Category: Top Tech Stock News

Where’s The M In FAANG? Here’s Why 2020 Belongs To Microsoft

Posted on by io-fund

This article was originally published on Forbes on Jun 26, 2020,02:56pm EDTForbes on Jun 26, 2020,02:56pm EDT

When the acronym FANG was created and later extended to FAANG, tech investing was dominated by mobile, advertising (led by mobile), over-the-top streaming and e-commerce. Today, tech stock investors would be remiss to not have cloud in their tech portfolio as the category has proven to be secular and insulated from economic drawdowns.

Microsoft is a central hub to the cloud trend with nearly every segment of its revenue driven by cloud except PCs/Surface and gaming, although gaming too will shift towards cloud. With Microsoft being nearly a pure play in cloud computing while boasting a $1.5 trillion market cap, the talking heads in media may need to find a new acronym.

I’ve covered the sheer supply of cloud software companies potentially weighing on returns in the coming months as the market begins to sort the winners from the losers this year. There are likely to be cutbacks across all budgets and these covid-19 cutbacks did not show up yet in the first quarter due to the limited, two-week exposure in March before companies started reporting (this lack of exposure in Q1 may seem obvious but the market has certainly not priced this in).

Meanwhile, Microsoft stands to benefit regardless of which cloud software companies pull ahead. Hundreds of cloud software companies crowd the public and private markets yet they all funnel into cloud infrastructure. This is the common denominator.

Hybrid Cloud Accelerated by Covid-19

Satya Nadella made a bold statement in the last earnings call that the company had seen two years’ worth of digital transformation in two months. He cited a surge in demand from the structural changes due to companies quickly reorganizing.

The coronavirus shutdowns accelerated cloud usage from current customers yet the most important impact is that it forced slow-to-adopt companies and industries to migrate to the cloud overnight. These slower-moving companies are more likely to adopt a hybrid cloud strategy which is where Microsoft excels over the competitors.

My original thesis when I began covering Microsoft nearly two years ago was that the company would rival AWS due to its focus on hybrid cloud. Historically, Microsoft was built around on-premise and the company is well situated to assist in a more conservative, slow migration, especially for enterprises with significant intellectual property or unique security concerns. According to a 2018 survey, the top reasons for using hybrid cloud include controlling where important data is stored, at 71%, and using cloud for backup and disaster recovery, at 69%.

Hybrid cloud allows for scenarios where customers can keep their most sensitive data on their own servers while sending workloads to the private or public cloud that gain an advantage from mining data more efficiently and require improved accuracy and productivity. Azure’s strength in hybrid computing has made it the main player in the industry with the product being used by 95% of Fortune 500 companies.

Microsoft’s Windows operating system has run on servers for decades, and it was a natural extension to offer Azure Cloud to run on-premise. Specifically, the company’s presence in traditional on-premise deployments of server and SQL databases have propelled Azure forward as an obvious choice for public and hybrid cloud deployments. This is due to being the path of least resistance for on-premise to Azure.

This prompted my prediction that Microsoft would beat Amazon in a contract for the Department of Defense and I believe Microsoft will win yet again from the coronavirus shutdowns for the same reason.

Azure’s strength in offering both on-premise and cloud in a hybrid solution has prompted Amazon to chase Microsoft with recent efforts to improve its hybrid strategy. According to a Goldman Sachs survey pre-covid, the majority of executives preferred Microsoft Azure over AWS. The survey is done bi-annually and Microsoft has been ticking upwards in the results since 2017. With that said, AWS is capturing an estimated 200% more revenue than Microsoft on cloud infrastructure at $9 billion for AWS compared to $4.33 billion on Azure (per analysts).

Notably, the Goldman Sachs survey may not have taken into account that outside of the Fortune 500, AWS has a loyal startup and SMB following, and is also popular with agile enterprises that scale quickly, like Netflix and Facebook. Often times, these companies look outside Microsoft’s walled garden.

