Tech Stock News – I/O Fund

Five Top Tech Stocks Of 2024: Year In Review

Posted on January 6, 2025June 30, 2026 by io-fund

This article was originally published on Forbes on Jan 1, 2025,06:21pm ESTForbes Forbes on Jan 1, 2025,06:21pm EST

The Nasdaq 100 is capping off 2024 with a return of 27.0%, building upon 2023’s 53.8% return (its best year since 1999). Since the start of 2023, the Nasdaq 100 has nearly doubled with stellar returns of 95.3%, its second highest two year performance since 1998 and 1999’s 274.2% rise.

This year, the Nasdaq had countless winners and strong repeat performances from AI leaders like Nvidia, but 5 stocks took the market by surprise with significant outperformance relative to the broader indices. I think it’s important to pause and draw some parallels around the stocks that performed well in 2024 to form an opinion on what might perform well in 2025, as many of the year’s top performers shared similar fundamental improvements or had similar thematic tailwinds such as AI, nuclear and quantum computing.

Below, I review five of the top stocks of 2024, selected based on their price action, fundamentals and presence withing leading tech themes. Choosing a top 5 means many great stocks were left off this list, yet this sample helps to form conclusions around how 2024 shaped up versus years past, centered around leading, core thematic opportunities.

Read about our Top 5 Stocks from 2023 here and our Top 5 Stocks from 2022 here – many of which went on to lead the following years.here and our Top 5 Stocks from 2022 here – many of which went on to lead the following years.

AppLovin (APP)

AppLovin was one of the Nasdaq’s best performers, up 735%and joining the Nasdaq 100 on a special rebalance in November. From the start of 2024, AppLovin rose from a mere $13 billion valuation to $111 billion, peaking above $135 billion in early December – the stock has done the unthinkable this year, awakening a low-growth mobile gaming ads industry with an AI engine that is showing demonstrable results.

This meteoric rise stems from APP’s AXON 2.0 AI advertising engine, which has driven significant revenue acceleration and massive fundamental improvements to margins and cash flow. AppLovin has reported four consecutive quarters with revenue growth above 30% YoY, a major acceleration from late 2022 and late 2023 where three of four quarters saw declining revenues. Management expressed confidence in maintaining 20% to 30% YoY growth for the foreseeable future due to the efficiencies of AXON’s self-learning and catalysts from web-based e-commerce expansion.

AppLovin has reported four consecutive quarters with revenue growth above 30% YoY, a major acceleration from late 2022 and late 2023. Source: I/O Fund

Not only has revenue accelerated substantially, but AppLovin’s margins have more than doubled further down the income statement. GAAP gross margin expanded more than 8 points to 77.5% in Q3, while operating margin rose more than 13 points to 44.6%. Taking a look annually, AppLovin is on track to potentially double its operating margin to ~38% from 19.7% in FY23. Additionally, net margin nearly tripled to 36% in Q3 on a GAAP basis, up from 13% a year ago. EPS rose 317% YoY to $1.25, with YTD EPS reaching $2.81, up 462% YoY.

AppLovin is on track to potentially double its operating margin to ~38% from 19.7% in FY23. Source: I/O Fund

AppLovin’s near-flawless execution has also translated to strong cash flow generation, with operating cash flow margin doubling, rising from 23% a year ago to 46% in Q3. Free cash flow margin followed, reaching 45.5%, up from 22% a year ago.

This kind of operating leverage while maintaining revenue growth rates in the 30% range is quite rare indeed, separating AppLovin from a majority of its ad-tech and software peers. Analysts are excited to see what the company’s expansion to e-commerce can contribute to growth and a path to $6+ in EPS next year from AppLovin’s very strong margin profile.

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Palantir (PLTR)

Palantir joins this Top 5 list for a second-year running, with shares rising 356%. My firm’s free stock newsletter previously pointed out that Palantir was “one of the rare few that sees AI drive both real returns for its business and real value for its customers,” as it continues to crush its software competitors in AI-related growth. Palantir’s Artificial Intelligence Platform (AIP) has driven a significant revenue re-acceleration following its launch, with profitability also expanding – a rare combination for growth software stocks.

Palantir has capitalized on the AI software opportunity at hand via AIP’s unique value proposition, its scalability and versatility. November and December’s partnership announcements alone help demonstrate the versatility of Palantir’s platform, spanning numerous different industries from autonomous drone navigation to AI models for defense tech to more government program wins. Palantir benefits from the best of both worlds in both government contracts and AI exposure, as enterprise adoption of AI builds.

For a deeper look at AIP and how it has been transforming Palantir and driving revenue growth higher, read This Stock Is Crushing Salesforce, MongoDB And Snowflake In AI Revenue.This Stock Is Crushing Salesforce, MongoDB And Snowflake In AI Revenue.

Palantir’s 2024 was characterized by strong underlying AI momentum, with Q3 seeing revenue growth reach 30%, more than 10 points faster than when it entered the year and nearly 5 points above guidance for 25.2% growth. AIP has aided this revenue acceleration story by driving significant growth in Palantir’s US commercial segment, with the past two quarters seeing growth there above 50% YoY.

Palantir’s 2024 was characterized by strong underlying AI momentum, with Q3 seeing revenue growth reach 30%, more than 10 points faster than when it entered the year. Source: I/O Fund

Similar to AppLovin, these AI growth tailwinds are not just driving revenue, but also aiding operating margin expansion and EPS growth. GAAP operating margin was 16% for the second quarter in a row, up 9 points from last year, while adjusted operating margin is approaching 40% and has been >30% for four quarters in a row. Cash flow margins have been strong — operating cash flow was nearly $420 million, or a 58% margin, while adjusted free cash flow was $435 million, a 60% margin in Q3, up from the low-20% range in the first half of 2024. Palantir is targeting adjusted FCF of $1 billion-plus this year, or ~36% of revenue.

Fundamentally, to have revenue growth around 30%, free cash flow margin of 30%, and adjusted operating margin nearing 40% is impressive, to say the least. Palantir’s returns this year reflect that fundamental strength from AI-driven growth as well as optimism about its AI growth prospects for next year.

