Category: Stock Updates (Blogs)

Market Update: February 6th

Posted on by io-fund

The Recent Pullback

Despite coronavirus fears that many were forecasting could lead to a crash, the market remained fairly stable. While the market was overextended in valuations we rarely see, it took the fear of a global pandemic to knock the indexes down just 3%.

The market hit the top end of our target at 3220, as mentioned in last week’s market update. Regarding the correction, 2.5% is what we got in the NASDAQ before the market caught a strong bid that pushed the index to new highs. The SPX soon followed.

A few things I’ve noticed this week:

  • Some extremes we’re seeing in the current Put-Call Ratio.
  • All-time high in the U.S. PEG ratio,
  • NASDAQ is reaching new highs while more than half the index is still at least 20% off their 52-week highs.

In short, a handful of stocks in the index are accounting for most of the returns. So, this is not a broad market uptrend. Therefore, I am not sure the correction is entirely over. We will monitor this as we go along. While the main indexes are reaching all new highs, it’s doing so without the transport index and small cap index doing the same.

The small caps represent the health of the domestic economy. Considering the vast majority of their revenue is domestically centered, they provide a better gauge for the domestic economy. The transport sector also reflects economic health simply because when businesses are booming, they need to transport more goods for sales. Until these indexes join in the broad market with new highs, the current uptrend should be closely monitored.

The market climbs a wall of worry, and the current environment is no exception. You will always be able to find reasons to not invest until it is too late. I have a stop in place with every trade so I don’t have to worry about a crash.

My goal is to try to buy stocks near key supports with tight stops, or when they are breaking out. As stated on the forum, as well as the last market update, we bought the recent dip, and will continue to until the broad market breaks key supports.

In the meantime, I’m holding some cash for new opportunities, have stops on all my tech positions, am hedged with a few choice gold/silver plays as well as some cheap, long-dated puts on indebted companies. And, most importantly, I’m staying with the general trend, which is up. The key level to watch today in regards to the recent correction is SPX 3290. If this support breaks, we will likely see a retest of last week’s lows, and the levels I outlined in the last market update will be back on the table.

Telaria (TLRA)

Last year, small caps started to break out. We did published report on this opportunity early-on, showing that small caps are trending towards recessionary levels while large caps continued to make new highs. The thesis was that if we are not heading into a recession in 2020, then small caps have a large gap to fill in order to catch up. Even though small caps have not made new highs, they began to breakout of their range, trending towards new highs. It was based on this thesis that we added to our two small cap positions with Telaria being one of them, and since then we are up about 40%.

The structure of Telaria is a complex one, which can be analyzed from various angles. It is because of this that I focused exclusively on the 5-wave uptrend we are currently in. Since TLRA was acquired, the 55-day EMA has been strong support for the price (the red line).

If TLRA breaks the 55-day EMA, the levels to watch are the $8.50, $7.90, $7.15, $6.20. These areas are derived from the ratios on the right of the chart, which are price clusters that are taken from various Fibonacci ratios applied to the structure of TLRA. There are very tight clusters that will define the important levels to watch if TLRA breaks the 55-day EMA.

As of today, I am raising my stop to either $8.25 or the 200-day SMA, which ever gives first. This will give the first support region some room to breathe. If this stop is triggered, it will lock in about a 20% gain from our initial position, and we will look to re-enter down the road.

However, if Telaria can break out to new highs at $11.82, we could see it trade in the $13 before any sizable pullback. If this happens, our stops will be raised to compensate.

The Trade Desk (TTD)

We are long The Trade Desk, and have been since their last earnings report. The recent breakout to new highs, suggests that the current 3rd wave that we are in is not over, and the next level I’m targeting is around the $350-$375 area before we see a pullback. However, it’s worth noting that we haven’t fully cleared the $296 region, and until we do, the risk is that the 3rd wave is topping at current levels is still present.

The internal momentum is fading while price is going up, which is not preferable as a price breaks out to new highs. However, we like TTD for 2020, so on any pullback, we will be adding to our current position.

Zoom (ZM)

We have been covering Zoom weekly, mostly because the bullish setup offered a great low risk/high reward opportunity. Going long in the mid-low $60s with a stop just under the all-time low at $59.95 was the setup we were offered our premium readers twice.

This also lined up with the 1-2, i-ii bullish setup we talked about in the last few market updates. If this was valid, we targeted the $87 region for a wave-3 top, which is exactly what we got the day of the breakout. The following day we extended to the $92 region before correcting.

The volume spikes are encouraging, as well. We saw an influx of buyers at key resistance step in. The RSI is showing positive divergence, suggesting the current pullback will likely be shallow before completing its 5th wave push. The MACD is also well above the trendline. All of these internal signs are suggesting a healthy uptrend.

As long as Zoom holds the $75.75 region, the larger degree 3rd wave uptrend is in place. That would put us in internal 4th wave of the larger degree 3rd wave. If valid, this will likely test new highs before we get the larger degree wave 4th wave pullback.

Boingo (WIFI)

Boingo is one of my favorite setups today. We have, like with Zoom, a 1-2,I-ii setup in place. This also is showing up as a standard cup and handle pattern. If WIFI can break above $13.40-$13.50 region with heavy volume, we will likely see strong uptrend, much like we witnessed with Zoom. If this is valid, I’m targeting the $20-$21 region.

