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How to Pick Growth Stocks in the Tech Sector

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How to Pick Growth Stocks in the Tech Sector

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“What makes a solid tech stock?” may be one of the most important questions an investor can answer. Over the last decade, tech companies started to penetrate the top ten list of global companies by market cap. Today, tech dominates this list with Apple, Microsoft, Google, Facebook and Alibaba.

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"What makes a solid tech stock?" may be one of the most important questions an investor can answer. Over the last decade, tech companies started to penetrate the top ten list of global companies by market cap. Today, tech dominates this list with Apple, Microsoft, Google, Facebook and Alibaba.

Not all tech stocks are winners, of course, with IBM and Yahoo flatlining over the past decade and Cisco unable to reclaim its valuation from nearly twenty years ago. This is why it is important to follow guidelines for individual tech stocks regardless of a broader bear or bull market.

Basic Definition of Growth Stocks:

"Growth stocks tend to react faster to market swings, so you need to examine the risk of every investment you make."

- Nick Giorgi, Investment Strategist in the Chief Investment Office at Bank of America Merrill Lynch

Growth stocks are commonly characterized as stocks with 20% revenue growth for a minimum of three years. Many growth stocks today have much higher revenue growth yet lack profitability. These stocks garner higher valuations and price-to-earnings ratios as the future growth of the company is priced into the stock. This creates more volatility for growth stocks than the broader market, although the risk comes with a greater potential for rewards as growth stocks are expected to double their market capitalization in five years.

Investors in growth stocks are chiefly concerned about the competitive moat, as any business model reporting solid growth will likely be copied by rivals. This is especially a concern if the stock is in the small-cap or mid-cap category as the rivals are likely to be larger than the disruptive company.

Key characteristics of a growth stock include:

Higher price-to-earnings ratio than the broader market

High earnings growth record

More volatile than broader market

Typically, doesn't pay dividends to shareholders

In general, the financial industry tends to look for a few common traits:

Revenue growth of at least 20% over each of the past three years compared to a typical S&P company showing 7% growth.

An identifiable moat that will protect the business.

A valuation above the market's average.

A reasonable chance to double in market capitalization in five years.

With that said, the basic definition of growth can deter investors from winning tech stocks as the definitions discussed above do not fit within the trajectories that tech companies follow.

3 Challenges to the Traditional Definition of Growth Stocks

The finance industry needs to see proof that products or services are becoming more and more popular every day. Typically, in the finance industry, there is hyper-focus on revenue growth for earnings reports, while net income and free cash flow are given broad leniency when evaluating the technology sector. This is a mistake that causes Wall Street investors to suffer losses.

On the other hand, venture capitalists who specialize in high-risk tech investments believe revenue growth is important but product-market fit is critical. Income is one way to determine product-market fit, however, the best markets for growth potential are often too nascent to show up on the income statement on the first day of listing as a public company. Product-market fit requires further analysis into customer retention and churn to conclude if the revenue growth is sustainable.

1. Tech Growth is Not Linear

Tech growth is typically parabolic and rarely proportional along the x-axis. Hockey-stick growth is the most coveted graph pattern for startups and young tech companies which is not consistent with the 20% year-over-year guidelines. This is due to the evolution phase of early adopters (phase 1), virality (phase 2), to critical mass (phase 3). This is why tech products struggle to gain traction for many years and then suddenly appear to be an overnight success. The typical growth trajectory for tech stocks is more like -15%, 10%, 70% compared to the 20%-25%-30% the public markets want to see. For example, Twitter had negative revenue in 2017 before posting 30% growth in 2018. Nvidia has issued guidance for the second quarter at a decline of -18% year-over-year.

2. Competitors and Growth Trajectory in Constant Flux

"Build fast and break things" is an oft-quoted motto in Silicon Valley. Tech companies iterate at minimum quarterly, and sometimes monthly, to stay competitive. The ecosystem is constantly changing, which causes surprises in the stock market, especially because most financial analysts were trained to analyze changes in financial statements rather than learning how to track continuous R&D.

