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.

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Alphabet is our Second FAANG

Posted on May 18, 2022June 30, 2026 by io-fund

We recently added back Microsoft as a LTBH position and we are now adding Alphabet as our second FAANG. We understand our editorials are often behind paywalls on Forbes and Seeking Alpha, and so we have copied the article from April 28th below.

Article on GOOGL Begins Here:

If an investor were to believe market price action this week, it would appear Facebook had strong earnings while Alphabet stumbled. Yet, the opposite is true. Primarily, it was strength in retail ads that led to Alphabet reporting healthy growth of 23%. Meanwhile, Meta Platforms (Facebook) reported revenue growth of 9.7% and is guiding for roughly 0% growth from $28.5 billion in Q2 2021 to $29 billion, at the midpoint for Q2 2022. This analysis looks at why Alphabet is able to provide higher revenue guidance despite 80% of its revenue coming from ads while Facebook is guiding for flat growth.

Notably, Q2 is particularly hard because there are three heavy macro headwinds: supply chain issues, Ukraine-Russia situation, and the transition that Apple has forced with changes to attribution and measurement on iOS. When you add the one-time event of Covid, which plummeted ad spend in Q2 2020, only to lead to a surge in ad spend the following year Q2 2021, the hurdle to clear for revenue growth is at a historic high. We believe those ad-tech stocks that can show top line growth right now are providing important clues for when macro headwinds clear.

BACKGROUND:

The ad-tech industry remains in a whirlwind of changes following iOS privacy changes that limit third-party tracking on Apple mobile devices. I am hyper focused on identifying who the winners and losers will be following these changes, as it will determine who will lead ad-tech going forward. This issue is important because it impacts leading FAANG ad-tech companies, such as Facebook (Meta) and Google (Alphabet). Wall Street particularly likes ad-tech’s bottom line, and will aptly reward those stocks that can capture more ad spend.

In the below analysis, I review Google’s Q1 2022 results and focus on its ad platform (I am ignoring Google Cloud for now) and look for hints if Google is being impacted by the recent iOS changes. You’ll find that Google has held up well relative to other app-based advertising platforms, such as Facebook, following the changes to third-party identifiers. This is because Google has a first-party data advantage, which is critical during a time that attribution and measurement is limited by third parties. I explain why in more detail below.

Google’s Q1 Ad Growth Remains In-Line

While the market is still digesting the macro headwinds previously mentioned – supply chain and Ukraine-Russia; the third headwind of attribution and measurement changes is the headwind that investors should pay most attention to as it leads to a material change in story for ad-tech companies. Meanwhile, the other two headwinds will resolve in time.

Q1 earnings are provide valuable data of who is most and least impacted. Two critical data points will be Facebook’s and Google’s Q1 results, as most of their sales come from mobile ads. Google recently reported that sales grew 23% YoY to $68 billion, which were in-line with estimates.

Furthermore, Google’s Search business slightly outperformed and grew 24% YoY to $40 billion. This follows the outperformance in Q4 as Search sales grew 36% YoY in Q4 while total Q4 sales grew 32% on a year-over-year basis. It may appear that Alphabet’s search revenue is slowing from 30% in the year-ago quarter, but the deceleration in search revenue is due to the tough comps, and relative to Facebook, is outperforming.

The strength in Search highlights the advantage that having first-party data provides. This is because Search is primarily done on a browser, allowing Google to capture valuable first party data from ownership of Google Chrome, Google Search and also from Android OS. Moreover, Google is releasing new products, such as Topics API, which enables behavioral targeting. This is a direct shot at Meta Platforms, who is known to be quite competitive on behavioral targeting through taxonomies.

However, while Search remained strong, both YouTube and Google Network sales underperformed during the quarter. For instance, YouTube grew sales just 14% YoY to $7 billion, a steep slowdown from the 25% and 49% YoY growth rates from last quarter in Q4 and Q1 2021, respectively. Google Network sales increased 20% YoY to $8 billion. This also represented a deacceleration from the 26% YoY growth rate in the prior quarter.

In aggregate, total ad sales increased 22% YoY to $55 billion, a deacceleration from the 33% YoY growth rate in the prior quarter. It is notable that despite the headwinds in YouTube and Google Network, Google’s sales vastly outpaced Facebook’s Q1 revenue growth. As shown below, Google’s ad sales grew nearly 3x faster than Facebook’s 7% growth.

I believe this outperformance was driven by Google’s first-party data advantage. Moreover, YouTube revenue was the biggest laggard during the quarter and YouTube sales grew 14% YoY to $7 billion during the last three-months (fun fact: YouTube is larger than Google Cloud). The slowdown in YouTube may suggest that ads have been impacted by iOS changes, but its important to consider that YouTube grew sales 49% YoY in the year-ago quarter, leading to a tougher comparable base period.