IonQ (IONQ)

Quantum computing stocks have been on a tear to end the year, with a handful of names seeing returns of more than 2,000% over the past three months. IonQ has risen 244% on surging enthusiasm for the quantum computing sector and revenue reaccelerating 40 percentage points over the past three quarters.

IonQ reported $12.4 million in revenue in Q3, with revenue growth of 102% YoY, following on 106% YoY growth in Q2. This has accelerated 42 points from 60% YoY growth in Q4, as IonQ is starting to quickly scale revenues as it has been consistently delivering on its technical roadmap ahead of schedule. IonQ also slightly raised its full year revenue guidance to $40.5 million at midpoint, for growth of 84% YoY.

As it is still in its scaling phase, IonQ is by no means profitable or close to profitability, with analysts not expecting the quantum computing firm to break into profitability until well after 2027. However, revenue is currently expected to grow at a ~95% CAGR through 2027, from $22 million last year to an estimated $315 million.

IonQ's revenue is currently expected to grow at a ~95% CAGR through 2027, from $22 million last year to an estimated $315 million. Source: I/O Fund

This positioning in a leading theme among investors in the second half of 2024, as well as consistent execution ahead of schedule with revenue growth forecast to rise at a nearly triple digit CAGR through 2027 has landed IonQ a spot on this list.

Reddit (RDDT)

Despite not even trading for the entire year with its IPO in March, Reddit has returned a remarkable 224% from its first day close of $50.44. The social media and online community platform reported a blowout beat and raise in Q3, with investors eyeing some AI training data opportunities ($60M/year deal with Google) on top of strong advertising growth.

Q3 revenue rose 68% YoY to $348 million, a 14 point acceleration from 54% YoY growth in Q2 and up 20 points from 48% YoY growth in Q1. Advertising revenue growth accelerated 15 points sequentially, rising 56% YoY to $315 million. Q4’s guide for $385 million to $400 million in revenue came in well above the $361 million consensus estimate, pointing to growth of 57% YoY. The market is expecting another blowout in Q4, with analysts already projecting $403 million in revenue, above the high end of management’s guided range.

Reddit's Q3 revenue rose 68% YoY to $348 million, a 14 point acceleration from 54% YoY growth in Q2 and up 20 points from 48% YoY growth in Q1. Source: I/O Fund

Reddit is demonstrating significant operating leverage, as it surprised the Street by reporting GAAP net income in the high single-digit percents in the quarter. GAAP operating expenses rose 53% YoY, less than that 68% YoY revenue growth, pushing GAAP operating margin to 8.6%, up from (3.4%) a year ago and (3.7%) in Q2.

Cash flow generation has improved, with Reddit generating $71.6 million in operating cash flow and $70.3 million in free cash flow in Q3, or margins of ~20%. This doubled from ~10% cash flow margins in Q2. Adjusted EBITDA has increased more than 9x from the start of the year, at $94.4 million in Q3, a 27% margin, up from just $10.0 million in Q1.

Reddit excites the market due to its fundamentals — a 90% gross margin business quickly shifting to GAAP profitability on rapid quarterly revenue growth. This combination hints at potentially strong EPS growth, should it scale from the single-digit net margin range of 8.6% in Q3, to the double-digit range in short time.

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Astera Labs (ALAB)

Though Nvidia arguably deserves a spot on this Top 5 list with a 114% gain following Hopper’s breakout 2023, with data center revenue continuing to beat estimates by $1 billion each quarter, I think it’s time to highlight an Nvidia supplier and ASICs beneficiary – Astera Labs. Astera returned 179% in Q4 for a total YTD gain of 128%, with the company showing multiple growth opportunities and a push for profitability despite still solidly being in its hypergrowth phase.

Astera is a major supplier to Nvidia’s PCIe-enabled GPUs with PCIe5 retimers and components, and its upcoming Scorpio fabric switches built on its lead in PCIe5. Management expects the new product to “exceed 10% of revenues in 2025” with “good momentum going into 2026” as it unlocks a $12 billion TAM by 2028.

Astera reported record revenue of $113.1 million in Q3, up 47% QoQ and 206% YoY, beating estimates by 16.1%. Management guided for $126 million to $130 million in revenue in Q4, well ahead of the $108 million consensus estimate and representing YoY growth of 153%, its fifth consecutive triple-digit growth rate.

Astera Labs reported 206% YoY revenue growth in Q3 and guided for 153% YoY growth in Q4, its fifth consecutive quarter of triple-digit growth. Source: I/O Fund

Even with revenue growth expected to be triple-digits for at least the next two quarters, management forecast for GAAP net income in Q4, though at a razor thin margin. GAAP operating margin is moving towards positive territory, from (7.9%) in Q3 to (4.3%) at midpoint of Q4’s guide. Adjusted operating margin expanded significantly to above 32% in Q3, up from 2% a year ago, while adjusted net margin improved 35.6% compared to (-1.1%) last year.

Astera was one of a handful of AI-exposed semiconductors to see dazzling returns this year, as AI semiconductors remained investor favorites throughout the year. Astera also shared key similarities to the rest of this list: adjusted margins showing strong expansion, high cash flow margins (56% operating cash flow margin in Q3), and AI-related rapid revenue growth.

For a more detailed look at Astera’s product lines, Blackwell and ASICs opportunities and its AI-driven TAM growth, read more here.here.

Conclusion

If there’s one major takeaway from this selection of 2024’s top tech stocks, it’s that being at the top comes with quite the price tag and premium. All five of these stocks trade at quite high multiples, headlined by IonQ at 230x forward revenue and Palantir at a 2021-esque 63x forward revenue and 32x 2027 revenue. Astera Labs trades at 53x forward revenue, while AppLovin and Reddit are not quite as high, at 24x and 22x respectively. However, these revenue multiples are all 130% to 500% higher than they were six months ago, highlighting just how quickly these five have gotten more expensive as they’ve rallied.

All five of these stocks trade at quite high multiples, headlined by IonQ at 230x forward revenue and Palantir at a 2021-esque 63x forward revenue and 32x 2027 revenue. Source: YChartsYCharts

Looking back at 2024 can be important as it often provides clues for tech investors as the new year begins. Winners have kept winning, from Nvidia to the five discussed here, and that is one reason I like to reflect on the clear winners from the previous year. These five stocks above highlighted similarities among winning tech stocks in 2024 – presence and prevalence in leading themes such as AI and quantum computing, strong revenue acceleration (and rapid growth), and operating leverage driving margin expansion.