Further proof comes from the structure of the handles in the above chart. Notice the 3-wave move, where the final wave ended exactly at the 127.2% extension of the first wave. This is textbook Fibonacci trading, which lends the current bullish setup being valid. In summary, as long as $9.55 holds, which is a wide stop, I’m long WIFI at current prices.

Slack (WORK)

We recently sold out position in Slack around the $23.50 area this time around. It appears that Slack, yet again, is topping out within its very tight range, and will retest the $20-$19.50 region. After climbing nearly 20%, which falls in line with the symmetry we pointed out in the last 2 attempts to breakout, we can see negative divergence between the RSI and price.

Also, the MACD is rolling over at higher highs. All of these signs are suggesting that a breakout may not happen this attempt. We will look to go long again if Slack can clear the $24.30 region, or if it finds another bottom around $20. Eventually Slack will break down or break out, and based on how range bound it has been, this move should be a strong one.

Datadog (DDOG)

Datadog is another stock with limited price action that is providing a complicated and ambiguous structure. Right now, I am giving the uptrend the benefit of the doubt and will keep this count as my primary one unless DDOG breaks through the $39.60 region. Below this region, which is my current stop, and DDOG will likely retrace in a more bearish count.

So far, the internals are lining up with the price in a healthy uptrend. Also, the yellow region on the chart highlights a very tight cluster of important Fibonacci prices, which should act as strong support.

Roku (ROKU)

Roku has been trading within a descending wedge pattern since December of last year. These patterns more often than not, resolve themselves in the direction they are pointing. The MACD confirms this with the direction it is pointing in, as well.

The blue and red regions on the chart highlight recent drawdowns, and they coincide with the colored ratios on the right of the chart. Symmetry is a strong force in technical analysis, and we can usually target the length of prior drawdowns for important inflection points.

The red area region highlights a, roughly, 21% drawdown. If we measure the length of this drawdown from the top that followed it, that will take us to $120.83 (or the 100% extension).

We have been layering in at this level, which also coincides with the 200-day SMA. If we break through this level, the next support region will be between $112-$115. Below that, and we will reach the 100% extension of the drawdown highlighted in blue, which will take us sub-$100.

I’m expecting us to at least hit the $112-$115 region, which I will use to layer in more longs. Roku sub-$100 would be a gift, based on our future calculations on where this we see this company going within the connected TV ad space.

Pinterest (PINS)

After reporting stellar earnings, Pinterest is set to open tomorrow with heavy volume, through the above resistance cluster between $24.75-$25. There is a heavy confluence of important prices, coupled with the 38.6% retrace level, which also happens to coincide with PINS closing the gap.

Breaking through an important price resistance with force is exactly what we want to see. What we want to see next is – can PINS hold the $24.75-$25 region as support now that it has broken through? We will likely see a retest of this area, and that is where I will look to add to my current position.

Quick update from Beth: the 5G spreadsheet is coming out this upcoming week. We got a little delayed as we have twice as many companies we are tracking as we do for cloud. Should be out Mon-Wed of next week.

Disney+ Killing it on the App Store – Roku Downstream

Posted on by io-fund

Not only should Disney+ perform well this quarter, according to the data below, but keep in mind, Roku is downstream from Disney+ and will benefit from the company’s success.

When I was researching Facebook last week, something really stood out to me. Disney+ was ranking very high on both free apps and top-grossing apps on Android and iOS. On a few days, Disney+ beat out #1 sensation Tiktok, and on most days, the app beat out Instagram, Snapchat, YouTube, Facebook, Facebook Messenger, and Whatsapp.

This is unusual because the majority of the OTT media downloads don’t come from smartphone app stores. They come from an OTT player, like Roku, Amazon Fire, Google Chromecast or Apple TV.  

This deck was collected at the four-week mark (or December 12th). Apptopia told me in an email that Disney saw a total of 30 million downloads on the app store in November and December (so, basically another 8 million after the deck was published).

You’ll see in the deck that retention is lower than usual, but with the OTT volume, Disney should be able to have a decent report tomorrow. Retention is probably low due to viewers watching The Mandalorian and not returning to the app. Disney will also have to prove it can convert free subscribers to paying subscribers when promotions expire (i.e. the Verizon promotion is a year of free Disney+).

From my perspective, this is positive data for Disney and I’m excited to see the earnings report tomorrow. I fully expect Disney to permanently overtake Amazon Prime Now for the number two spot over the next year or so. Global will be a significant strength for Disney.

Theme parks in Hong Kong may affect earnings. The coronavirus may also affect theme park earnings and theater earnings in fiscal Q2 2020 ending in March. I think analysts will look at these as temporary setbacks and will be more focused on Disney+.

Disney also probably spent a decent chunk of change on advertising this quarter. This may affect their earnings, but I think any positive news on Disney+ will overshadow this. Roku will benefit from the ad spend. Also, look at page 8 in the deck– it shows the effects Disney+ has had on Roku downloads.

Here’s a note from Needham on the Disney-Roku relationship that I highlighted in my convictions update. 

Please note, the Disney+ information will be in MarketWatch tomorrow per an agreement with Apptopia. I will not be publishing the Roku download information  on page 8 of the deck and will keep that exclusive for premium subs.