This goes hand-in-hand with growth companies investing heavily in R&D instead of paying dividends. How often do value stocks iterate, such as Hershey's, Walgreens or Starbucks? Most value stocks have had the same product lines with little variation for many decades while a tech company can change monthly. A good example was when Facebook announced Audience Network in 2014 at their Developers Conference. This announcement signaled the beginning of third-party programmatic for Facebook, and marks the plot point on the x-axis that precedes the upward parabolic rise.

3. Revenue Too Simplistic for Growth Stocks

Revenue, operating income, net income and free cash flow are very important and should be included in every diligent analysis. Keep in mind, however, that financials don't tell the story of what is driving the growth. Venture capitalists rely on up to fifty key metrics for each industry vertical to determine if a company will make a good investment. Across all industry verticals, the tech sector has hundreds of key metrics that help determine future growth. Generally speaking, you want to look for accelerating revenue and decelerating losses with a discernable path to profitability. For larger investments, you'll need to rely on a tech analyst who works with key metrics or plan to spend time doing this research on your own.

Here is a sample of the key metrics venture capitalists use that are not available on the income statement, balance sheet or free cash flow statement.

Recommended Reading:

Conclusion:

To summarize, you can forget how the finance industry defines a solid growth investment when analyzing technology. Tech companies change frequently and post sudden growth. Financials do not tell the whole story and key metrics help fill in the missing pieces. There are hundreds of key metrics when looking at the tech industry, averaging fifty or so key metrics for each industry vertical. In the following post, I will discuss 7 do's and don'ts for evaluating tech investments.

Beth's research services provide an edge in finding opportunities and identifying risk in the leading growth sector. She has analyzed thousands of companies in the private and public markets and has an impeccable track record. Learn more here and access 12-month history of her calls.

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I'm an industry insider who writes free in-depth analysis on public tech companies. In the last 12 months, I predicted Facebook's Q2 crash, Roku's meteoric rise, Uber's IPO flop, Zoom's IPO success, Google's revenue miss and more. Be industry-specific. Know more than the broader markets. Sign up now. I look forward to staying connected.
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How to Pick Growth Stocks in the Tech Sector | Beth.technology

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"What makes a solid tech stock?" may be one of the most important questions an investor can answer. Over the last decade, tech companies started to penetrate the top ten list of global companies by market cap. Today, tech dominates this list with Apple, Microsoft, Google, Facebook and Alibaba.

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Ride-share earnings this week proved that if you lower the bar to the ground, any earnings performance can leap over it. Both companies reported staggering losses that were delivered with positive PR spins.

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Ride-share earnings this week proved that if you lower the bar to the ground, any earnings performance can leap over it. Both companies reported staggering losses that were delivered with positive PR spins.

Lyft reported "record second quarter results" while losing roughly the same amount of money as previous years. Uber had an epic $5 billion loss that is closer to $1.3 billion adjusted. The second number only looks acceptable in the parallel universe where a $65 billion market cap company can report any losses at all, let alone $4 billion per year.

Likewise, Lyft looks digestible compared to its counterpart at $850M in losses, until you realize these numbers haven't improved since 2016 when the company reported negative net losses of $692M and net losses of $708M in 2017. There is an improvement from 2018, but again, this depends on how you spin it. To me, it's cut and dry - Investable companies should have fewer losses as they grow revenue. There may be quarters where a company moves backwards, maybe due to capex or another legitimate reason, but the revenue growth in ridesharing creates losses due to subsidizing, and this is a holistic problem that is not going away.

The market found it encouraging that Lyft was expected to lose $1.1B but has revised this to $850M for 2019. Profit margins are negative 23%versus negative 37.7%. The price was adjusted for the $200M improvement, which during after-hours resulted in a 11% spike. The spike soon settled when Lyft announced they are moving up the lock-up period from late September to August 19 th.

We see evidence of the holistic problem where Lyft's losses will marginally improve this year compared to last year. There is no evidence, however, that this is sustainable. If Lyft needs to support R&D on autonomous driving, for instance, then the margins will be deep in the red once again. An important metric to watch is the EBIT margin of -77% compared to -61% a year ago.

Uber's Q2 results are more straight forward to analyze. Adjusted EBITDA was negative 292M in the year-ago period compared to negative 656M in the current period for an increase of 125%. Keep in mind, Uber Eats and Uber Freight help offset the losses.