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For comparison purposes, some of Microsoft’s offerings are cheaper than AWS while having a larger global data center footprint. In the most recent earnings report, Microsoft stated it had more data center regions than any other cloud provider. New center regions announced in this quarter are Spain and Mexico. It plans to invest $1.1 billion over five years in Mexico. In Spain it plans to open Azure regions and also expand Telefonica relationship. This is especially helpful as compliance regulations require local data storage.

Halo Effects of Microsoft Teams

The story of the year may very well be cloud productivity apps. Microsoft Teams, though not exactly a verb, has been seeing rapid growth among Office 365 users. According to the recent earnings report, Microsoft Teams has increased 70 percent quarter-over-quarter to 75 million daily active users. This is up from 44 million daily active users in March. Perhaps even more impressive, Microsoft saw 200 million meeting participants in a single day in April.

This isn’t to say that Microsoft Teams will wipe out competitors outside the Office software ecosystem but it’s certainly going to help the company protect its turf. Zoom Video is likely to hold more mindshare as consumers can also enjoy HD video and office workers can share video links seamlessly outside of Microsoft’s enterprise walled garden. Slack is likely to lead on innovation as a developer and programmer favorite. After all, AWS is still in the lead over Azure and these customers will want a Microsoft alternative.

(Disclosure: I’m an investor in both Zoom Video and Slack and recommend these stocks to my premium service).

For the Fortune 500 and the 250 million who don’t mind Microsoft’s walled garden then Microsoft Teams offers valuable collaboration features, such as sending files within the apps, and holding video or audio calls. As of now, 20 organizations with more than 100,000 employees use Teams with Accenture being the first company to surpass 500,000 users.

Beyond enterprise companies, Microsoft Teams is also seeing inroads into education and health care from the coronavirus shutdown. According to the fiscal Q3 earnings call, more than 183,000 educational institutions rely on Teams with an emphasis on global education, including the United Arab Emirates, which has over 350,000 students using Teams, and Italy, which moved over 80,000 students to Teams in just three days.

The health care industry has 34 million users on Teams, including in New York and in the UK. Microsoft also launched its first industry-specific cloud offering that allows organizations to work horizontally across apps, like Dynamic 365 and Azure IoT, for virtual visits, chatbot assessments, and remote health monitoring.

The CDC and various healthcare systems are using Microsoft Health Bot Service to build and deploy AI-powered virtual assistants that reduce that workload on emergency services. As of early April, about 1200 instances of covid-19 bots had serviced 18 million individual users and served 160 million messages.

Microsoft also expanded Teams recently with the Booking app, which allows healthcare providers to schedule, manage and conduct provider-to-patient virtual visits with Teams. Depending on the size of the organization, this could be a competitor to Teladoc.

Conclusion:

Microsoft has many inroads into cloud and is nearly omnipresent in this category. There is a halo effect that allows for upgrades into premium products and increased renewals. When it comes to industry specific data needs, such as health care, Microsoft will also be a strong competitor for its experience in strict compliance across data-driven environments. I believe Microsoft’s biggest strength will take center stage this year, which is massaging the more conservative enterprises to adopt cloud with hybrid architectures. Teams, as well, could not be in a better position to strengthen the walled fortress.

New Age Of Stock Market Volatility Driven By Machines

Posted on by io-fund

This article was originally published on Forbes on Apr 10, 2020,04:05pm EDTForbes on Apr 10, 2020,04:05pm EDT

The Dow broke many records in March of 2020. We saw the fastest bear market in history, the largest one-day gain in history, and the Dow had its worst first quarter since 1987.

Many more records were broken on the intraday level. For instance, fourteen trading days between February 25th and March 20thmade the top twenty list for largest intraday swings. According to Wikipedia, nine of the top ten positions occurred in a span of three weeks between March 2nd and March 20th.