Broad Market Update – Technical Analysis

Posted on by io-fund

My Methodology: Tracking 10-year Bull Market

Looking at the current bull market that began in March 2009, we can map out the path using Elliott Wave Theory, and guess a likely trajectory for the remainder of the move up.

To provide context, Elliott Wave Theory, in essence, claims that the market moves in 5-waves up, then 3-waves down. There is a rigorous number of rules as well as math involved to justify a count, but the fundamental idea is the 5-3 structures.

Each 5-wave move is part of a larger degree 5-wave move, and it also has smaller degree 5-wave moves within it. It’s fractal, which is very important, and something we witness on the hourly chart as well as a monthly chart.

The chart is a close up of the prior chart that is focusing on the bull market that started in March of 2009. In the larger context, we are looking at a close up of the final 5th wave in red, and within this wave we have several degrees of waves, which constitute this move.

On a smaller degree, the blue count is meant to express the 5-wave move that started in March of 2009. Within that blue count, you have the green count, and then below that in the red count.

The Current Correction

Regarding this correction, I consider this to be a buying opportunity, as long as we hold 2950.

Zooming in even closer, we can see the structure of the current correction within its bigger context. The 3rd wave of the red count topped out exactly at the 161.8% extension, which is a text book 3rd wave. That being said, we can expect the current 4th wave to target the usual range, which is around the 123.6% and 78.6% extensions between 3220 – 3070.

I am personally buying in this pullback in the 3220-3070 range with some funds reserved if we hit the 2950 level.

Below 2950, and we could be in for a much larger correction. Each of our individual positions have relatively tight stops that coincide with this level of SPX. Of course, my high conviction investments purchased with low cost basis will not be sold (BABA, MSFT, ROKU, NVDA, etc). This only applies to stocks that I’m still trying to find a breakout on (ZM, AYX, DDOG, etc). I will re-enter anything I stop out of to make back those incremental losses when the trend resumes.

As of now, the more likely scenario is the 3220-3070 range. I’ll update you if this changes.

 

Market Update: January 31st

Posted on by io-fund

Microsoft (MSFT)

Microsoft has been a long-term position, which we have been covering since it was priced in the low $90s. For our newer readers, we recommended considering a position on any pullbacks and breakouts. The most recent breakout, which we pointed out in update, occurred last November and MSFT has gained about 20% since then.

Ever since, the uptrend has not spent more than 2 days below the 10-day EMA, while staying mostly above the upper band of the Keltner Channel, which is an incredible show of strength. However, the RSI is fading while the price is rising, suggesting the momentum may not be enough to support the price as it approaches a key resistance area between $178-$182.

 At some point, Microsoft will pull back and likely test the 55 EMA (in Red). With the negative divergence between the RSI and price as MSFT approaches the above resistance, it’s probable that we could get this pullback for entries or additions to any current position. As long as the market trend is up, MSFT is a buy on any pullback. For a core position like MSFT, I am holding with a 25% trailing stop for now.

Dynatrace (DT)

Dynatrace has held strong this week while the market pulled back slightly. I’m expecting a pullback in the near future (perhaps due to IPO lock-up expiring?). We have negative divergence within the internals and price – momentum indicators are making lower highs while Dynatrace is making higher highs. Note the MFI (money flow index). This index is basically the RSI with volume factored in and is usually a great leading indicator. When I see negative divergence developing in the MFI, it holds more weight.

Furthemore, there appears to be some notable bearish candlestick patterns on the chart. For one, there is a bearish spinning top as well as a possible island reversal pattern. These patterns commonly precede a reversal, and indicate that the buyers are having second thoughts at current levels. Dynatrace will need to break to new highs to invalidate these patterns. For those looking to go long, patience should provide better entries. We entered DT and continue to consider DT a buy on any pullback.

Zoom (ZM)

Like Netflix last week, Zoom is developing into a very bullish structure, which suggests we could be in the early stages of its wave 3 upwards. In Elliott Wave, this is called a 1-2,i-ii setup. This means waves 1 and 2 for a large degree upward move are in place (in green on the chart), and we are in the early stages of wave 3 pointing up.

I’m expecting ZM to pullback into the high to mid-$60s as we progress in this pattern. As long as ZM holds the $62 line, this bullish pattern will remain valid. We recently stated on the forum that the bottom could be in the low $60s and a good stop is at the all-time low – $59.94. As long as ZM holds $62, the bullish setup is still valid. However, below $59.94, and we could see a deeper drawdown.

Boingo (WIFI)

Like Zoom, Boingo is showing us a potential 1-2, i-ii set-up as well on the hourly chart. This is also showing up as a cup & handle pattern, which is a bullish pattern in technical analysis that usually leads to an exciting move up.

If Boingo breaks the $13.40-$13.50 region, expect a strong move, which would coincide with the potential 3rd wave the current structure is suggesting. As long as Boingo holds $9.55 this potential bullish setup is still valid. Below $9.55 and I will hit my stop.

Marvell

Marvel appears to be on the verge of a pullback that should take us to the outward bounds of the bottom Keltner Channel. The momentum is fading, while price and momentum is testing the current uptrend lines. Price is currently below its 55 EMA (red), so the pressure is down.