During the Q1 call, Google’s management team explained that the tough comp and “modest” growth from direct response advertising had also impacted the segment, but noted that brand advertising remained an area of strength. The diversification across content types and ability to offer at true omnichannel strategy across mobile, browsers and CTV likely contributed and suggests that brands have shifted ad budgets to YouTube, likely due to its ability to measure ROI at the expense of competing platforms.

Google also reiterated this point during their Q1 Conference Call when CBO Philipp Schindler explained that being able to fully measure what users do after they click on an ad is critical to measuring ROI. He added that “Measurement is also obviously a key component to success [in CTV], and we want to make sure that advertisers can fully measure their YouTube CTV video investments across YouTube and YouTube TV for an accurate view of true incremental reach and frequency and so on.”

CBO Schindler’s comments highlight the importance of measurement, a key aspect of digital advertising that has been challenged following the changes to iOS cookies. If advertisers cannot measure ROI, they tend to limit their ad expenditures, so its critical that ad platforms find solutions to measure ROI in order to sustain growth.

Perhaps the most important comment during the Q1 Conference Call was a statement by management that Google continues to see strength in Retail, reiterating comments made during the Q4 2021 Earnings Call that retail (e-commerce) continues to be strong.

This brief statement is very important, as it adds support that Google will not be as impacted by the iOS changes. Given the signal loss from iOS changes, e-commerce has been one of the hardest hit verticals. Google’s strength here is likely due to its first-party data advantage.

Here is what Facebook CFO David Wehner said about Google’s strength in the retail vertical during Facebook’s Q4 2021 Conference Call:

“e-commerce was an area where we saw a meaningful slowdown in growth in Q4. … But on e-commerce, it's quite noticeable — notable that Google called out, seeing strength in that very same vertical. And so given that we know that e-commerce is one of the most impacted verticals from iOS restrictions, it makes sense that those restrictions are probably part of the explanation for the difference between what they were seeing and what we were seeing.”And so given that we know that e-commerce is one of the most impacted verticals from iOS restrictions, it makes sense that those restrictions are probably part of the explanation for the difference between what they were seeing and what we were seeing.”

Google’s statement that it continues to see strength in retail suggests that it is not as impacted from the iOS changes relative to app-based peers such as Facebook. Importantly, Search is often based on a web browser (Google Chrome), allowing Google to capture first party data and limiting the signal loss from the removal of cookies on mobile based apps.

Our thesis is that in this new cookie-less world, owners of first-party data will outperform going forward. We expect that Google will remain strong given its ownership of first-party data on both its Search platform and also its YouTube platform. However, Facebook will likely continue to struggle here due to its reliance on third-party data and not owning “the real estate,” or essentially the device and/or operating system while needing to collect data from this device in order to support its high ARPU.

Conclusion

Notably, Q2 is particularly hard because there are three heavy macro headwinds: supply chain issues, Ukraine-Russia situation, and the transition that Apple has forced with changes to attribution and measurement on iOS. When you add that the one-time event of Covid, which plummeted ad spend in Q2 2020, and later led to a surge in ad spend the following year Q2 2021, the hurdle to clear for revenue growth is at a historic high. We believe those ad-tech stocks that can show top line growth right now are providing important clues for when macro headwinds clear.

Compartmentalizing Cloud Stocks

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

Maintaining focus can be really tough when the market is penalizing tech stocks across the board. How do we determine which ones to trim/exit and which ones to add/enter? Despite it being counterintuitive, usually the best entries are made when the market is in a state of fear.

My first instinct is to protect our stocks with the highest allocations with a few of these certainly in the cloud category. I am less concerned with near-term price action and much more concerned with how the fundamentals mesh with the current macro environment. If a company has a strong report (AMD, Datadog) then I don’t stress market moves as fundamentally these companies are showing strength. It’s not an investor’s job to control the market or change positions based on 6-month price action. That’s why we haven’t changed positions such as AMD or Datadog. I’m using them as an example because they already reported.

The I/O Fund is positioned for an ad-tech rebound in H2. We’ve published quite a bit on this. We understand this requires a bit of speculation and we have been keeping our members up to date on this over the past few months with this research here and here. Ultimately, ad-tech valuations are well below the median in 2018 and 2019.

Strong growth in ad-tech is often awarded a 10 Forward EV to Revenues. The bottom line can fluctuate depending on how much a company is investing in growth, yet rarely does ad-tech have cash flow issues at scale. Snap and Roku are certainly at the scale where the path to profitability has been proven. Ultimately, we believe there is alpha here due to the market over-reacting to macro which is why we own ad-tech positions. There are many more ad-tech positions than the ones we own for investors to consider.