As I stated in MarketWatch, I'm not a fan of the price war narrative. Increases in revenue per users is irrelevant if the losses are also accelerating or stagnant. This means the subsidization of rides continues to drive demand, and if both companies raise prices, they will also have more losses. The end of a price war sounds like a PR spin to me and we see no evidence in the financials that this will do anything for profitability.

There are also many other unknowns in how demand will react to higher priced supply. Gross bookings may decrease as people decide to drive to a destination, park at the airport for $8 per day, or hire a regular taxi who is already waiting outside many venues. Also, Uber may pull ahead of Lyft if prices go up as the service has more drivers readily available and is a larger brand.

I've written extensively about these companies and expressed why my readers should steer clear ahead of the IPOs during the exuberant market of April 2019. I highly recommend anyone who wants to invest in the ride-sharing story to consider the liquidity the lock-up expirations will create with more shares flooding the market.

I won't repeat everything here, but below are a few bullet points from my previous analysis published March 14 th, 2019 - one month before Lyft went public. I've also included links to my previous analysis on Uber - both before and after the company went public.

Lyft and Uber pay incentives to acquire and retain users. In gaming, a company might spend $8 to acquire a user with a lifetime value of $15 per user for a profit of $7. The problem with ride-sharing apps is that the incentives offered do not cover the costs of the ride, and that is one reason we see strong sales growth mired by substantial net losses.

Reuters has some historic information on this dated back to 2015, when Uber passengers paid only 41 percent of the actual cost of their trips. At the time, Reuters reported that this creates an "artificial signal about the size of the market" with Uber releasing limited financial data that showed losses of $708 million per quarter.

Lyft and Uber are mobile applications, but the business model is more of a large-cap human resources department with many variables around wages, and potentially regulations due to independent contractor classifications. (There was a recent $20 million settlement due to the misclassification of drivers in California).

A paramount risk to both Uber and Lyft is total addressable market. Room for geographic expansion is limited beyond the United States, other than a few outlier countries like Saudi Arabia. Of course, the underlying issue with TAM is a lack of intellectual property with an easy-to-duplicate mobile application that leverages common app features such as GPS location and SMS/voice. For a list of competitors, reference "Lyft: Risky Valuation and No Intellectual Property"

My premium subscribers received a 12-page report on Roku And TTD prior to earnings, Snap prior to earnings and tech trade war plays to hedge their portfolios. members receive updated recommendations and entry/exit scenarios on tech stocks. Learn more here.
For additional information on Uber: Uber IPO: Record-Breaking for All the Wrong Reasons Uber Stock Had Disappointing Q1 Earnings: So Why Did the Price Go Up?
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I'm an industry insider who writes free in-depth analysis on public tech companies. In the last 12 months, I predicted Facebook's Q2 crash, Roku's meteoric rise, Uber's IPO flop, Zoom's IPO success, Google's revenue miss and more. Be industry-specific. Know more than the broader markets. Sign up now. I look forward to staying connected.

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Uber and Lyft: Unprofitable Powerhouses | Beth.technology

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Ride-share earnings this week proved that if you lower the bar to the ground, any earnings performance can leap over it. Both companies reported staggering losses that were delivered with positive PR spins. Lyft reported "record second quarter results" while losing roughly the same amount of money as previous years.

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Beaten-down Nvidia is diligently preparing to pounce on its rivals

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Beaten-down Nvidia is diligently preparing to pounce on its rivals

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Nvidia’s stock went from unstoppable to nearly uninvestable in the matter of a few weeks last year and has not recovered.

The sudden drop in Nvidia’s stock price and a competitive ecosystem that’s hard to understand are two reasons the chipmaker has scared away growth investors, who have opted for momentum bets such as cloud-software companies. The fact that semiconductor companies are cyclical, and mired in the U.S.-China trade war, has further overshadowed Nvidia’s growth potential.

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Nvidia's stock went from unstoppable to nearly uninvestable in the matter of a few weeks last year and has not recovered.

The sudden drop in Nvidia's stock price and a competitive ecosystem that's hard to understand are two reasons the chipmaker has scared away growth investors, who have opted for momentum bets such as cloud-software companies. The fact that semiconductor companies are cyclical, and mired in the U.S.-China trade war, has further overshadowed Nvidia's growth potential.