For 2025, the I/O Fund has worked to identify key Nvidia suppliers with Blackwell on deck to ramp significantly, sharing this research and buy zones with premium members. Stay tuned for our upcoming 2025 and Q1 webinars to hear more about what the I/O Fund expects for the new year. Learn more here.

I/O Fund Equity Analyst Damien Robbins contributed to this report.

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

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Five Top Stocks Of 2023: Year In Review

Posted on January 9, 2024June 30, 2026 by io-fund

This article was originally published on Forbes on Jan 4, 2024,11:27am ESTForbes Forbes on Jan 4, 2024,11:27am EST

The Nasdaq 100 capped off 2023 with a return of +53.8%, erasing 2022’s losses and recording its highest annual return since 1999. This year had countless winners, but 5 stocks surprised and shocked the market with significant outperformance relative to the broader indices.

We think it’s important to pause and draw some parallels around the stocks that performed well in 2023 to form an opinion on what might perform well in 2024, as well as identify common themes that are seeing high levels of investor interest, such as AI.

Below, we review five top stocks of 2023, selected based on their price action and strong fundamentals. Choosing a top 5 means many great stocks were left off this list, yet this sample helps to form conclusions around how 2023 shaped up as a different trading environment from years past.

Read about our Top 5 Stocks from 2022 here.

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Nvidia

It wouldn’t be a top 5 list without Nvidia, with shares surging past a $1 trillion valuation as the company rapidly became the face of the AI revolution taking the market by storm. One phrase from CEO Jensen Haung sums it up nicely: Generative AI is the largest TAM expansion of software and hardware that we've seen in several decades.

Nvidia has added $800 billion in market cap this year as data center revenues continue a streak of triple-digits YoY growth due to soaring AI chip demand. Data center revenues have risen from a record $4.28 billion in Q1 this year to $14.51 billion in Q3 – a 217% increase in just two quarters. Total revenues for the data center are projected to reach $46.6 billion this year as Nvidia is expected to ship at least 550,000 of its highly popular H100 GPUs.

Source: Twitter

Regardless, the market has rewarded Nvidia handily for building an AI GPU empire so strong, every major cloud provider, from Amazon to Microsoft to Google to Oracle and others, are all scrambling to secure supply. Revenues for fiscal 2024 are projected to increase 118% YoY to $58.9 billion, followed by another 53% YoY increase to $90 billion for fiscal 2025, and it’s this growth at such a scale that has driven Nvidia’s outsized returns this year. The Street is also rewarding Nvidia’s strong margins and FCF generation, as it had the best cash flow margins of the Magnificent 7 in Q3: a 40.5% operating cash flow margin and 39.8% free cash flow margin.

2023’s market has seen very narrow leadership, and Nvidia has been one of the de facto leaders within that narrow leadership.

The I/O Fund was early to this year’s move in Nvidia with a bold analysis in 2021 that claimed Nvidia will surpass Apple in valuation. In January of 2023, Beth also stated Nvidia was a top pick for 2023. Later, it became one of the best performing stocks of the year. Sign up Nvidia will surpass Apple in valuation. In January of 2023, Beth also stated Nvidia was a top pick for 2023. Later, it became one of the best performing stocks of the year. Sign up today to stay on the leading edge with Nvidia and get an update on the long-term thesis in the coming weeks, with details on how Nvidia will close-in on the next trillion in market cap.

Palo Alto Networks

Palo Alto returns to the top 5 list after being featured in last year’s edition, with shares up 111% as cybersecurity has been one of the strongest sectors this year. Palo Alto’s stance as a one-stop cybersecurity shop offers what we previously called the “best of both worlds” – it has potential to accelerate revenue growth from its platform approach, and has an enviable bottom line.

The market has rewarded Palo Alto for its shift to become “firmly GAAP profitable,” a key differentiator from a majority of other cloud stocks. Gross margin expanded 440 bp to reach another record level at 74.8% in the most recent quarter. Operating margin increased 1050 bp from 1% a year ago to 11.5%. This strong increase in operating leverage has greatly benefited Palo Alto’s bottom line, with net margin at two consecutive quarters above 10%.

Source: YCharts

Palo Alto is reporting strong underlying metrics, especially with its next-gen offerings. Next-Gen Security ARR increased +53% YoY to $3.23 billion, and SASE ARR increased +60% YoY. Palo Alto witnessed very strong growth in multi-module customers, with +155% YoY growth in those adopting 5+ modules, and +59% YoY growth in those adopting 3+.

We discussed in early October how cybersecurity will be the next industry disrupted by AI, and the market is already looking to select the frontrunners in this trend. Palo Alto and peer CrowdStrike, an honorable mention on the list, are two of the market’s favorites in 2023 stemming from GAAP profitability and strong cash flow.

Duolingo

It might be the odd one out on this list for many tech investors, but Duolingo (DUOL) is not to be ignored: it has proven this year that it’s a textbook growth stock, boasting a 219% return. It’s also hard to argue with the strength of Duolingo’s growth flywheel, as active user metrics, paid subscribers, and bookings grow at a blistering pace.

Source: Duolingo

MAUs increased 47% YoY to 83.1 million, the third straight quarter with growth above 47%. DAUs rose 63% YoY to 20.3 million, the fourth quarter in a row with growth above 62%. Paid subscribers also rose 60% YoY to 5.8 million. Bookings growth has accelerated each quarter this year, from 37% in Q1, to 43% in Q2, and now to 49% in Q3.

Revenue is on the verge of breaking $500 million on a TTM basis, and bookings have topped a $600 million annual run rate. While it is easier to see hypergrowth at a smaller scale of revenue, Duolingo is showing no signs of slowing – very few hypergrowth stocks, if any, can say the same this year.

One other factor behind Duolingo’s stellar year is a shift to two consecutive quarters of GAAP profitability, and strong expansion in adjusted EBITDA margins. GAAP net margin in Q3 was 2%, and though it is razor thin, the market is looking forward to how revenue hypergrowth will translate to increased operating leverage, and ultimately, a strong net margin expansion. Adjusted EBITDA margin was above 16% in both Q2 and Q3, up from the 2% range last year – a hint of what the Street is anticipating for the bottom line.