This analysis goes over cloud as what happened last Friday to Bill and Cloudflare caused me to shelf a deep dive on ad-tech post-earnings in favor of a cloud overview of our holdings. Many cloud companies have not been public during a rising rate environment (2017- early 2019). With the FOMC decisions being out of a tech investor's control, we have been forced to evaluate our cloud stocks to look for expanding margins and positive cash flow. There was some evidence last week that the market’s appetite for growth in this category has changed if the growth doesn’t contribute to the bottom line. I understand there is a relief rally today but my job this week has been to make sure fundamentally our cloud stocks can withstand macro pressure.

It’s true that cloud is deflationary but it’s also true that cloud can have profitability issues. As you saw last Friday, cloud is quite resilient in terms of growth, due to being deflationary, but those weak bottom lines may be questioned over time. Cash came easy over the past decade, and as cloud investors, we need to reframe our thinking on what constitutes an attractive cloud stock.

For long-term cloud investors that hold sizable allocations, like the I/O Fund does, I believe the following has to be answered:

1. Is there something inherent to the product that weighs on margins? If so, these companies have an additional hurdle beyond rising rates that must be resolved.

Cloudflare could fall into this category due to CapEx (something to monitor – we closed this position for now). The CapEx went from 9% in the current quarter to 12% to 14% for the year, and the market is likely assessing the cost it requires to become the fourth cloud provider.
Twilio falls into this category until Segment and other products can improve its core product gross margin (I believe it will and we will layer back in when it does). I expand on this more below.

2. GAAP operating margin versus Non-GAAP operating margin; this is where stock based compensation can affect a company’s GAAP profitability and companies that recently went public or had an acquisition often see an impact. There are also many cloud companies that invest their cash to grow rapidly, yet the leniency for “growth at any cost” may shift substantially.

3. Free cash flow is probably the most important in a rising rate environment for a sector that is often unprofitable and/or must spend heavily for growth. Below, we examine our top cloud holdings on the basis of their ability to become free cash flow positive.We need to recognize that the innovation cycle is such that venture capitalists exit through public offerings and there is often no path to profitability at the time a tech companies goes public. When you couple the historically loose FED policy we’ve had, it compounds the issue of figuring out which companies can become profitable and sustain in a slowing economy. Cloud will be put to the test the longer interest rates remain elevated and/or slated to rise, and I believe this will catch tech investors off guard because the sector has treated them so well. These relief rallies also do not help to distinguish which are fundamentally stronger as the price action reflects more of a rising of all boats.

Our Cloud Stocks

SentinelOne

SentinelOne is a company where we like the product very much. However, there is no denying that this company has weak margins albeit the margins are improving quite rapidly.

SentinelOne leads the cloud category in growth at 120% last quarter. In the previous quarter, SentinelOne accelerated to 128%, up from 121%. The company is expected to report $74.7 million in revenue for growth of 99.5%, assuming they come in at this number, that would be a deceleration in revenue.

Full year revenue is expected to be $370 million, up 80%. The 1-year forward for fiscal year 2024 ending in January is expected to be $605 million, up 64%. The main key metric that forecasts strong revenue growth is that ARR was up 123% year-over-year. This is a highlight from the last earnings report.

SentinelOne has a particularly weak operating margin of (108%) last quarter. The adjusted operating margin was at (66%) compared to (104%). The management guided for (85%) this quarter. The company emphasized this is improving with a full year adjusted operating margin guide of (55%) to (60%) for full year.

I believe this improvement in the guide is why the stock recovered after hours the evening of its earnings report. Will SentinelOne be able to provide a meet/beat on operating margin in the upcoming quarter and a meet/beat for the full year guide? This must happen and we also need revenue to remain strong.

We covered here in the Q2 2022 webinar how cybersecurity budgets are indicated to grow this year over 2021.

Management seemed to be quite sensitive to understanding this is key as it was the second thing they mentioned in the opening remarks:

I'm pleased to share that we ended the fourth quarter with double-digit year-over-year improvement in both our gross and operating margins. Our gross margins expanded 12 percentage points year-over-year, and our operating margin improved 38%. This progress reflects our growing scale and increasing efficiency.

The number of shares owned by institutions and the percentage of shares owned by institutions is also high at 92% (compared to Cloudflare at 80%). However, the number of institutions has declined by about 13%.