But the real story is that Nvidia is spring-loaded as its product offerings quietly gather strength in a market of enormous magnitude: artificial intelligence (AI). The path for Nvidia's market domination in the AI economy, worth $15 trillion over the next decade, will be choppy now and exhilarating later.

Nvidia's profits have been slammed over the past two quarters, and will require a few more quarters to return to levels before the cryptocurrency bust, which reduced demand for Nvidia's mid-range graphics chips. A spectacular comeback is not likely when the company reports earnings Thursday after the stock market closes.

In the first quarter, Nvidia reported $394 million in net income and earnings per share (EPS) of 65 cents, down from $1.24 billion and EPS of $2.05 a year earlier. Analysts are predicting EPS of $1.07-$1.24 for the third quarter. Still, profit margins are better than those of rival AMD, which booked net income of $35 million on revenue of 1.53 billion in the second quarter. Despite that, AMD's stock has risen 79% over the past 12 months, compared with Nvidia's -40%

Nvidia vs AMD

Taking a somewhat contrarian stance, I do not regard AMD as Nvidia's primary competitor. AMD is more focused on Intel and taking market share from the CPU data center. Nvidia's true rivals are FPGA chips from Xilinx and Intel/Alterra. I also believe AMD will have to choose if it plans to go against two 800-pound gorillas (Intel on CPUs and Nvidia on GPUs).

It would be nearly impossible to stave off Nvidia, which is putting all of its weight into the GPU data center with the acquisition of Mellanox and new partnerships such as with Arm on AI and high-performance computing software. That will help strengthen Nvidia's lead, which already owns over 90% of the cloud infrastructure-as-a-service market.

Chief Executive Officer Jensen Huang had an excellent quote that described Nvidia's ongoing cooperation with CPUs as the necessary backbone to GPUs, and why his focus has been elsewhere in the data center stack. It helps to provide a glimpse into his future strategy.

"These two types of processing are going to be here to stay," he said. "With accelerated computing, we don't suffer from Amdahl's Law - we obey it, and the thing that you don't accelerate becomes the critical path. We believe in fast CPUs, and that is why we work with all of the world's fastest CPU makers - IBM, Intel, AMD, Arm."

Huang went on to say he's focused on the X factor, or what will accelerate the path forward at the highest percentages possible. Rather than compete with many players on CPUs, Huang wants Nvidia to be the leader in the highest growth piece of the data stack - parallel computing and acceleration, especially in AI.

The $7 billion acquisition of Mellanox, announced in March, will help Nvidia accelerate the performance of GPUs while maintaining a low barrier to entry for developers who favor Nvidia's CUDA platform for AI development.

Mellanox acquisition

To illustrate how Mellanox accelerates the performance of GPUs, Nvidia and Mellanox support more than 250 of the world's top 500 super computers, including the world's two fastest supercomputers, Sierra and Summit, operated by the U.S. Department of Energy.

Mellanox's Ethernet switch systems are the most used internal system in the top 500 in a recent report released at ISC High Performance, with 247 systems, and InfiniBand is the second most-used, with 140 systems. However, InfiniBand, a computer-networking communications standard, connects the most high-powered computers where the presence of Ethernet is nearly non-existent.

This is clearly a strategic acquisition for Nvidia as Mellanox has small profits (net income of $38.4 million in the second quarter) with profit margins of 2%, and the acquisition will require nearly all of Nvidia's cash reserves. As a result, Nvidia may have to take on debt.

Some speculate that Chinese regulators could block the acquisition, similar to what happened when Qualcomm attempted to acquire NXP Semiconductors. This is less likely, though, as Nvidia and Mellanox are in separate categories and don't pose security risks from communications. In addition, China is a large customer of Nvidia for AI applications and stands to benefit from the combined company.

Nvidia's strategic goal is to close the gap between GPUs and FPGAs, a competing AI and machine-learning (ML) chip that has 10 times better power consumption and four times better general-purpose compute. FPGAs deliver better performance and lower latency. However, FPGAs are more challenging to develop as they require custom hardware development skills that are outside the scope of many software developers.