Palantir

Palantir rounds out the top five as another Street favorite in AI, with the company’s Artificial Intelligence Platform (AIP) driving an acceleration in growth. Palantir is seeing strong growth in its US commercial segment due to AIP, which launched in June and has since seen remarkable growth. A shift to GAAP profitability and an ensuing four consecutive quarters with GAAP profits cemented its spot as a top tech stock with a 167% rally this year.

Source: YCharts

Palantir nearly tripled the number of AIP users in the past quarter, with over 300 organizations using the new product in the last 5 months. Palantir can “more aggressively invest” in AIP and other AI products without sacrificing margins due to its GAAP profitability, a key differentiator from a majority of cloud AI plays, who are investing in growth at the expense of margins.

The US commercial business accelerated in Q3, rising 52% YoY and 19% QoQ, due to the “rapid expansion of AIP at both our existing and new customers.” This acceleration in a key segment combined with strong adoption of an AI model has sparked optimism, with shares adding +34% in November before pulling back in December.

The market is forward looking, and in Palantir’s case, the market is looking forward to a revenue reacceleration in 2024, another catalyst for the rally Palantir has enjoyed this year. Revenue growth is poised to accelerate in Q4 and through 2024, boosted by AI demand, reacceleration in Palantir’s US government segment, and continued strength in the US commercial side. Palantir is projected to report 18.5% YoY growth in revenues in Q4, the highest in five quarters, and 2024 is expected to see a marked acceleration — current projections point to a 320 bp acceleration in Palantir’s revenue growth rate to 19.7% YoY.

Conclusion

Looking back at 2023 is important as it often provides clues for tech investors as we move forward into 2024. Winners keep winning, and that is one reason we like to reflect on the clear winners from the previous year.

The stocks above have proven they do not need good or easy conditions to perform well. It can be hard to have a repeat year as often investors will take gains, and there’s certainly gains to take in the five stocks listed above. Therefore, we are searching for patterns rather than attempting to exactly repeat 2023. This pattern is expanding margins, strong cash flows, shifts to GAAP profitability, and any hint or sign of accelerating revenue growth.

Recommended Reading:

Top 5 Stocks Of 2022: Year In Review

Posted on January 11, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Jan 6, 2023,09:04am ESTForbes on Jan 6, 2023,09:04am EST

In this analysis, rather than prognosticate on the top stocks of 2023, we think it’s more productive to go back and review the stocks that performed well under new macro conditions in 2022. This exercise helps to inform tech portfolios for the upcoming year as investors can reasonably assume 2023 will look more similar to 2022 than the preceding years.

2022 was a very volatile year for the stock market with rising rates, inflation, and geopolitical tensions leading to sudden sell-offs. All three main U.S. indices ended the year with negative returns, with Dow Jones Industrial Average down 6.86%, S&P 500 index down 18.11%, and Nasdaq down 32.54%. Despite the indexes being in the red, some stocks greatly outperformed the broad market.

We think it’s important to pause and draw some parallels around the stocks that performed well in 2022 to form an opinion on what might perform well in 2023. This is assuming macro will be more similar to 2022 than the preceding years, which is a reasonable assumption to make at this time.

Below, we review the top five stocks of 2022. These stocks were chosen based on their price action and strong fundamentals. Choosing a top 5 means many great stocks were left off this list, yet this sample helps to form conclusions around how 2022 was a different trading environment from years past.

Source: Ycharts

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Super Micro Computer (SMCI)

Super Micro Computer stock had 2022 returns of 86.8% and is the best-performing stock in our tech universe. Below is a chart that shows the quarterly year-over-year revenue acceleration Super Micro posted in 2022, which helped support its 2022 winning streak.

Pictured above is SMCI’s Qly revenue YoY growth. – Ycharts

The company provides server and storage solutions to data centers, cloud computing, 5G, AI, and edge computing markets. The company was recently added to the S&P MidCap 400 Index and enjoys tailwinds from leading semiconductor companies such as AMD, Nvidia, and Intel.

In the recent earnings call, the founder and CEO of the company, Charles Liang said, “For Intel, we are engaged with many large opportunities with Intel’s upcoming Gen 4 scalable Xeon CPU codenamed Sapphire Rapids. We now have hundreds of early seeding engagements including several dozen early shipments. Similar programs have been executing with AMD, and we have seen very strong demand for our upcoming Genoa CPU based platforms.”

“With respect to NVIDIA, not only do we have the most complete portfolio of systems supporting H100 GPUs, but we have also developed many brand new architectures for the leading Metaverse and Omniverse partners.”

The company’s revenue in the recent quarter, Q1 FY23, grew by 79% YoY to $1.85 billion. The gross margin improved to 18.8% in Q1 FY23 up from 13.4% in the same period last year. The company’s profits have grown steadily with net income of $184 million compared to $25 million in the same period last year. The stock is currently trading at a P/E ratio of 10.3 and a fwd P/E ratio of 8.1.

Source: Ycharts

Microsoft (MSFT)

Microsoft was one of the best performing tech mega cap stocks last year ending the year down (28%), compared to Meta and Tesla, which ended the year down (64%) and (65%), respectively. Notably, Microsoft narrowly beat the Nasdaq in 2022.

The company is positioned for outsized growth due to its exposure to secular tailwinds such as Artificial Intelligence (AI), Machine Learning (ML), and the build out of the 5G edge network. Microsoft could take a substantial share of these markets at the infrastructure level due to its relationships with the Fortune 500 and Global Fortune 2000.

In addition to top-down enterprise penetration across the Fortune 500, Microsoft is also focused on developers to help complete Microsoft’s customer cloud strategy. Microsoft addressed its previously poor reputation in open-source communities by acquiring GitHub for $7.5 billion in 2018. Developers help determine the cloud IaaS service an enterprise or SMB customer will choose, so in-roads into this community could help Microsoft hedge the developer favorite, Amazon Web Services.

The company’s Q1 FY23 revenue grew by 11% YoY and down 3.4% QoQ to $50.1 billion.