For SentinelOne, weighing on operating margin is also sales and marketing expenses at 64% of revenue and R&D at 65% of revenue. Compare this to Crowdstrike with S&M at 38% of revenue and R&D at 24% of revenue. To be clear, Crowdstrike has a better bottom line than SentinelOne. The operating margin has been at (10%) over the past few quarters and is at (5%) in the most recent quarter.

SentinelOne’s free cash flow has been improving but certainly needs work, which is common for a company that has not reached scale. The company reports cash flow of ($7.1) million improving from ($25.6) million in the same period last year.

SentinelOne has $1.67B in cash and the company burns about $400M so that’s three years. If we assume the margins improve, and the company reaches profitability by 2025 (analyst consensus believes this will happen) then the negative free cash flow should not hinder the stock. We had discussed why SentinelOne is similar to Crowdstrike at this stage of growth here.

Notably, last year, SentinelOne was weakest in Q1 and they’ve mentioned strong seasonality in Q4.

“The strength of our performance was broad-based, coming from a healthy mix of new customer additions, existing customer renewals and upsells. All of this was further magnified by the strong underlying seasonality of our fourth quarter.”All of this was further magnified by the strong underlying seasonality of our fourth quarter.”

Here was their comment about the upcoming Q1 quarter:

“Our ARR and revenue growth track very closely. Our revenue guidance for Q1 implies that we should be at or better than typical Q1 net new ARR seasonality, which has been down between 25% to 35% sequentially in the past 2 years.”

Here was our comment about Q1 following the last earnings report:

“Total ARR is nearing $300 million while annual revenue for the upcoming fiscal year 2023 is guided at $368 million, with ARR suggesting this guide could be easily met over the next four quarters. Most importantly, customers over the $100K range are growing at a rate that is double overall customer growth at 137% and 70%, respectively.

The overall customer growth represents a slowdown from 79% YoY to 70% YoY while larger account growth was fairly flat at 141% in Q3 to 137% in Q4.

The company guided for Q1 revenue of $74.5 million, compared to revenue in Q4 of $65.6 million. This is important because management has stated in the past, Q1 revenue was down sequentially by 20% to 25%. “Our revenue guidance for Q1 implies that we should be at or better than typical Q1 net new ARR seasonality, which has been down between 25% to 35% sequentially in the past 2 years.”

Notably, the I/O Fund is unable to track where the ARR was down “for the past 2 years” but the sequential growth is headed in the right direction. The numbers we have show Q1 FY2021, net new ARR declined 37% QoQ to $8 million yet in Q1 FY2022 it grew +8% QoQ to $30 million. This year, the sequential growth will be +13.5%.

Higher ARR sequentially for the upcoming Q1 is likely driven by the record number of 100,000-plus deal and a record number of million-dollar plus deals. International is another area of strength as the company saw revenue grow 140%. This represents 31% of revenue – so something to watch closely as a near-term driver.”

Takeaway: No changes to our position right now, if there is a meaningful change to operating margin, we will update you.

MongoDB

MongoDB had an acceleration in revenue from 50.1% in Q3 to 55.85% in Q4. The market rewarded this earnings report with an increase in price, moving from $280 to $338 on the report. At the beginning of April, the stock price was nearly flat YTD.

There was an acceleration in revenue for FY2022 to 48% year-over-year, up from 40% growth in FY2021. Looking forward, FY2023 revenue growth is expected to be 35% year-over-year.

Key metrics supporting future revenue growth include customers over $1 million in ARR growing 67% and customers over $100,000 growing 34%. Atlas customers outpaced total customer growth at 35% compared to 33% growth, respectively.

MongoDB has a 72% gross margin and GAAP operating margin of (29%) due to stock-based compensation, or a loss of $78.6 million. The adjusted operating margin is (0.49%) or essentially a loss of $1.3 million. The net margin is (32%) or a loss of $84.4 million with adjusted net margin of (2%), or a loss of $6.3 million.

With that said, MongoDB is cash flow positive. It needs to remain cash flow positive for the market to be confident in its valuation. I do believe where Cloudflare was penalized was the surprise to the downside in cash flow. This is a marked change to how the market treated cloud companies in the past.

MongoDB has $474 million cash on its balance sheet with operating cash flow of $22.3 million and free cash flow of $16.8 million. This represents a free cash flow margin of positive +6%. The company holds $1.2 billion in debt.

The difference between MongoDB’s GAAP EPS and Non-GAAP EPS is primarily due to SBC. Here we have a forward GAAP EPS of ($1.22) and Adjusted EPS of ($0.10). Overall, MongoDB has improved it’s adjusted EPS as it was typically in the ($0.20) range.