In other words, Nvidia is not acquiring Mellanox to simply own InfiniBand and Ethernet, but rather to boost its GPUs as the best data center option available. Nvidia is aligning its architecture with speed, as Mellanox supports Virtual Protocol Interconnect (VPI), which allows the ubiquitous Ethernet to provide bandwidth as cheap as possible, and InfiniBand to deliver higher throughput and fewer bottlenecks during high loads.

Mellanox has done an excellent job of taking market share from Ethernet incumbents, such as Cisco, Arista Networks, Juniper Networks, Hewlett-Packard, Dell and Intel. Some of this is due to Ethernet, and also InfiniBand, and now a hybrid of the two.

Nvidia's Mellanox acquisition helps increase Nvidia's competitive lead on GPUs, while also slightly reducing the requirement for CPUs from companies like Intel and AMD. Mellanox can be leveraged to speed up GPUs while closing the gap in latency performance with FPGAs (Xlinx and Intel/Alterra). This is a strategic acquisition for Nvidia and Mellanox to become the strongest combination for artificial-intelligence and machine-learning computations.

Declining data center revenue

This thesis hinges on data center GPU revenue, which is declining quarter-over-quarter across both Nvidia and AMD. The Mellanox acquisition won't close until the end of the year. Plus, rumor has it, China may delay trade talks through the 2020 election. Therefore, timing remains a primary challenge for Nvidia investors to capture this forward-looking opportunity.

Nvidia's data center sales have fallen over the past two quarters by 14% in January and 7% in April. According to MarketWatch, some analysts predict data center revenue will continue to decline through the third quarter of this year.

AMD reported its average GPU sales price was down slightly quarter over quarter due to lower data center GPU sales. Still, sales rose year over year.

Nvidia's singular focus is GPU-powered cloud and artificial intelligence applications, and FPGAs are the second runner-up rather than AMD's GPUs. According to Liftr Cloud Insights, 97.4% of cloud infrastructure-as-a-service (IaaS) compute instances deploy Nvidia's GPUs across the top four cloud providers. The top four cloud providers are Amazon, Microsoft, Google and Alibaba, and account for 62.3% of the IaaS and platform-as-a-service markets. According to the insights report, AMD accounts for only 1% of the cloud IaaS market.

As with many of the best growth opportunities, the current earnings outlook does not accurately portray Nvidia's potential. This will be true for a few quarters. It may require sniper-like timing (or a generous trailing stop), but betting on Nvidia and AI will have spring-loaded gains when there are clearer skies for semiconductors and hyper growth in the $15 trillion AI economy.

My premium subscribers received a 12-page report on Roku And TTD prior to earnings, Snap prior to earnings and tech trade war plays to hedge their portfolios. members receive updated recommendations and entry/exit scenarios on tech stocks. Learn more here.

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I'm an industry insider who writes free in-depth analysis on public tech companies. In the last 12 months, I predicted Facebook's Q2 crash, Roku's meteoric rise, Uber's IPO flop, Zoom's IPO success, Google's revenue miss and more. Be industry-specific. Know more than the broader markets. Sign up now. I look forward to staying connected.
If you are a more serious investor, we have a premium service that offers institutional-level research and entry/exit options. This membership offers a competitive edge in identifying growth opportunities and reducing risk in the tech sector. Learn more here . Join 3,003 other tech investors who receive weekly stock tips:

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Beaten-down Nvidia is diligently preparing to pounce on its rivals

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Nvidia's stock went from unstoppable to nearly uninvestable in the matter of a few weeks last year and has not recovered. The sudden drop in Nvidia's stock price and a competitive ecosystem that's hard to understand are two reasons the chipmaker has scared away growth investors, who have opted for momentum bets such as cloud-software companies.

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What Happened to Splunk Last Week? Earnings Review

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What Happened to Splunk Last Week? Earnings Review

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Splunk Inc’s (NASDAQ: SPLK) shares are currently trading at $118.46 which represents flat gains over the past 12-months basis compared to the broader market returning flat gains over the same time frame. Second-quarter earnings were reported on Wednesday and the question of weakening cash flow is taking center stage.

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Splunk Inc's (NASDAQ: SPLK) shares are currently trading at $118.46 which represents flat gains over the past 12-months basis compared to the broader market returning flat gains over the same time frame. Second-quarter earnings were reported on Wednesday and the question of weakening cash flow is taking center stage.