Operating income increased by 6% YoY to $21.5 billion. Net income was $17.6 billion compared to an adjusted net income of $17.2 billion in the same period last year (adjusted net income in the previous year as the company received income tax benefit last year).

The net profit margin was 35% in the recent quarter.

Microsoft has proven it has many levers it can pull during a tougher macro compared to its mega cap tech peers – primarily seen in the consistency of its profit margin.

Source: Ycharts

Due to Microsoft being a leading tech stock that the I/O Fund plans to buy on any weakness, we have included a YouTube clip from Portfolio Manger Knox Ridley of the 2023 price action we are expecting for Microsoft including sample entries.

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The I/O Fund has launched a new $99/year Premium Newsletter called "Essentials" — this newsletter delivers premium samples for our readers who want more actionable analysis for their tech portfolios. This month, we released a stock pick that we believe will be a leader in 2023 plus a video with the buy plan.$99/year Premium Newsletter $99/year Premium Newsletter called "Essentials" — this newsletter delivers premium samples for our readers who want more actionable analysis for their tech portfolios. This month, we released a stock pick that we believe will be a leader in 2023 plus a video with the buy planbuy plan.

ASML Holding (ASML)

ASML Holding is benefitting from strong semiconductor equipment demand from the leading foundry companies. As new fabs are built, these companies will need equipment in the coming years. The company’s fiscal year 2022 revenue analysts estimate rose 12% in the last 2 months. The company raised the 2025 revenue guidance to be between €30 billion and €40 billion, up from the previous guidance of €24 billion to €30 billion. The company in its press release acknowledged, “While the current macro environment creates near-term uncertainties, we expect longer-term demand and capacity showing healthy growth.”

The company’s Q3 revenue was €5.8 billion compared to €5.2 billion in the same period last year. The management expects Q4 revenue to be between €6.1 billion to €6.6 billion. The gross margin was 51.8% compared to 51.7% in the same period last year. Net income was €1.7 billion (net profit margin of 29.4%) compared to a net income of €1.7 billion (net profit margin of 33.2%) in the same period last year.

The company has a strong backlog of over €38 billion. The company’s CEO Peter Wennick said in the earnings call, “And as a matter of fact, our 2023 shipment demand is still significantly above our build and shipment capacity for next year. And this is supported by the record bookings this quarter, of €8.9 billion and our largest backlog ever of over €38 billion. Almost 85% of this backlog is for EUV and immersion, which is used for advanced nodes and related wafer capacity expansions.”

Palo Alto Networks (PANW)

Leading cybersecurity company Palo Alto Networks has a strong free cash flow margin, which is rare in the cloud and cybersecurity category. The company has been GAAP profitable for the last two quarters. The company’s revenue in the Q1 FY23 grew by 25% YoY to $1.6 billion, which was above the management guidance of $1.535 billion to $1.555 billion.

The company’s margins are improving. The company reported a GAAP net income of $20 million compared to a GAAP net loss of ($103.6) million in the same period last year. The adjusted net income was $266.4 million compared to $170.3 million in the same period last year. Consistent GAAP profitability is key in this macro environment.

The company reported free cash flow of $1.2 billion (76.6% of revenue) compared to $554 million in the same period last year (44.4% of revenue). Dipak Golechha, CFO of the company, said in the earnings call, “This cash flow performance was largely driven by strong collections in the quarter, that we expected based on the strength of our business in Q4.” The management has guided an adjusted free cash flow margin in the range of 34.5% to 35.5% for the FY23.

Dipak Golechha said, "We exceeded our top-line guidance while generating $1.2 billion in free cash flow and expanding our operating margins," He further added, "We will continue to balance growth with profitability and cash generation to further strengthen our position in the market."

Source: Ycharts

First Solar (FSLR)

Solar stocks were the leading sector in tech last year. First Solar ended the year on fire with a return of 72% compared to the (33%) return of the Nasdaq. The sector got a boost from the Inflation Reduction Act of 2022, which we covered last year in our free newsletter when we said:

“The solar industry will benefit since Inflation Reduction Act includes the extension of Production Tax Credits (PTCs) and Investment Tax Credits (ITCs) for the construction of wind and solar projects beginning before January 1, 2025. It means a three-year extension for PTCs and a one-year extension for ITCs.

It also extends the 30% federal tax credits for installing solar panels on rooftops by another 10 years, from 2022 to 2032. Solar installations are eligible for 26% tax credit for installations in 2020 and 2021. It now extends till 2032 for 30% tax credits, and in 2033 the tax credit will be reduced to 26% and 22% in 2034. There will be no tax credit after this period unless Congress renews it. Home battery systems that store energy generated by solar systems for later use will also be eligible for a 30% tax credit.”

First Solar is a leading provider of photovoltaic (PV) energy solutions. It is one of the major beneficiaries of the IRA in the form of solar manufacturing tax credits. The company was also recently added to the S&P 500 index.

The company announced last year its plan to invest $1.2 billion to expand its solar module manufacturing in the U.S. It includes a $1 billion investment for a new manufacturing facility in the Southeast U.S. and $185 million for the upgradation of the existing Ohio facility.

Mark Widmar, CEO of the company, said in the Q3 earnings call, “In our view, by passing and enacting the Inflation Reduction Act of 2022, Congress and the Biden-Harris administration has entrusted our industry with responsibility of enabling and securing America's clean energy future, and we recognize the need to meet the moment in a manner that is both timely and sustainable.”

The company’s Q3 2022 revenue was up 7.8% YoY to $628.9 million. It reported a net loss of ($49.2 million) compared to a net income of $55.8 million in Q2 2022 and $45.2 million in the same period last year. The company benefitted from the gain from the sale of the Japan project development platform in the Q2 2022 and also experienced higher logistics charges in the recent quarter.

Mark Widmar, CEO of First Solar said, “Our focus continues to be on setting the stage for long-term growth, and from this point of view, 2022 has so far proven to be foundational,” He further added, “This year we have developed the potential for our CdTe semiconductor technology by progressing our next-generation Series 7 and bifacial platforms, set in motion plans to scale our global manufacturing capacity to over 20 GWDC by 2025, and secured record year-to-date bookings of 43.7 GWDC with deliveries extending into 2027.”