Marvel, like a lot of the stocks we are monitoring, appears to also be in the early stages of a wave 3. My target for entry is between $22.25 – $18.75, with a hard stop just below $15.90

Bitcoin (BTCUSA)

Ever since topping out last June at $13,868, Bitcoin completed the first leg in a renewed uptrend. This first leg, from Elliott Wave Theory, would be called the first wave in a 5-wave uptrend that is projected to take us to new highs. As long as we hold $4300, this renewed uptrend, which began early last year around $3,000, will be valid. 

With the first wave in place, we have been dealing with the 2nd wave correction, waiting for a bottom to be in place, which would put us in the early stages of an exciting 3rd wave up. Based on the structure, it appears that we have a potential bottom for this wave 2, which landed in the upper boundary of the green target box we were projecting in prior market updates.

Since this bottom, Bitcoin has given us a series of positive signs that the bottom could be in. First off, we have on a micro structure, 5-3-5-3-5 waves in place off the bottom, which on a larger degree, gives us a clear larger degree wave 1. That would put us in the early stages of wave 2 within the larger degree 3rd wave that we are after.

From a more basic technical analysis perspective, the above chart is showing a classic inverse head and shoulders pattern. Note the right shoulder is very small. This has historically been an encouraging sign for a significant move.

Based on the current projections, I’m expecting a pullback around $8,800-7800. Below $6975 is my current stop for this uptrend to protect gains. For long term buyers, a hard stop at $4300 is a good place to exit.

Checking in on Tech Trends and My Current Convictions – January 2020

Posted on by io-fund

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

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

Purpose of this update

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

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

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

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

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

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

Some leading stocks that I’ve covered:

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

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

Connected TV

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

Please reference the following premium coverage for Connected TV ads:

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

I’ll provide a quick summary:

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

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

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

Roku:

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

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

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

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

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

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

Telaria:

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

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

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

The Trade Desk:

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

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

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

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

More on ad companies

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

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

A few notes on Snap and Pinterest …

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

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

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

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

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

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

Hybrid Cloud

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

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

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

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

To illustrate my point using statistics:

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

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

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

Yet, the budgets don’t match up …

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

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

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

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

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

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

Datadog and Dynatrace

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

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

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

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

Elastic NV

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

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

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

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

Cloud Productivity Tools

Cloud productivity tools claim the majority of cloud budget allocations, and will increase from 10% in 2019 to 14% in 2020.

The percentages are even higher among smaller businesses with up to 18% spent on cloud productivity tools in companies with under 500 employees.

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

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

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

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

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

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

5G and Artificial Intelligence …

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

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

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

In February  …

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

Market Update: January 23rd

Posted on by io-fund

Hope everyone is having a good week. You can find some of these updates on the forum. I’ve put together a few notable charts for you to consider.

Twilio

Twilio (TWLO) is currently above its 8-day EMA (in green), which is holding the price as support, as it tests the 61.8% retrace level around $123.50. This level coincides with a number of price clusters, so breaking through it would indicate that the likelihood of a new uptrend is high.

  • I want to see it take break above the 61.8% retrace level around $132/$133 before initiating a position. Once in, I will use the 200-day MA as my stop.
  • I am leaving a count up that suggests another leg down until these levels are taken back.

It’s also worth noting that the RSI is at an extreme overbought point. The internals will need to reset to continue the climb up, or it’s reached exhaustion.

Alteryx

Alteryx (AYX), like Twilio, appears to be corrective. The structure of the uptrend appears to be a 3-wave move, were the final leg extends to the 127.2% extension of the first leg around $132.60. This is a significant point in Fibonacci trading, where we see prices usually hault and reverse. With Twilio, this level is currently acting as resistence. The RSI is also at overbought levels, showing negative divergence (higher highs in the RSI compared to lower highs in the price), which is also suggesting a needed pullback, so the internals can reset.

  • Above the $132.60 level and I will go long with a very tight stop, which I will place just below the 20-day EMA (in blue). I will keep this stop until we break out to new highs, at which point I will look to widen the stop.
  • If AYX continues to stall, look to the 200-day MA for the next support level (in red).
  • If the 200-day MA does not hold, expect AYX to test the prior bottom.

Slack

Slack (WORK), also saw a new uptrend, but terminated around the same region it has failed since bottoming in November of 2019. Slack has been trading in this range between $23/$24 – $21/$20, showing no sign of making a decision yet.

It’s worth pointing out the symmetry in Slack’s recent failure to breakout. Symmetry is an important tool in Technical Analysis, which can be used to establish game plans. The last move up failed at 20.53%. So, for this move up, the 20% range was an important pivot point, which I was watching for a confirmed breakout, or a retest of the lows.

Notice The current uptrend failed at 20.23%. This is not coincidental, and a phenomenon we see time and time again.

  • Slack has been range bound between $19.50/$20.00 and $23/$24 for a few months. I’ve been able to predictably trade this range.
  • If Slack breaks through the new 78.6% retrace level at $21, while breaking the noticeable uptrend in the MACD, we can expect a retest of $19.50.
  • When Slack breaks $24, that’s a sign of a renewed uptrend and will be with the trend. Or, attempt to catch the bottom with a buy and hold in the $20-21 range with a stop at $19.50. We believe the sentiment around Slack could lead to a surprise this year. Beth believes timing could be somewhat painful for Slack, but the engagement is too high to ignore. The noise about Microsoft is valid yet there is easily room for two workplace messaging apps and this shouldn’t deter Slack’s user base from growing.