Splunk Overview

Splunk is a hybrid cloud computing company that harnesses the power of artificial intelligence to offer data analytics solutions to a variety of organizations. The company is one of the leaders in the big data analysis and security space, which according to Statista is expected to grow from roughly $42 billion in 2018 to $103 billion by 2027 representing a CAGR of 9.4 percent.

The company derives the majority of its revenue from licensing its platform which gives users the ability to investigate, monitor, analyze and act on machine data regardless of format or source. "Machine data is produced by nearly every software application and electronic device across an organization and contains a real-time record of various activities, such as transactions, customer and user behavior, and security threats," Splunk notes in its annual report.

Splunk offers customers two options; either Splunk Enterprise whose license fee is based on the estimated daily data indexing capacity required and Splunk Cloud which offers the core capabilities of Splunk Enterprise as a scalable cloud service.
Splunk's Q2 Highlights
Ultimately, the most important aspect that potential shareholders were looking for was whether Splunk would be able to improve its cash flow going forward. Back in May when the company released its first-quarter earnings report, the share price tumbled by at least 17 percent driven by concerns about the company's weakening cash flow.

History seemed to repeat itself again on Wednesday when shares fell over 10 percent after it reported earnings. Apparently, the market chose to ignore the fact that Splunk had another one of its best quarters in recent years and that it had made significant progress towards shifting its business model from perpetual software licenses to recurrent cloud-based revenue.

As a matter of fact, Splunk reported better than expected numbers in the quarter, and also reaffirmed guidance for the rest of the year. According to the earnings release, the new business model is already paying off with revenue for the second quarter posting a 33 percent increase to $517 million compared to the year ago quarter. Software revenues, which combines licensing and cloud, were up $350 million or 46 percent year-over-year.

Moreover, the company added more than 500 new Enterprise customers including Verizon Media Group and ABB Group, in addition to recording 93 orders greater than $1 million. In spite of this, the company still posted an operating loss of $100.9 million, though adjusted earnings came in at $0.30 per share which beat Wall Street's expectations of $0.12 on revenue of $488.4 million.

Overall, gross margin for the quarter was 84 percent up 2 points on a year-over-year basis with cloud delivering over 50 percent gross margin.

In Q2, 95 percent of software revenue was either term or cloud and management expects the elimination of perpetual license sales will accelerate the renewable mix to 99 percent in Q4 and high 90s for the full year.

As previously highlighted in Q1, the accelerated shift to renewable has a timing impact on cash collections. In other words, Splunk's transition from perpetual licenses to more predictable, cloud-based subscription model is happening much faster than the company initially anticipated and this has caused the timing of Splunk's cash flow to take a hit over the short term.

Newly appointed CFO Jason Child had this to say about the cash flow situation:

"As expected, Q2 operating cash flow was negative, given the more rapid growth of multi-year term and cloud contracts. This translates to a greater cash flow drag this year, as more of our contracts are paid ratably. We are now expecting negative operating cash flow for the balance of the current year and expect fiscal 2020 with $300 million net negative operating cash flow."

This is in stark contrast to the Q1 cash flow guidance of positive $250 million which understandably spooked investors triggering a mild sell off.

According to Child, there were two new drivers behind this expected reduction. First, the renewable transformation is already essentially complete with the mix at 95 percent in Q2 and expected to go to 99 percent by Q4. Second, the company is significantly reducing its upfront cash invoicing for term and cloud deals from 58 percent paid upfront in the first half of FY 2020 to an estimated 33 percent paid upfront in the second half of FY 2020.

William Blair analyst David Griffin further explains that "because the entire value of perpetual contracts is invoiced and collected in cash up front, the lower contribution creates a significant headwind to cash flow." The company is also billing customers for fewer months in advance, which again reduces cash received up front.

Apart from transitioning away from perpetual licenses, Splunk has made some strategic purchases in the recent past to boost its artificial intelligence position, including SignalSense in 2017 and VictorOps last year. On the call, Splunk revealed that it would be making another acquisition - cloud-monitoring service SignalFX for $1.05 billion in a cash-and-stock deal which is expected to strengthen the company's application monitoring service.