Conclusion:

The I/O fund is an actively managed tech portfolio that is audited and we carefully choose our positions to reflect the current macro environment for tech. Therefore, our analysis is very actionable and I strongly feel that looking back at 2022 is providing clues for tech investors as we move forward into 2023.

This week, I recently stated on our research site’s private forum:

“My concern for retailers is that the underlying tone is that macro will clear up quickly and tech darlings will return. It's more likely macro will be throwing curveballs for some time. To put it another way, it's obvious that 2022 was terribly bad for investors, but what if the real issue is that the previous years were so terribly good/easy. Will those good/easy conditions return?

Part of the good/easy conditions was fueled by the venture capital cycle. When every tech company going public has high growth rates yet is losing on the bottom line, and it's clear the market is still awarding the poor bottom lines with sky high valuations, what you get is a runaway train of a bull market.”

The stocks above have proven they do not need good or easy conditions to perform well. It can be hard to have a repeat year as often investors will take gains, and there’s certainly gains to take in the names listed above. Therefore, we are looking for a pattern rather than attempting to exactly repeat 2022. This pattern is expanding margins, strong free cash flows, and any hint or sign of accelerating revenue.

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

Roku Stock May Rebound From Easing Supply Chain Issues

Posted on April 13, 2022June 30, 2026 by io-fund

This article was originally published on Forbes on Apr 7, 2022,11:53pm EDTForbes on Apr 7, 2022,11:53pm EDT

Last week, we discussed signs of improvement at key automotive semiconductor suppliers and why this was affecting ad-tech stocks. Supply chain issues are causing a ripple effect due to automotive being a significant category of ad spend and due to low inventory, advertising budgets are being slashed. As stated in last week’s analysis, our expectation is that supply issues will ease by Q3 causing both automotive and ad-tech to rebound.

Specifically, it’s the extremes of seeing a $300 billion drawdown in inventories in Q2 2020 followed by the largest increase on record of inventory levels in Q4 2021. We believe this sharp rebound helps highlight that production is catching back up with demand.

Supply Chain Impact to Roku Stock and Ad-tech Going Forward

Below, we discuss why Roku stock could be set to rebound when supply chain issues begin to ease due to extreme oversold conditions based on transient headwinds. We also discuss more in depth the supply chain rebound we are forecasting for some time around the second half of 2022.

Source: U.S. Bureau of Economic Analysis (I/O Fund)

While supply chain constraints are expected to remain tight in 2022, there are numerous signs that the bottom is in. For instance, aggregate inventories rebounded strongly in Q4 2021 and have made up most of the decline from production halts during Q2 2020. Moreover, inventories relative to aggregate sales are at multi-year highs. The rebound in aggregate inventories suggests that supply chain constraints are normalizing for the broader economy.

Connected-TV (CTV) is particularly exposed to automotive advertising budgets, and a rebound in automotive inventories will be a tailwind for CTV ad-tech companies such as Roku. Automotive ad spend was just 15% of its pre-pandemic levels, largely due to the shortage of automotive inventories.

During the Q4 earnings call (02/17/22), Roku’s management explained how automotive was ‘soft’ during the quarter, yet they expect this to be a temporary trend. Roku CFO Steve Louden made a good point during the Q4 call, stating that automotive manufacturers are much stronger today than they were at the start of the pandemic, meaning that these brands have increased capacity to market their brands going forward.

For instance, if the top two automotive ad spenders (Volkswagen and Toyota) grow their topline by the midpoint of their respective guides and if their sales and marketing margins normalize to pre-pandemic levels, then aggregate ad spending could rise by about ~25% YoY in 2022, up from the ~6% YoY rise in 2021. Rising ad spend from these two leading manufacturers will likely spur marketing investments from peers.

Despite lower growth in Q1, Roku reiterated full year 2022 growth in the mid-30s. Going into the report, analysts were expecting 36% annual growth. The ad platform missed analyst expectations at $703 million compared to $732 million expected.

EBITDA was a miss with company guiding for $55 million compared to the consensus for $79 million in the upcoming Q1 quarter. The company plans to spend $1 billion on operations, which translates to investments in headcount, The Roku Channel (which is producing originals), and the Roku TV program (which means growing operating system market share).

The $1 billion in expenses is not overly concerning although it’s certainly an adjustment in expectations as the Street may have believed that Roku’s earnings were quickly scaling, but this was impacted by a slowdown in expenses during covid, and now those expenses need to ramp in the upcoming year to remain competitive.

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I/O Fund Financial Analyst Bradley Cipriano stated in a research note to our clients that Netflix's operating expenses ramped nearly $1 billion YoY when it passed $3 billion in revenues in 2011, which Roku is nearing. Viewed differently, the expected revenue growth in FY2022 of $830 million will be accompanied by a $1 billion rise in expenses, meaning that each $1 of expenses will drive just $0.76 of revenue, which is the lowest value in Roku's history. This suggests that growth is much more expensive than in prior years.

However, this is likely due to the slowdown in investments made during 2020 and 2021, and the three-year average for the above metric is 1.08x (including FY2022), meaning that each $1 of expenses resulted in $1.08 in revenues. This is above the prior three-year average of 1.04x (2019-2017), highlighting that over a longer time frame, Roku is in fact demonstrating leverage, albeit it is lumpy. FY2021 and FY2022 also includes the Player gross loss headwind that wasn't the case in prior years, and adjusting for this, the three-year average would be even higher. The takeaway is that the rise in expenses seems in-line with historical trends once we account for COVID.

The lower EPS this year is a headwind to the company's valuation, but it is expected to be profitable in FY2023. The company should be cashflow positive in FY2022 and with $2.1 billion in cash on balance, likely should not need to dilute shareholders despite the losses. There is also some leverage to improve earnings as there were $82m in one-time expenses during the most recent year.

If we widen our view, we will see that 2020 was the first year Roku was EBITDA positive and the company is expected to remain EBITDA positive this year. Most importantly, Roku has leverage with a gross profit of $1.4 billion and they are choosing to spend for top line growth.

