull market, our projections of where that will take us will make up for being a little late. If we continue to see the ripple effects of closed businesses and (mind-blowing) unemployment, then we will look below 2300.

Thanks!