MongoDB’s catalyst for growth is Atlas, which we covered in a deep dive here. We also covered how this company fits into our Big Data and Analytics positioning here. We are more likely to hold a cloud stock that falls into the Big Data theme and/or cybersecurity due to seeing evidence of growth in these markets. Primarily, Microsoft pointed towards the following trends in the recent earnings report, which we covered here:

Starting in September, we began to position for Big Data, Analytics and ML. Microsoft has grown their Cosmos database (DB) transactions and data volume by 100% year-over-year for the third quarter in a row. Synapse data volume has also doubled. Monthly machine learning inference requests increased 86% year-over-year. for Big Data, Analytics and ML. Microsoft has grown their Cosmos database (DB) transactions and data volume by 100% year-over-year for the third quarter in a row. Synapse data volume has also doubled. Monthly machine learning inference requests increased 86% year-over-year.

We discussed cybersecurity and other cloud trends in our Q2 2022 Webinar found here.

As stated above, MongoDB’s cash flow margin is what can keep the stock strong given stock based compensation is weighing on GAAP operating margin. We want a meet/beat on revenue, strong Atlas growth (bonus for acceleration) and we must continue to have a healthy, positive cash flow margin.

Analyst consensus has MongoDB reaching profitability on an adjusted basis by calendar year 2023.

Snowflake

Snowflake is seeing a deceleration in revenue yet is reaching adjusted profitability this year.

The company is expected to report revenue of $412 million, representing growth of 80%. The previous quarters the company reported revenue growth of 101% in Q4, 109% in Q3, and 104% in Q2. For the fiscal year 2023 ending in January, the company is expecting revenue growth of 67% for revenue of $2.03 billion. Analyst consensus shows revenue of $3.17 billion, or growth of 56% for fiscal year 2024.

There has been an outflow of institutional shares since December with a 30-day change from 330 million shares to 305 million shares.

As Snowflake continues to grow revenue, the losses are narrowing. When the company reported roughly $300 million revenue, the GAAP operating losses were around $200 million. The company is now reporting a little over $400 million in revenue with GAAP operating losses of about $150 million. What you don’t want in this environment is an inverse relationship to where losses increase as revenue increases.

Snowflake is steadily improving its margins from 58% gross margin a year ago to 65% gross margin in the recent quarter. The company has improved its GAAP operating margin from (90%) a year ago to (40%) in the recent quarter. The company has a positive adjusted operating margin of 5% and has stated they will end the year with a positive 1% adjusted operating margin. They have to deliver on this promise to maintain a category-high valuation.

Confluent

Excerpt from forum post here.forum post here.

Revenue grew 64% to $126 million and customers over $100K grew 41%. Analyst consensus on revenue was for $127.4 million. The company reported EPS of (0.19) and analysts were looking for (0.20).

However, free cash flow for Confluent is a blemish at ($58.4) million, or 46% of revenue. Adjusted operating margins are at (41%) and GAAP operating losses of (88.4%). Adjusted gross margin is 69.7% with employee bonuses and employee stock purchase plans hurting the operating margin. FCF is to be the lowest in Q1.

Confluent has cash and marketable securities of $2.0 billion with cash of $1.05 billion.

Adjusted operating margin is expected to be (38%) on revenue growth of 44% for FY 2022.

We all know how the market feels about those margins right now – Confluent was not alone in the AH bloodbath.

On a positive note, Confluent Cloud is ripping at 180% YoY growth. This has led to RPO accelerating to 96% YoY. The company signed an 8-figure deal that was not recognized in Q1. Cloud net retention rate is 150%.

Analysts on the call were excited about the net new add in customers and the company reiterated its goal of positive FY2023 operating margin.

Note: We believe the negative free cash flow margin is too steep for Confluent to be a high conviction company at this time. We very much like the Confluent Cloud growth and will look for the more normalized growth rate once it scales. If Knox asked me where to raise cash in cloud, I would choose Confluent although we do not have all earnings reports yet.

Datadog

Excerpt from forum post here.forum post here.

Datadog was down after putting up a solid report and we bought a small tranche following the earnings report.

The company beat and raised on all accounts. Customers over $100K grew were up 54%, growing from 80% of revenue to 85% of revenue. The company also said the magic words: “36% free cash flow margin” in Q1 with a TTM cash flow margin of 28%. Free cash flow (FCF) grew from $250 million in Q4 to $335 million in Q1.

The company was expected to report 70% revenue growth and instead reported 83%, with revenue up 11% sequentially. Guidance also impressed at $378 million at the midpoint, or 62% growth. That should be enough to keep Datadog in the top 5 on forward growth in the cloud category. FY2022 guidance raised to $1.61 billion for growth of 56.4% at the midpoint, up from $1.53 billion.