Netflix

Netflix is showing a classic (1)-(2), 1-2 structure. In other words, in Elliott Wave Theory, the 5-wave move is comprised of smaller degree 5-waves and is part of larger degree 5 waves. So, in the chart, we have a clear wave (1) and then a (2) in red. That would potentially put us in the first wave of the wave (3). This will be confirmed if we get a corrective pull back, which bottoms around the target box in the graph.

  • If Netflix pulls back to the $250 level, then I will look to go long and lean towards the next leg up being the early stages of a 3rd wave.  
  • I understand I could miss an upward trend if Netflix breaks $385 on high volume. Due to risk/reward, I’m favoring the pullback.

Zoom Video

Zoom (ZM) cannot break above the volume weighted moving average, which is anchored at the all-time high in blue. These levels show who is in control of the current trend, and breaking above these levels is both a sign of strength and also needed to confirm a continued uptrend.

However, the structure of ZM is suggesting more downside before we get a confirmed breakout. The internals have broken their trend, and the uptrend in ZM is too overlapping to be anything but corrective. For anyone looking to go long, I think you will get better price. For any positions, I recommend placing a tight stop at the all-time low of $59.90.

We recently suggested buying ZM in the low $60, and as long as ZM holds the all-time low, we are expecting new highs in the coming months.

Beth is putting out a conviction list soon. She likes Zoom’s fundamentals quite a bit including the viral mechanics of the product.

Market Update – January 16th

Posted on by io-fund

As we have referenced in the past, we are not a research site that attempts to predict the market. We think that’s a nearly impossible task. We simply keep an eye on various, opposing scenarios while providing stock tips we think are relevant in the current environment.

Bull Count

The level I’ve been watching is the S&P 500 at 3200. The market powered through this and has overtaken 3300. This means the bull market could take us up to 3800-4000 region. This is based on basic Elliott Wave analysis where the 5th wave, more times than not, reaches the length of the 1st wave, or an extension of that wave, which we see time and time again.

My rational for such a position is based on the global loose monetary policy seen by central banks. Not only are dozens of central banks cutting rates, but the Federal Reserve publicly said the goal is to keep the expansion alive, and they are using tools used to re-stimulate an economy from a recessionary position. In other words, they are going all-in on keeping the expansion going.

Also, it’s worth noting that an accommodative Fed has historically been great for MOMO stocks. As long as inflation stays muted according to the CPI, and central banks stay accommodative, I will stay long tech with rising stops to match rising gains.

Another point of encouragement is that a record level of cash is still on the sidelines, waiting to come back in. Furthermore, one trading platform shows 69% of clients are short the S&P 500 today. As these shorts cover their losses, it will force more buying, which will force more covers. Massive levels of shorts can propel a market, and this pattern will continue until the shorts give up, which can be propelled forward if cash on the sidelines moves in because of FOMO.

So, long term, I am bullish and slow-tilting my portfolio towards a more aggressive stance. However, in the medium term – i.e., a few weeks to a month out – I am expecting a local top to take us back at minimum 3%-5%, at which point I’ll look to allocate more of my cash. Tech has led this market and I believe it will continue to lead throughout the expansion.

Flashing Bear Signals

I’m going to expand on this more next week, but the current market environment is not without some flashing signals. It’s important to understand the backdrop in which we are investing and also where we are in the current market cycle. 

 In a nutshell, these are:

  • The yield on the 2-year treasury and on the 10-year treasury have inverted. The inversion occurred in August of 2019 and the average time period before a recession following an inverted yield curve is 18.5 months.
  • According to the ISM, manufacturing peaked and has been in a steady decline since late 2019. Once again, this trend has preceded every recession, and about 31 months after the cycle peak, on average, a recession follows. So far, the ISM peaked in summer of 2018.
  • The Conference Board Leading Economic Index (LEI) is at the zero line. This is at its lowest level in over a decade. To be clear, it has not crossed yet, so it’s worth watching. I’ll expand more on this next week.
  • After several years of zero percent interest rates, corporate debt is at historic and unsustainable levels totaling over $10 trillion total, or 47% of our national GDP. Fifty percent of investment grade debt is in the BBB ratings.

I’ll go more in-depth next week on those signals. The way that I protect my gains is to have trailing stops between 10-30%. If I hit my stop on a stock that I like, I will re-enter once the price has stabilized. A recent example is when I exited Zoom at $68 and got back in at $62. This is a small-scale exit, whereas Nvidia’s crypto bust was a larger-scale exit. My gains were protected and I simply re-entered once the price stabilized again. This is the only way I’ve found that I can stay in the market when there is a lot of noise towards the end of a market cycle.

Technical Analysis:

By Knox Ridley

Alteryx (AYX)

After about a 40% drawdown, Alteryx has dragged along the bottom of the long-term trend channel, which is highlighted by the blue dotted lines. The move up appears to be overlapping, and therefore corrective in nature, with the final C-wave unfolding in a 5-wave pattern, which I’m targeting the 127.2% extension around $133. I’m treating this as a corrective move, and holding off on adding to my current position until:

(1) we break $133 with heavy volume, at which point I’ll hold this position with a very tight stop until we clear new highs. If this happens, we will be in the heart of a 3rd wave, and the bottom for wave-2 will be in.

(2) AYX stalls in the coming days/weeks, and retests the $100 level. If this support doesn’t hold, I’ll look to pick up more shares as we approach the C-wave target box that I outlined in the chart above.