Overall, Roku is a more complex product story because the strategy is to conquer from many angles. It’s an ad exchange, it’s a content channel, it’s an operating system and it’s a hardware player. It also owns the best first-party data available on CTV ads and I tend to stick with the data in terms of ad-tech. So, that’s primarily the reason we own Roku and continue to own Roku.

Regarding Roku’s recent price action, we look for dislocations within the markets and we believe transitory supply chain issues have caused the dislocation seen below in Roku’s valuation and its forward estimates. Most of tech has seen a dislocation between January-March, although Roku’s dislocation is particularly steep.

What is most striking about the divergence above is that the current selloff has provided a much cheaper stock than during the pandemic when many businesses were shut down entirely and ad budgets halted.

Despite strong growth estimates in the second half of the year, the forward PS on Roku reached 4x, which we consider to be extreme to the downside. We took this opportunity to begin building up Roku and other key ad-tech allocations. We also believe that Q4 2021 will likely represent a ‘bottom’ in automotive supply constraints, and that ad spend from automotive manufacturers will rebound going forward as supply chain constraints begin to ease.

More Data Supports Supply Chain Issues Easing in Q3

Please reference our first article “Supply Chain Issues Could Recover In Q3 2022” Supply Chain Issues Could Recover In Q3 2022” for additional data points.

The surge in raw materials and work-in-process inventory at major auto manufacturers adds further support that auto companies are positioned to quickly ramp production. As shown below in Chart 8 and 9, both aggregate automotive raw materials and work-in-process inventories have increased to a five-year high relative to total inventory.

Chart 8. Aggregate Automotive Raw Materials to Inventory Ratio

Source: Auto manufacturer filings (I/O Fund)

Chart 9. Aggregate Automotive Work-in-Process to Inventory Ratio

Source: Auto manufacturer filings (I/O Fund)

What this trend shows is that automotive manufacturers have high levels of working capital stored in near-complete inventory. Once semiconductor supplies arrive, we should expect automotive manufacturers to quickly convert this inventory into finished goods. A build in finished goods inventory should also lead to a strong rebound in advertising budgets from the automotive industry.

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Since the semiconductor shortage is a systemic issue, we should expect auto manufacturers to ramp spending at the same time. Furthermore, auto manufacturers will likely look to quickly offload their inventory to avoid oversupply and capture market share. This trend should help drive demand for ad spend going forward.

Notably, the timing of this ramp remains unknown, with some auto executives expecting H2 2022 to be a return to normal, and others forecasting a longer horizon. We discussed this trend in more detail in last week’s analysis.

Chart 10. Aggregate Automotive Finished Goods to Inventory Ratio

Source: Auto manufacturer filings (I/O Fund)

Automotive semiconductor OEMs report rising inventories and increasing capex

IHS Markit estimated that North American vehicle production in 2021 increased just 1% YoY to 13.1 million. In 2022, vehicle production is expected to rebound and increase 13% YoY to 14.7 million units in 2022 but remain below the 15 million vehicles produced in 2019.

Nonetheless, the rebound in production should support a rebound in ad spend going forward.

While there remains considerable uncertainty due to the cadence of the ramp in vehicle production, there are signs of improvement from key automotive semiconductor suppliers.

For instance, Infineon Technologies, a key supplier of inverters for automotive applications, stated during their latest earnings call (02/03/22) that “the December quarter was the first one in a while where we did not experience [supply] disruptions”. Management added that tightness remains in securing foundry supply, but that wafer supplies are expected to materially improve in the second half of 2022.

The below charts highlight how raw material inventories have been rising for key automotive semiconductor suppliers, a trend that supports a rebound in supply going forward.

A rise in raw materials signals that companies are expected to ramp production in the near term. Furthermore, these automotive semiconductor suppliers have also ramped capacity, as aggregate capex for the group increased 29% YoY to nearly $8 billion. A rise in capex signals that management is increasing supply capacity in anticipation of future demand growth. The concurrent rise in raw materials and capex signals that supply will improve going forward, suggesting that we are nearing a trough in semiconductor imbalances in the auto industry.

Chart 11. Recent Trends in Raw Material Inventories for Automotive Semiconductor Producers

Recent Trends in Raw Material Inventories for Automotive Semiconductor Producers (I/O Fund)

Chart 12. Recent Trends in TTM Capex from Automotive Semiconductor Producers

Source: Company filings (I/O Fund)

We believe that 2021 will likely represent a ‘bottom’ in automotive supply constraints, and that ad spend from automotive manufacturers will rebound going forward as supply chain constraints begin to ease. However, semiconductor supply is expected to remain tight throughout 2022, which is the main bottleneck impacting the ramp in auto production. With record levels of idle work-in-process inventory, we believe that auto manufacturers will quickly ramp ad spend to turnover their inventory once semiconductor supply reaches them. With semiconductor OEMs reporting a ramp in both capacity and raw materials, we believe that automotive ad spend will be a tailwind for ad-tech going forward, with a significant ramp in H2 2022 and into 2023.

Roku has been a strong and steady performer in terms of revenue growth and improvement in the bottom line since going public. In six years, Roku has been able to grow its revenue 850% from $398 million in 2016 to an estimated $3.72 billion for FY2022. The Trade Desk will have grown 687% on a lower revenue base while trading 3X higher.

Even with increased spending of $1 billion, it’s important to consider that the company has leverage in its business model. Critics will point out that TTD has a much better operating margin – but time will tell if Roku has chosen the correct strategy to own the real estate. To me, this is arguably the better business model considering the average consumer owns their connected TV for seven years. If so, the current valuation for Roku is too low compared to its forward growth, which made it a buy in Q1.

Financial Analyst Bradley Cipriano, CFA, CPA at I/O Fund, contributed to this analysis.

Supply Chain Issues Could Recover In Q3 2022

Posted on April 6, 2022June 30, 2026 by io-fund

This article was originally published on Forbes on Apr 1, 2022,01:24pm EDTForbes on Apr 1, 2022,01:24pm EDT

Aggregate Inventories Have Recovered but Auto Inventories Remain Under Pressure:

Supply chain issues have been a well-publicized event that has been hard to predict. While there have been improvements in supply chain management since the harsh production halts enforced during the pandemic, semiconductors continue to be a bottleneck in numerous industries, especially automotive.