They said the other magic words which is that “dollar based net retention rate continued to be over 130% as customers increased their usage and adopted newer products.” During covid, this DBNRR wouldn’t be as meaningful as many cloud companies were at the 130 mark but Datadog proving itself best-of-breed here by maintaining this level for 19 consecutive quarters.

Datadog’s strength is cross-selling or standardization, which we’ve covered in detail. Number of customers using 2 or more products increased to 81%. The company signed its largest contract in terms of ARR (they said it was 8-figures with a next-gen fintech company). There were examples on the call of customers consolidating monitoring tools from 5 products to 10, and from 1 product to 6.

Notably, on top of accelerating revenue growth YoY from 51% in Q1 last year to 83% in Q1 this year, Datadog also improved operating margin from 10% to 23% in the current quarter.

Note: Datadog is the strongest cloud company on the market if you look at the relationship between the top line and the bottom line.

Twilio

We covered Twilio pre-earnings here and also post-earnings here on the forum. We ultimately trimmed our position due to the reason stated post-earnings: “Analysts asked if increased costs in core product could affect gross margin and/or user fall-off. This comment is probably the most concerning to me. Lots of questions on Gross Margin, which the main concern being any fluctuations here if there's pricing pressure from telcos.”

Ultimately, we will layer back into Twilio when we see the software business help to sustain the gross margin.

Here is what was asked on the call:

Michael TurrinMichael Turrin

Gross margin saw a meaningful improvement sequentially. The prepared remarks still referenced just some near-term fluctuation potential. Just in sort of adding some more context around that. I guess the question is just why wouldn't that be at least somewhat bottoming if we're looking at sort of a point in time where U.S. growth is moderating? Some of these 10DLC impacts are playing through. Are you at all comfortable that gross margin can at least remain around a similar ZIP code regardless of our messaging mix plays through? Or anything else you could just provide to help us think through normalization of what these fluctuations can look like?. I guess the question is just why wouldn't that be at least somewhat bottoming if we're looking at sort of a point in time where U.S. growth is moderating? Some of these 10DLC impacts are playing through. Are you at all comfortable that gross margin can at least remain around a similar ZIP code regardless of our messaging mix plays through? Or anything else you could just provide to help us think through normalization of what these fluctuations can look like?

Khozema ShipchandlerKhozema Shipchandler

Yes. That's a good question. I mean I think with respect to the gross margins in Q1, we are obviously happy with them improving to 53%. I think, Michael, the thing I'd encourage you to keep in mind is that just the size and scale of our messaging business is what tends to drive it. And so that's why we're kind of signaling some level of fluctuation in gross margins in the near term. I think it'll be in the ZIP code. I mean I'm not going to be prepared to call the bottom or anything like that. But I'd also remind you that we like the messaging business a lot. And while it does carry that lower gross margin, it also generates a lot of gross profits that we reinvest back into the business.And so that's why we're kind of signaling some level of fluctuation in gross margins in the near term. I think it'll be in the ZIP code. I mean I'm not going to be prepared to call the bottom or anything like that. But I'd also remind you that we like the messaging business a lot. And while it does carry that lower gross margin, it also generates a lot of gross profits that we reinvest back into the business.

If you go back to Q1 of 2020, Twilio’s growth rate in customers was about 23.5% from 190K customers to 235K customers. The most recent year-over-year growth was 14% from 235K customers to 268K customers. The company does not break out the growth rate but the presentations provide number of customers. This would imply some churn due to increased fees passed onto customers on the core product.

In terms of margins, the company guidance missed expectations at adjusted EPS of ($0.23) to ($0.20) compared to consensus of ($0.13). The forward growth of 27%-29% is to be expected during this pivot. I want to emphasize the management has been preparing for the core product to hit saturation essentially which is why we want to remain invested to participate in this management team bringing API-driven marketing to marketing departments. Twilio certainly is consumer-facing and thus what we are seeing with ad-tech affects Twilio, as well. This is unique from more deflationary cloud products at the enterprise-level.

Cloudflare

We covered Cloudflare this week for the free newsletter, which will hit your inboxes soon. The stock hit our stop and here is the main thing that drove our decision on fundamentals.

At the time the low-cost R2 cloud storage service was launched, Cloudflare’s CEO has stated “we’re aiming to become the fourth major public cloud.” Big Tech has the advantage of strong margins and quite a bit of cash on the balance sheet to build out cloud infrastructure. For this ambition to materialize, not only must Cloudflare build more Points of Presence (PoPs) but the company must also undercut AWS on egress fees, for example, in order to remain competitive.