Roku (ROKU)

I’ve been patiently waiting to pick up more Roku sub-$100, and the set-up is in place for this to happen. Roku has tested the $127 support level 3 times, and each time it has corrected from $127 with less momentum and lower highs.

It’s currently trading just under the Volume Weighted Moving Average, which I anchored at the all-time high (in red). This average factors in volume from a critical moment. This week, the bears are in control. Furthermore, the price is below the 55-day exponential average, which is a great measurement of the overall trend.

Also, look at the internals (MACD, RSI). They have both broken their respective trendlines and are heading lower. I take this as a warning.

But, most importantly, the final C-wave set up is intact. Corrective waves (second waves and 4th waves) unfold in 2 moves (A down, B up, C down). There are several rules patterns that we see over and over. One of the most notable is that the C wave will almost always unfold in an impulsive, 5-wave structure, which on lower time frames will have its own smaller degree 5-wave structure.

We have a 1-2, (i)-(ii), i-ii setup right at the $127 support. If $127 is broken, we will be in the 3rd wave lower. Based on basic Elliot Wave, I’m expecting this move to terminate around $100-$95, at which point, I’ll look to add to my long-term position. Just to be clear, I’m still expecting Roku to reach $200 by 2021. 

However, it’s worth noting that Roku has held the $127 support, and though the signals are suggesting that it could head lower, Roku has a tendency to move fast against bears. On a long-term basis, $127 is not a bad price to pay for this stock, based on what we are projecting for 2020.

Also, if Roku can break out on heavy volume in a 5-wave move up from $127 upwards, while the internal indicators break their downtrend (look at the green arrows), I’ll scrap this bearish set-up, and look to go long from higher levels.

Qualcomm (QCOM)

QCOM is approaching a cluster of resistance. The red box highlights a strong concentration of significant Fibonacci prices. Rarely do you see a concentration like this. QCOM will either break through on heavy volume, which would be an indication to go long, or it will break down from current levels. If we break down, I’ll be looking to add to my position in the green target box between $80 and $62.

Alibaba (BABA)

Since Alibaba broke out, we have clearly been in a 3rd wave uptrend. For anyone curious what a 3rd wave feels like, this is it – an uninterrupted bull train, where the price stays above the 10 and 20-day EMA. I’ve put my targets in the chart above as well as significant resistance zones as we continue upwards. We should have pullbacks along the way.

Twilio (TWLO)

Twilio has shot straight through the 200-day SMA and found resistance at the 61.8% retrace level around $123. If Twilio can break this region, I will likely begin layering into Twilio. I will want to see it break through the $135 region for a final confirmation that the 2nd wave is over. However, a move up like we’ve seen in Twilio, breaking the 61.8% retrace is worth noting.

Zoom (ZM)

So far, Zoom is playing out as planned. After topping out in its first wave, it retraced nearly the entirety of that move in a very deep second wave. Since then, it’s provided us with a 1-2 setup, and is now powering up towards its AVWAPS. We picked up shares in the low $60s with a stop at all-time lows. As long as this level holds, I’m expecting new highs this year for ZM. If it can power through the above AVWAP in blue, that will be a strong showing of strength, at which point I’ll add more to my position.

Thank you to all of our subscribers in 2019. What to Expect in 2020.

Posted on by io-fund

We want to extend a warm appreciation to our subscribers this past year. Since launching in July, the site has completely exceeded our expectations. We are keenly aware of the contributions all of you have made in helping this site become possible.

When we first set out, our goal was to take a stock picker who has analyzed technology and products for nearly a decade and combine this skillset with a calculated, technical trader. We think we’ve done a decent job of delivering bullish ideas this year with a wide range of analysis.

Here’s a snapshot of our coverage this past year:

You can check out Knox’s 2019 track record trading off my analysis here.

What to Expect in 2020

We are both dedicated to improving the site in 2020. For starters, we have been working on algorithmic safety nets to keep us in long positions longer and to help exit losing positions faster. We’ve been working on this system for months and it will become a premium benefit for subscribers that Knox will help to spearhead. Once we have this in place, we will begin to launch portfolios on various categories.

Please keep in mind that we write for both styles: buy and hold, as well as some active trading. When we recommend stops, we are simply making sure to provide the exit plans we use ourselves if there is an unforeseen market event. This ensures we lose no more than 10-30% while letting our winners run.

Stock Lists

Recently, we published a 2020 cloud software list followed by a few PDFs. We think cloud software has more room in 2020 than the market currently has priced in, and this is one reason we’ve been focused on this category.

We plan to publish similar lists for future technologies, such as 5G, artificial intelligence, and blockchain. We will also publish more lists for common categories, such as semiconductors, finance tech (fintech), and a high conviction list (a conviction ranking has been requested a few times by our readers). We will start with the lists we think are most time sensitive.

These lists achieve a few things:

  • Creates a master index of stocks in a category
  • Organizes companies the market is most likely to reward based on financial strength
  • Organizes which companies are most likely to surprise the market based on product strength
  • Helps to track which companies are breaking out
  • Short-lists the best companies if a trend breaks out
  • Help to keep companies on our radar even if we haven’t been able to cover them with a full-length analysis just yet

We Appreciate Your Referrals

Paraphrasing on forums or social media about any wins you’ve had from our service is encouraged and much appreciated. We greatly appreciate all of the referrals you’ve sent us. We couldn’t do this without you.