Furthermore, the semiconductor bottleneck has had a ripple effect and has impacted industries outside of automotive production, such as ad-tech. In fact, ad-tech has been one of the most beaten-down industries due to the supply chain crisis. This is because automotive is a significant category of ad spend, and without inventory to sell, advertising budgets have been slashed. Nonetheless, we expect that this is only a temporary concern and that ad-tech will rebound in 2022 as supply chain issues begin to normalize. We especially look for discounts in tech that stem from a transient yet external issue outside of any individual company’s control.

The I/O Fund team went beyond relying on management commentary and studied the data to better understand the supply chain bottleneck. We found that aggregate inventory levels have generally recovered, but automotive inventories remain under pressure. I/O Fund Financial Analyst Bradley Cipriano notes that an analysis of automotive inventory composition suggests that the supply-chain issues have likely bottomed and will improve going forward.

The I/O Fund chose to be aggressive during the Q4 earnings season between January and March by building ad-tech positions for this reason. We expect that improving inventory trends will lead to a sharp rebound in automotive advertising in the back half of the year, driving topline growth for the ad-tech sector. We discuss why we believe that the supply chain crisis will ease around H2 2022 below.

Supply Chain Management: Aggregate Inventories Have Recovered but Auto Inventories Remain Under Pressure

The pandemic began in early 2020 and resulted in a whipsaw effect that impacted both supply and demand. With governments enforcing strict shelter in place orders, production of goods declined in 2020 but consumers still demanded goods. Government stimulus further bolstered demand and there was less of a contraction in total demand than there otherwise would have been. This dynamic led to the supply shortage that many sectors have been working through.

Since inventories are essentially the difference between production and sales over a period of time, the dynamic of reduced production but increased demand led to a sharp reduction in inventories in 2020 and 2021. As shown below in Chart 1, changes in private inventories, which is a measure of the value of the physical volume of inventories that businesses maintain to support their production, materially declined in Q2 2020. In fact, the $300 billion drawdown in inventories in Q2 2020 was the steepest drawdown in history.

However, while Q2 2020 represented the steepest decline on record, Q4 2021 represented the largest increase on record, as inventory levels bounced back by over $200 billion. This sharp rebound helps highlight that production is catching back up with demand

Chart 1. 50-year Trend of Changes in Private Inventories

Source: U.S. Bureau of Economic Analysis – I/O FUND

In Chart 3 (below), inventories are also rising relative to sales, suggesting that there has been a build in inventory levels. Furthermore, the metric is above the five-year average, implying that inventories are not tight on a systemic scale.

Chart 3. Five-Year Trend of Private inventories to Final Sales

Source: U.S. Bureau of Economic Analysis – I/O FUND

While the above charts highlight that there has been a strong recovery in inventory levels in the economy, it fails to take into account the types of inventories. Specifically, despite the recovery in aggregate inventories, automotive inventories have fallen to all-time lows.

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The below chart from the U.S. Bureau of Economic Analysis shows that auto inventories have declined to a record low and are hovering just above 0. Without much inventory to sell, there is little incentive to spend on advertising, which has negatively impacted ad-tech.

Chart 4. Domestic Auto Inventories

U.S. Bureau of Economic Analysis – I/O FUND

Chart 5. Domestic Auto Inventories to Sales Ratio

Source: U.S. Bureau of Economic Analysis – I/O FUND

Data from Dentsu’s Global Ad Spend Report highlights how automotive spending is still below 2019 levels. As shown below in Chart 6, global automotive ad spend declined 16% YoY in 2020, and rebounded just 12% in 2021, meaning that global automotive ad spending was still ~6% below its pre-pandemic levels. Since automotive advertisers spend an outsized amount of their budgets on TV ads, ad-tech companies exposed to connected TVs have been especially impacted by the soft recovery in auto ad budgets shown below. As I’ll discuss in more detail below, we believe that automotive ad spending has bottomed and will be a tailwind for ad-tech going forward.

Chart 6. Automotive Global Paid Search Ad Spend

Source: Dentsu Global Ad Spend Report – I/O FUND

Curiously, despite the fact that auto inventories are at record lows, automobile manufacturers’ inventories are also at an all-time high. As shown below in Chart 7, total inventory levels in the automotive manufacturing industry have surged throughout 2021 and into 2022.

Chart 7. Automotive Total Inventories

Source: U.S. Census Bureau – I/O FUND

These disparate trends are driven by the well-publicized semiconductor bottleneck. As Chart 7 highlights above, automotive manufacturers have large amounts of nearly completed inventory that is sitting idle until semiconductor supply arrives.

Once the supply of semiconductors arrive, automotive manufacturers should be able to quickly ramp and turn work-in-process inventory into finished goods that can be sold. Moreover, this should also drive demand for advertising as auto manufacturers look to quickly convert their inventory into cash.

Fortunately, there are signs of improvement for supply chain issues, specifically from the automotive industry. For instance, Volkswagen Group’s management team explained on their Q4 call that they “expect semiconductor supply bottlenecks to continue in 2022, but gradually improve in the second half of the year” (03/15/22).

General Motors echoed similar sentiment during its Q4 earnings call. GM CEO Mary Barra stated that “by the time we get to third and fourth quarter [of 2022], we're going to be really starting to see the semiconductor constraints diminish” (02/01/22).

However, this sentiment was not shared by all automotive executives. CEO of Stellantis, maker of Dodge RAM, Fiat and other brands, stated on the company’s Q4 call (2/23/22) that the size of the automotive market will be driven by the supply of semiconductors, adding that “hopefully, things will get a little bit better. But we believe it's going to be very slow. It will take time. And 2022 is not going to be from that perspective, the year where we can say we are back to normal. We don't think that will happen”

Looking forward, automotive manufacturers have outsized raw material and work-in-process inventory that will help them quickly ramp production once semiconductor supply improves. The timing of this ramp remains unknown, with some auto executives expecting H2 2022 to be a return to normal, and others forecasting a longer horizon.

Next Tuesday, we will discuss the signs of improvement at key automotive semiconductor suppliers and what this means for ad-tech including one strategic bet the I/O Fund made in ad-tech during the January-March selloff.

Bradley Cipriano, Financial Analyst, CFA, CPA at I/O Fund, contributed to this analysis.