In the current quarter, network capex was 9% of revenue. For the full year, the network capex is expected to increase to 12% to 14% of revenue. I believe this is a primary reason Cloudflare’s valuation could come under pressure.

Here is what the company said on the call:

I think the thing which is powerful about as we build out more POPs is that counterintuitively, because of the design of our network and because of the efficiency of our network that both Thomas and I just alluded to, it actually drives our cost down over time rather than driving it up. It takes a certain amount of servers in order to process a certain number of requests. So your CapEx is actually driven by the amount of usage of your service more than anything else.

What is powerful is because we have done the hard work on the networking and software side to make it so that any server, anywhere can handle any request, that means that as we continue to expand our network out that we're able to directly interconnect with the various ISPs and eyeball networks around the world and drive our cost down for things like bandwidth, co-location and other variable costs that are part of our business.

At this time, revenue growth is not an issue for Cloudflare as it’s been quite robust for many quarters. The company reported 54% revenue growth beating estimates by 6% with 49% growth expected next quarter. The company raised full year revenue guidance to $957 million, at the mid-range, for growth of 46%.

There is additional supporting evidence that growth is not an issue for Cloudflare, including remaining performance obligations (RPO) up 57% year-over-year and dollar based net retention up 400 bps YoY. Customers paying over $100K increased 63% year-over-year to 1,537. This outpaced total customer growth of 29%. Notably, the >$100K segment was a deceleration from 71% in the previous two quarters.

Large customers contributed 58% of revenue. There was solid growth in the >$500K customer base of 68% year-over-year growth and >$1 million customer base grew by 72% year-over-year.

The company has a gross margin of 77.80% but had a GAAP operating margin of (18.90%) and adjusted operating margin of 2.30%. The primary difference being stock based compensation which doubled to $34 million in Q1, up from $18 million in the year-ago quarter. The market has not been very friendly to companies diluting GAAP operating margins due to SBC, and we see evidence this may have impacted Cloudflare.

Similar to the note about network capex, the company is stating they will not see improvement to operating margin in the near term. I believe this could put pressure on valuation if cloud peers are able to improve operating margin during the current macro environment.

Here is what management said:

“We intend to grow our operating expenses in line with the revenue staying here or at breakeven and reinvest excess profitability back into the business to address the enormous opportunity in front of us.”We intend to grow our operating expenses in line with the revenue staying here or at breakeven and reinvest excess profitability back into the business to address the enormous opportunity in front of us.”

Free cash flow was negative $64.4 million (30% of revenue) in comparison to a negative $2.2 million (2% of revenue) in Q1 2021. Of this, $30 million was due to a unique withholding tax payment in the recent quarter. This would still show a marked decline in free cash flow from last quarter during a time when the market is especially sensitive to cash flows. The company reported positive free cash flow of $8.6 million in Q4 2021, and it was the first positive free cash flow quarter since the company became a public company. Management stated they will be cash flow positive in the second half of the year while the first half of the year will have negative free cash flow due to the investment in network and redesigning of physical offices post Covid-19.

The company had cash and available-for-sale securities of about $1.7 billion, out of which cash is $152 million.

Clearly, many investors like Cloudflare and the company is not without merit by any means. Rather, I can’t rely on cash flow improving in H2 and/or CapEx not rising beyond the current 12% to 14% to personally maintain conviction in the current environment.

For costs inherent to the product, my personal choice is Twilio as I can see the product road map a bit more clearly on Segment/software side and how this can expand the company’s gross margin.

Asana

Please note, Asana is a small 1% position and we covered the company’s financials here and the unexpected rise in expenses. We will update you on the next earnings report. We hold the stock because the product should be deflationary (more than most).

Microsoft: Eyeing for LTBH position

Posted on April 27, 2022June 30, 2026 by io-fund

We are eyeing a LTBH position for Microsoft. As many of you remember, we’ve owned Microsoft in the past following a spree of analysis published in 2018-2019.

In our latest Q2 webinar, I discussed why reducing cloud costs is a key trend for 2022 and beyond. Most investors on our site agree that cloud is a critical trend to have in a portfolio as it increases productivity and reduces costs. This is especially true for software-as-a-service whereas cloud infrastructure as-a-service does not always result in lower costs compared to on-premise servers.

The overall cost savings and/or overhead can often rely on the size of company, where it’s a no-brainer for startups to rent servers as they don’t have the budget to own servers and manage an IT department. However, we’ve pointed out in an analysis and on our webinar that companies of Dropbox, Asana or Datadog’s size are seeing a hit to their margins. If you add up the cloud infrastructure, platforms and software costs across a company, it can often become costly to manage and deploy a full cloud stack.