Analysis can be a competitive field. We only provide original analysis, which requires domain technology experience and is incredibly time consuming. For this reason, please do not share the links to the lists or PDFs (i.e. the verbatim analysis).

We honor the premium site far and above our free analysis. In fact, I’d say my free analysis has suffered a bit since launching the premium site as I am giving my best ideas to the premium members. You will see me publishing more on Forbes this year, as well as MarketWatch, but my best work goes to the premium site.

Thanks Again …

Our mission is to help you make as much money as possible in the tech sector – and to provide value that goes above and beyond your subscription.

Our plan is to far exceed what we did in 2019 with in-depth tech analysis on companies you won’t find elsewhere and to combine this with smarter and sharper entries.

Thank you again for your vote of confidence and subscribership.

Beth Kindig

Rubicon and Telaria Merger

Posted on by io-fund

On Thursday, The Rubicon Project and Telaria announced plans for an all-stock merger. The combined companies state this will be the largest independent supply-side platform (SSP). Rubicon shareholders will own 52.9% and Rubicon CEO Michael Barret will become CEO of the new company with a stock ticker $RUBI. The deal is expected to close in the first half of 2020.

Aggregate revenue for the combined company grew 32% to $217 million for the year ending September 30, 2019. The combined company will also have $150 million in cash and no debt. Both companies had market caps around $350 million prior to the merger. The merger is expected to reduce costs by $15-$20 million with 600 employees.

The main benefit to this merger is that Rubicon will now be truly omni-channel (i.e. desktop, mobile, connected TV, video, etcetera) without having to build a connected TV platform, which can take two to four years.

In turn, Telaria is now able to attract larger media companies who want to work with fewer partners across various types of inventory. The combined company is a full-service SSP that will require advertisers and publishers to work with fewer vendors.

The company expects Connected TV ads to make up mid-to-high teens as a percentage of business. Previously, Telaria’s CTV ad business accounted for 44% of the most recent quarter’s total revenue.

Strengths and Weaknesses

Strengths

Supply-side is typically the better side of the deal when compared to the demand side.

On a high-level overview, this is because publishers (the supply side) own the content and the data, and therefore, they control the relationship. Advertisers are fickle and will quickly switch who they are working with according to the best pricing at the time.

Please note: there is a full-length report on the differences between SSPs (Telaria/Rubicon) and DSPs (The Trade Desk)  in the Telaria PDF.in the Telaria PDF.

Telaria and The Rubicon Project onboard publishers. This provides a slight advantage to onboarding advertisers. Nearly every major success in advertising is on the publisher side. Facebook and Google own the content and the data. Gaming exceeds Hollywood and music more than 15X on revenue due to owning content and data with free-to-play alone/ad-supported exceeding Hollywood’s revenue alone. The Superbowl charges record-high prices by owning the content and the viewer data. Therefore, having a larger SSP in the Connected TV ad space is intriguing to say the least.

The most important strength and catalyst for the merger is Connected TV ads, of course. There are many statistics provided in the Telaria PDF and Roku/TTD PDF to support my conviction on CTV ads.

Read the Roku/TTD PDF here covering Connected TV ads.Roku/TTD PDF here covering Connected TV ads.

Weaknesses

Rubicon has some weaknesses around growth that are important to discuss. Although revenue was up 27% year-over-year, the revenue was flat at essentially 0% quarter-over-quarter at $37.64 in Q3 compared to $37.87 in Q2 2019. In Q4, Rubicon is guiding for year-over-year growth of 15-16% at $47 million-$48.5 million. The EV/revenue reflects the lackluster growth at 2.17 compared to The Trade Desk’s EV/Revenue of 19 and Telaria at 4.7.

According to the most recent earnings call, the CEO stated, “we got dinged by [new transparency methods] slightly.” Basically, what happened is some app publishers have not converted to the new standards (likely due to development constraints) and this is affecting demand (advertisers are starting to require the new transparency methods). The new transparency methods are app.ads.txt, which reduces app ad fraud by requiring app publishers to provide text files that list the ad networks authorized to sell their inventory.

Another issue affecting Rubicon is supply-path optimization, or sellers.json. In many instances, Rubicon is a reseller rather than the SSP with the direct relationship with the publisher. Advertisers are pushing back on resellers as more middlemen can increase costs in the real-time bidding process and create opportunities for fraud.

With that said, the aggregate company with Telaria and Rubicon combined has year-over-year growth of 32% for Q3 compared to The Trade Desk’s at 38%. It’s the lack of revenue in the most recent quarter and the upcoming quarter for Rubicon that is concerning (not the TTM).

Regarding weaknesses, I can’t stress enough that the advertising market is incredibly tough as there is not much intellectual property to stave off competitors. For SSPs and DSPs, it is a relationship-based business and a pricing war. I would personally not go long on any ad platform (that does not own the content) without a stop in mind. At the very least, a wide stop should be considered.

About Walled Gardens & CCPA

As Telaria CEO Mark Zagorski stated, this is “an opportunity for someone to create really The Trade Desk of the sell-side — a real alternative to those walled gardens.”

The walled gardens he is referring to are Google and Facebook. They provide little transparency to advertisers and publishers. Meanwhile, they lock publishers into their ecosystems, and advertisers with precise data targeting.