Throughout the generations, there have been world wars, depressions, recessions and financial market implosions, but this is the first market to be whipsawed by machines. What’s driving the intensity is algorithms which puts wealth preservation at stake as retirement funds compete against quant traders.

Flash rallies and flash crashes are occurring as I write this, with yet another record-breaking day of the Dow gaining 1,627 points on April 6th. Following the fastest bear market and worst first-quarter since ‘87, we have now closed out our best week on the Dow in 45 years on April 9th.

The full effects of this much machine trading is yet to be seen, especially as forward-looking markets must reconcile with double-digit unemployment and other economic uncertainties. While machines can change their allocation in the blink of an eye, many average Americans must grapple with the effects these swings may have on their livelihood.

Wikipedia

Source: Wikipedia, List of largest daily changes in Dow JonesWikipedia, List of largest daily changes in Dow Jones

March 2020: Fastest Bear Market in History

Last month holds the record for how quickly the market plummeted into a bear market at only 16 days starting on February 19th. The contrast is even more severe when calculating how quickly the March 2020 crash hit 30%'

KNOX RIDLEY

Source: Knox RidleyKnox Ridley

Last month was not for the faint of heart. The bear market of March of 2020 took 19 days to drop 30% while all other black swan events took 55 days or longer. Meanwhile, the economic backdrop includes a health care crisis, high unemployment, canceled school years, and state mandates to “shelter in place.” Machines driving record gains last week are clearly not in a quarantine.

The Fed recently warned that the country could face an unemployment rate of 32%, or 47 million. This would exceed the Great Depression at 24.9%. As we saw in 2008, massive unemployment forces the middle class to withdraw their 401Ks to pay bills. This could cause major unintended consequences from the Federal Reserve policy that pushed retirement accounts into equity markets in order to keep up with inflation.

Despite evidence of negative consequences, rampant algorithmic trading in the financial markets has become accepted as the new norm. However, this will be the first time that algorithmic trading could compound an economic recession as 401Ks have been squandered by the sheer speed of stock market machines. This, of course, depends which way the wind blows next week and how machines react to news headlines with natural language processing (NLP).

Machines Behaving Badly: Faster than “Blink of an Eye”

High-frequency trading costs regular investors up to $5 billion per year, according to a recent study released in January of 2020. The practice of “latency arbitrage” involves arbitraging prices extracted by lower latencies. Better prices are then quickly bought by machines that can move quickly.

The FCA found the machines racing against one another is faster than “the blink of an eye” at 79 millionths of a second. The FCA study tracked 2.2 billion transactions over 43 trading days and found 20% of trading volume was from latency arbitrages. The FCA concluded that latency eliminating latency arbitrage would reduce the cost of trading by 17%. Six firms won the arbitrages 82% of the time.

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In 2011, electronic inter-dealer broker ICAP had introduced a fifth decimal point to its EBS foreign exchange platform so that its currency pairs such as euro/dollar read as $1.24980, instead of the standard $1.2498. The fifth decimal attracted high-frequency computers, which disrupted the flow of liquidity on the EBS platform. This upset the banks with slower technology as they could not execute large transactions when super-fast computers sliced them into smaller trades. Notably, Deutsche Bank and Barclays had already offered tenth pricing to their customers.

In 2014, The Securities and Exchange Commission sanctioned a New York City based high frequency trading firm Athena Capital Research for placing a high number of aggressive, rapid-fire trades. The trades occurred in the final two seconds of nearly every trading day during the six-month period with an intent to manipulate the closing prices of thousands of NASDAQ-listed stocks. The Company had to pay a $1 million penalty to settle the SEC’s charges.

Tower Research Capital paid $67 million to settle spoofing charges. On thousands of occasions, between 2012 and 2013, the company manipulated the futures contracts on the Chicago Mercantile Exchange and the Chicago Board of Trade.