To put it simply, Sayta Nadella said in yesterday’s call: “More value for less price means you win.” In the same breath, he also said: “Most businesses are not looking to their IT budgets or to digital transformation for budget cuts.” These two statements echo my first point in the webinar which is that both are true: increase in cloud spending and wanting to lower costs. This is differentiated from budget cuts, such as headcount. Most importantly, our slides showed that despite Gartner’s forecast for 2020-2021 shifting by $100 billion to what became actual spend (or essentially a pull forward). Pull forward might not be the right term, however, as cloud growth is not slowing down as a result, instead it’s predicted to be a tick higher from 2019 to 2022, if we remove the anomalous 2020-2021.

Therefore, we wanted to emphasize that the trend towards reducing costs should not be confused as being prohibitive to the trend for cloud adoption, rather, it can offer investors an edge if they identify what companies serve both needs.

As you can see from our portfolio, we are best-of-breed investors and I do not believe Microsoft is a best-of-breed company, rather they aggregate cloud services to help drive down costs. This is especially attractive for the Fortune 500 whereas startups, SMBs and mid-sized enterprises are likely to seek out and manage a larger portfolio of cloud services from various vendors. We can easily evidence this by Microsoft’s Fortune 500 penetration with 95% using Azure, which was achieved through hybrid computing where Microsoft was first-to-market on serving a mix of on-premise, private and public clouds for their large enterprise customers. Secondly, as this analysis is about, Microsoft is undercutting other services on price to win the aggregate, long-term contract.

Microsoft is using the term Tier 1 workloads to not exclude those outside of the Fortune 500, and the company stated the following in terms of deal size: “The number of $100 million-plus Azure deals more than doubled year-over-year. “

As stated on the I/O Fund Wire, Azure growth of 46% is performing quite well given the tough comps it has overcome, and Microsoft’s best financial metric during this tech selloff is that commercial bookings increased 28% this quarter following 32% increase last quarter. I would look for Azure to remain elevated against AWS and Google Cloud for those two reasons – hybrid cloud leader which attracts large enterprises and its ability to reduce costs with its tech stack.

Despite overall revenue softening from 20% to 18%, Azure remained flat at 46%. This is quite remarkable considering Azure has overcome incredible growth over the past two years. Operating income was up 19% and EPS up 9%. The lower overall revenue guide is driven by gaming and Office 365, both expected to be lower by single digits. Azure growth is also guided to be sequentially lower yet Intelligent Cloud is a stronger-than-expected guide at $21.1 billion and $21.3 billion. This is what is meant by the analyst on the call when they stated: “

Starting in September, we began to position for Big Data, Analytics and ML. Microsoft has grown their Cosmos database (DB) transactions and data volume by 100% year-over-year for the third quarter in a row. Synapse data volume has also doubled. Monthly machine learning inference requests increased 86% year-over-year. Takeaway: Let’s hope this translates well for our larger holdings MDB and SNOW, and our placeholder on CFLT. This was also covered in the Q2 2022 webinar.

According to our research, cybersecurity is the top tech vertical for increased spending from 2021 to 2022. Microsoft is increasingly becoming a cybersecurity company, as well, with $15 billion in revenue and growing at a rate of 45%. Microsoft was careful to build a multi-cloud product and is the only Big 3 cloud vendor to be multi-cloud on security right now.

On a side note, not only does Datadog, SentinelOne and Cloudflare participate in cybersecurity here but they also reduce costs through standardization and/or eliminating object storage fees.

Catalysts

There are a few reasons Microsoft can continue to do well, in addition to its proven strategy to onboard large enterprises and lock them in by optimizing workloads for Azure and its broader suite of cloud platforms and services. The first reason is that I believe Microsoft will own the edge. The company is closely partnered with many telecoms and has the most data centers in the world. Another reason is that when more enterprises adopt AI/ML, whether it’s automation, super computers and/or other use cases for training and inference, it will a natural decision to use Microsoft if they’re already optimized for Azure. In other words, Tier 1/Fortune 500 are likely to be the largest customers for AI/ML. Power Automate was up 72% year-over-year, surpassing $2 billion in revenue, although not vendor agnostic like UiPath. Third, the company ranks with Nvidia and Unity for inroads to the Metaverse as it owns many gaming publishers now and is the most widely used VR headset (HoloLens). The company also has Teams to introduce Metaverse-like qualities to business meetings. It will be industrial that drives forward 3D worlds (not consumer) and Microsoft is auspiciously positioned.

These catalysts matter a little less when macro is so tough but worth mentioning as to why investors should look beyond Azure growth when it comes to Microsoft.