These two companies essentially wiped out the ad industry around 2014-2016 and both Rubicon and Telaria come from the wreckage of those years (Telaria’s path was covered in the PDF). This should be behind us now as what Google and Facebook did is increasingly seen as anti-competitive due to leveraging private data as a means of shutting down ad competitors.

One nod towards the end of the anti-competitive behavior was Amazon opening up its Connected TV ad platform. I am fairly confident this was to thwart any future legal issues and is a healthy sign that the days of iron-clad walled gardens may be behind us.

With that said, there will need to be some finesse from ad platforms on the privacy side. California has passed the California Consumer Privacy Act (CCPA) that will take effect very soon on January 1st. The law is a bit vague as to how to define the selling of consumer data, which Facebook is already preparing to fight.

The reason this is applicable to The Trade Desk or Rubicon/Telaria is these companies typically have various tracking code for omni-channel campaigns, such as TTD’s Universal Ad ID. Interesting enough, Telaria’s CTV ad platform could be protected as they are partnered with Nielson for data, an industry staple for nearly 100 years. Nielson typically collects data on viewing habits rather than on private individuals, so Telaria could actually have an edge if privacy laws prevent the tracking of individuals.

The above paragraph is not something to worry about right now, but I will be keeping an eye on it to make our readers aware if the CCPA extends to omni-channel tracking methods.

Conclusion

The ad industry is often messy and convoluted, which we are seeing with Rubicon’s most recent quarter. They’ve made it clear their intention is to compete with The Trade Desk. While TTD is the first mover, this merger can offer better data for targeting purposes due to being a supply-side platform.

Small Caps: Breaking Out

Posted on by io-fund

There are many reasons to have an allocation to small caps in a portfolio. For one, they offer further diversification with a lower correlation to the broad market. However, the primary reason is that, over time, history has shown small caps tend to outperform the more popular large caps. According to Ibbotson Data, this outperformance, on average, is 2.2% per year.

The Set-Up

Ken French, the professor from Dartmouth who compiled the data in the graph above, discovered there is a seasonality for small caps when you average out all of the data we have going back to the 1920s.

From February through December, the average small cap stock tends to underperform. However, from Dec 20 – Jan 31, the average small cap stock tends to outperform by a noticeable amount

This data is showing that over the December 20 -January 31st time frame, the average relative performance of small caps over large caps is about 2.5%. This may not seem like a lot, however, keep in mind this is sourced from 89 years worth of data, which is statistically significant.

Today, we are seeing an important anomaly in the small cap region that we haven’t revisted in about 20 years.

The above chart shows that small caps, in blue, tend to do better during an uptrend, just like Ken French outlined, and also tend towards sharp reversals in downtrends. With more returns, typically comes more volatility. However, today we are witnessing a relative outperformance of large caps that we haven’t seen since the late 90s.

Euphoric emotion disconnected these two markets during the late 90s, while pessimistic emotions disconnected the markets today. The fear of a recession has taken the current market to levels we also haven’t seen since 2008. Mutual Fund/ETF equity outflows are at historic levels, and short interest has run above the historic average. The risk-on trades have been penalized, small caps being one of them.

Today, we are not only entering the season for small caps,but we’re doing so with small caps showing significant under performance relative to the broad market. If the fear of a recession was overblown, then small caps have some catch-up in order to revert to the mean.

To further build the case, the weekly chart above is showing that the RSI is breaking 60. This is a great sign for building momentum for small caps. In a healthy uptrend, we want to see the RSI above 60 and oscillating above 30 – the higher the oscillation, the healthier.

If we zoom in to highlight the last year, the weekly chart above is showing that small caps are starting to show signs of life. They are breaking above the 60 line on the RSI, the MACD is pointing up, and small caps have broken through their downtrend and closed above the resistance we’ve seen this year. Also, it’s worth noting that small caps are less than 10% away from all time highs.

Review of Our Small Caps (TLRA and WIFI)

Fundamental coverage can be found in PDF form by searching for the stock name.

Boingo Wireless (WIFI)

Boingo (WIFI) appears to have bottomed at the 50% retrace, which is ideal for a wave-2 bottom. We have gotten 5-waves off that low, which is also encouraging. It still has some work to do to confirm this uptrend, but so far, the structure is providing us with a 1-2 set-up pointing up. If it is valid, the 3rdwave is typically targeted around the 161.8% of wave-1, which puts us in a much higher region above the blue lines beginning around $13.50 with the potential to climb higher with a breakout.

If you want to go in on WIFI, I’d put a hard stop just under $9.55. Below this level invalidates the set-up and opens the door for more downside before a new uptrend can commence.

Telaria (TLRA)

Since we covered Telaria (TLRA), the stock is up about 12%. However, the structure is more ambiguous than WIFI, which is why I’m suggesting a tighter stop. I am leaning toward the more bullish set-up, which has us tagging the range in the red box above. However, we also have a potential 1-2 set-up pointing down. If TLRA closes below $6, this will invalidate the uptrend and suggest further downside.

 

KEEP IN MIND …

We have been leaning cautiously so far, and are due for a correction. Stocks are stretched as they are, and a correction would be healthy for further gains.

However, with the seasonality of small cap relative strength approaching in December/January, coupled with them breaking out right now, it’s worth acknowledging current set-ups are in place for two of our favorite small cap plays.