Evidence of Recent Algorithmic Damage

Over the last 10 years, commodity trading assets (CTAs) have collectively risen by about 36% to roughly $360 Billion. Because they are hedge funds, they are likely leveraged anywhere between 2-5 times this amount, putting the total amount of assets anywhere between $1-2 trillion dollars. These software driven funds tend to be crowded in the same trade together, which can make for violent swings.

Nearly a decade ago, there was a flash crash that occurred on May 6, 2010. This “flash crash” caused the Dow Jones to drop 998.5 points (about 9%) within minutes, only to recover a large part of the crash later in the day. According to the Commodity Futures Trading Commission (CFTC), high frequency trading “did not cause the Flash Crash, but contributed to it by demanding immediacy ahead of other market participants.”

Flash crashes and flash rallies of 1000 points are now the new normal with sixteen occurring since March 1st. Four of these historical daily gains were above 9%. Trading curbs, known has circuit breakers, were hit four times last month.

Wikipedia

Source: Wikipedia, List of Largest Daily Changes in the Dow JonesSource: Wikipedia, List of Largest Daily Changes in the Dow Jones

Can’t Beat Them, Join ‘Em

During the Q4 2018 sell-off, Guy De Blonay, a fund manager at Jupiter Asset Management stated 80% of the stock market is controlled by machines. In 2017, JP Morgan stated that “fundamental discretionary traders” accounted for only 10 percent of stock trading volume.

Billionaire Steven A Cohen’s hedge fund had to focus more on quant trading in 2017 when it lost money in most of its traditional trading strategies in that year, while its quant investors made money. For example, Steven Cohen’s $12-billion hedge fund, Point 72 Asset Management, is moving about half of its portfolio managers to a “man plus machine” approach.

According to Wells Fargo, robots will replace 200,000 banking jobs over the next 10 years. Citigroup has formed a lab to cross-train traders and developers for machine learning and artificial intelligence. The programming language, Python, is especially in high demand at leading banks, such as JP Morgan and Goldman Sachs.

Conclusion:

Daniel Pinto, JP Morgan’s Co-President, stated that investors may have to get used to big, sudden moves in the stock market due to fewer institutions pushing equities to attractive valuations while hedge funds reach unprecedented levels of employing computerized momentum-based strategies. The result will be “faster and deeper” corrections.

The problem with “faster and deeper” corrections is there is essentially no time for the average investor to adjust. Perhaps we will get a coronavirus vaccine or antiviral tomorrow, and business will go on as usual. Or, the opposite could happen, and things will get worse. One thing is certain: Until there is regulation, the machines will profit either way.

Zoom Video Analysis From Long-Time Bull

Posted on by io-fund

I recently discussed Zoom Video and its continued phenomenal rise. In the face of a global pandemic, the company has become the top performing stock on the NASDAQ this year with over 130% gains, or nearly a 160% spread with the 30% market decline.

From there, the stock has continually commanded the highest price-to-sales in the cloud software category and was able to hold its opening IPO price of $62 as support even when the market dumped cloud software last September with 30-40% drawdowns across the board.

So what’s Zoom’s secret?

Zoom’s easy access and URLs is the foundation of Zoom’s success. This is what we call product-market fit and why analysis on tech stocks should start with the product to maximize returns.

Product-market fit is what led me to call Zoom Video the best IPO of the year in 2019, why I encouraged investors to know their winners during the cloud selloff, and why we reiterated a buy signal on my research site when Zoom Video was at $65.

Read the full article here.

Zoom Video is a company where valuation defies logic. Zoom’s enterprise value/sales of 66 is the highest EV/Sales of any U.S. tech company valued at more than $500 million. The forward PE ratio is 260, although some of this reflects a company newly profitable.

Prior to going public, Zoom Video (ZM) had been doubling its revenue for the past three years and did this again for the fourth year. The company posted 100%+ revenue growth, climbing from $60M in revenue for fiscal 2017 to $330M in revenue for fiscal 2019. This is with gross profit margins in the high 70% to low 80% range.

Additionally, quarterly revenue also grew 78% same-quarter year ago to $188.3 million. Adjusted EPS was $0.15 compared to $0.04 EPS in the year-ago quarter. Q4 GAAP income grew 92% YoY to $10.6 million with adjusted non-GAAP income growing 292% YoY to $38.4 million. And total revenue grew 88% year-over-year to $622.7 million and revenue grew at a CAGR of 117% from FY 2017 to FY 2020.

Meanwhile, Zoom Video’s forward guidance shows a more tempered growth rate as the company approaches the $1 billion annual run rate. The median revenue estimate for Zoom Video is 48% growth in fiscal 2021 to $921.8 million and 39% growth in fiscal 2022. Management guidance for revenue is slightly lower than the consensus at $910 million in the mid-range for fiscal 2021. The median EPS guidance for FY 2021 is $0.45 and for FY 2022 is $0.58.

Finally, it’s worth mentioning that Zoom is outperforming both Google Hangouts and Microsoft Skype. The app is currently the second most downloaded mobile app, behind TikTok, according to app-analytics firm Sensor Tower. Citing data from tracking company Apptopia, The New York Times reported that close to 600,000 people had downloaded the iOS app in a single day earlier this month.

Read the full article here.

Top Tech Stock News: 7 Things You Missed This Week (11-Oct-2019)

Posted on by io-fund

1. Comcast to Restructure NBCUniversal Hierarchy Ahead of Peacock Launch

Comcast is reshuffling its senior hierarchy ahead of Peacock’s launch date. The company recently announced that it is consolidating Universal Television and Universal Content Productions under a single business unit to be led by NBCUniversal cable’s chairman, Bonnie Hammer.

Hammer will assume the title of Chairman for NBCUniversal Content Studios and will report to NBCU CEO Steve Burk. The reorganization is being carried out in preparation for Peacock’s launch, Comcast new streaming service, which is to be headed by Comcast Cable’s Matt Strauss.

According to Burke, Hammer was chosen for her ‘strong track record of generating popular and award-winning programming,’ whereas Strauss was selected for his ‘great experience with video, digital technology, and streaming.’

The new appointments are nothing new however. Earlier in January, Hammer was given the position of streaming operations, while NBC Sports Group’s Mark Lazarus was given a bigger role in cable.

Comcast’s NBCUniversal Restructures Its Hierarchy Ahead of Peacock Streaming Launch

2. Lyft Helps Drivers With New Reward System

Lyft recently launched a new ‘driver rewards system’ for their drivers. The system is now live in certain US cities, and was designed to assist drivers manage their daily earnings and workflow.
It also offers many improvements over Lyft’s usual system which only tells drivers about ride-requests and offers them the option to either accept or decline them. In contrast, the new rewards system will allow certain drivers to know how far they will need to drive, how much fare they can expect to receive and how much time they will need to spend driving.

The only downside is that these features will only be available to drivers who have reached Lyft’s ‘gold tier.’ For those who could only reach the lower tiers of the program, however, there are other rewards, such as a 4% cash back on gas when using a Lyft debit card and a $5 cash back for every 500 points achieved in the reward system.

https://www.businessinsider.com/lyft-rewards-include-ability-to-see-trip-details-2019-10

3. Apple’s macOS is Now Available

Apple’s new macOS, Catalina is now live and is available as a free software update. The new OS offers the latest Mac versions for Apple Music, Apple TV and Apple Podcasts as well as Sidecar, a special feature which extends a Mac desktop using an iPad as a secondary display or a tablet input device that has Apple Pencil with Mac apps.

For those who want to add iPad apps to Mac devices, Catalina also features the Mac Catalyst, which allows third party developers to transfer those apps to their Mac devices. Finally, Catalina also allows users to enjoy all of their iPad apps in the latest Mac versions, including Twitter, Post-It, Jira, Tripit and GoodNotes, and it also offers Apple Arcade, Apple’s new gaming subscription service.

https://www.apple.com/newsroom/2019/10/macos-catalina-is-available-today/

4. Tesla Delivers 97,000 Vehicles in 3rd Quarter; Falls Short of Target

Elon Musk had said that Tesla will be able to deliver 360,000 to 400,000 vehicles to consumers in 2019. Unfortunately, reaching this goal remains a difficult challenge.

According to their third quarter report, Tesla only managed to deliver 97,000 cars during this period. The total deliveries include 79,600 Model 3 vehicles as well as 17,400 Model S and X cars. In order to reach their year-long goal, however, Tesla will need to complete over 105,000 vehicle deliveries during the fourth quarter.

Although Tesla’s third quarter reports are impressive, it still falls short of achieving investor expectations. Tesla’s deliveries are used as proxies for sales, and a guide for understanding Tesla’s performance across different periods. So although the company’s third quarter data is certainly impressive, investors are wondering if Musk has what it takes to meet their expectations by the end of the year.

https://www.cnbc.com/2019/10/02/tesla-tsla-3q-2019-production-and-delivery-numbers.html

5. Alphabet’s Waymo to Map Out LA

Alphabet-owned Waymo is 3-D mapping Los Angeles, its infrastructure and its traffic congestion levels to see if it can operate there. The mapping team consists of a small fleet Chrysler minivans to gather data and analyse how Waymo may be integrated into LA’s transportation environment and offer new innovative solutions to traffic problems.

Although Waymo has no immediate plans to launch its services in Los Angeles, the mapping process represents the first major step in finding a location that could best serve its needs, and such expansions will not be out of the ordinary. Waymo is currently expanding into several states, including Florida, California and Michigan, mainly to test the capabilities of their autonomous driving technology.

Unfortunately, commercializing Waymo’s services is taking longer than expected, and the company can only sustain a full live fleet of vehicles in Phoenix, and even then, the vehicles are still maintained by human operators.

https://www.cnbc.com/2019/10/07/alphabet-owned-waymo-is-3d-mapping-la-to-test-if-it-can-launch-there.html

6. Wallstreet Analysts Slashing Netflix Forecasts Ahead of Possible Weak Earnings Report

Wallstreet analysts are slashing their forecasts for Netflix ahead of the company’s third quarter earnings report due to increasing competition and slow subscriber growth. Goldman Sach analysts, in particular, believe that subscriptions are falling ‘modestly below guidance’ whereas UBS is citing weak international growth as a cause for concern. Consequently, both firms have reduced their target price for Netflix stocks.

On the bright side, there’s news that Netflix may have a strong fourth quarter due to additional content line up, such as The Irishman and older favorites like The Crown. Some analysts believe that the new shows could potentially bolster Netflix’subscriber growth numbers as well as offer protection against increasing competition.

https://markets.businessinsider.com/news/stocks/netflix-stock-price-targets-cut-goldman-ubs-before-q3-earnings-2019-10-1028591399

7. Activision Blizzard’s Complicated Political Balancing Act

Activision Blizzard is currently on hot water as it tries to navigate an increasingly complicated political situation. Ever since the company suspended one of its players from an e-sports competition over certain pro-Hong Kong comments, it has been on hot water.

The suspension was seen as an attempt to pander to Chinese authorities, and consequently, sparked a backlash from pro-Hong Kong protestors, including several groups in the US who are calling for a boycott. In fact, #BoycottBlizzard became one of the top trending hashtags on Wednesday.

The latest casualty in this political drama is the company’s ‘Call of Duty Mobile,’ which is still waiting for approval from the Chinese government. Expanding into the Chinese market would significantly boost sales for the new game, but the banning controversy is complicating Activision Blizzard’s plans.

https://www.wsj.com/articles/activision-weighs-chinas-call-against-duties-back-home-11570644011