The combination of Splunk and SignalFx will give application developers and IT departments a unified data platform that allows them to monitor and absorb data in real-time, no matter the infrastructure or scale, in order to cut costs, boost revenue and improve the customer experience. "I am excited by our strong quarter, tremendous cloud growth and our agreement to acquire SignalFx," Splunk CEO Doug Merritt said during the earnings call. "I am particularly pleased with how quickly we are accelerating our business transformation to cloud, and the impact cloud is having on our customers."
Splunk's Valuation
A quick look at Splunk's revenue multiples shows that it is trading well below its three-year historical price to sales ratio. Furthermore, on a relative valuation basis, Splunk doesn't appear to be as expensive as other companies in a similar space. The chart below shows the price to sales ratios for Splunk versus Adobe (NASDAQ: ADBE), Talend (NASDAQ: TLND), Salesforce (NASDAQ: CRM), Workday (NASDAQ: WDAY).
(Source: YCharts)
With the company expecting total revenues of approximately $2.25 billion in 2020, this would imply a forward price to sales of roughly 7x which would make it a bargain compared to other companies in the same sector.
Conclusion
Splunk has delivered revenue figures above analysts' forecasts in the past 12 consecutive quarters. The main takeaway is that the transition of the business model is just about completed and any near-term weakness should be watched closely for a potential buying opportunity. Acquisitions, like Salesforce and Tableau, and Google and Looker, are shaking up the space and this may have also affected buying pressure.

Disclosure: Subscribers to my premium service may have positions in the securities mentioned in this article or may take positions at any time. Splunk is not currently on my list of top tech stocks although this may change in the future.

Sign up for Analysis on the Best Tech Stocks

I'm an industry insider who writes free in-depth analysis on public tech companies. In the last 12 months, I predicted Facebook's Q2 crash, Roku's meteoric rise, Uber's IPO flop, Zoom's IPO success, Google's revenue miss and more. Be industry-specific. Know more than the broader markets. Sign up now. I look forward to staying connected.
If you are a more serious investor, we have a premium service that offers institutional-level research and entry/exit options. This membership offers a competitive edge in identifying growth opportunities and reducing risk in the tech sector. Learn more here . Join 3,003 other tech investors who receive weekly stock tips:

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What Happened to Splunk Last Week? Earnings Review | Beth.technology

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Splunk Inc's (NASDAQ: SPLK) shares are currently trading at $118.46 which represents flat gains over the past 12-months basis compared to the broader market returning flat gains over the same time frame. Second-quarter earnings were reported on Wednesday and the question of weakening cash flow is taking center stage.

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Okta Earnings: More to Squeeze From Valuation?

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Okta Earnings: More to Squeeze From Valuation?

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Okta is fundamentally weaker than many analysts believe, making its booming stock priced to perfection.

The company was early out of the gate for cloud-subscription IPOs in 2017, and the valuation has reaped the benefits of Wall Street’s enthusiasm for subscription models. However, a reasonable price to initiate Okta as a buy-and-hold investment is now in the rearview mirror, rendering it a momentum play. That will be important for investors when they review its earnings report for the three months through July after the stock market closes Wednesday.

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There is ample evidence that, although Okta is priced to perfection, it does not need to report perfection to continue its momentum. This is one red flag for a buy-and-hold strategy at current prices, but a positive sign for momentum trading. Eventually, the market will want perfection for the price it's paying when macro conditions warrant more discernment.

For instance, many analysts are touting the stock for positive free cash flow (FCF), although this is from operating cash efficiencies. Okta does not have positive free cash flow from positive net income, which is something financial analysts are writing out of the script entirely.

Free cash flow becomes more indicative of financial health when net income is positive; to separate the two underweights profitability, which is a mistake for buy-and-hold investors (or analysts) when evaluating the stock. Free cash flow positive is much more celebratory when net income is positive.

In fact, Okta suffered a record net loss in the fiscal first quarter that ended in April. Okta's loss widened nearly 200% year-over-year, to $51.9 million. This led to diluted EPS of negative 46 cents, compared with negative 25 cents in the year-earlier quarter.

Lastly, Okta is no longer a debt-free company and is carrying $275 million in convertible senior notes.

Wall Street is laser-focused on Okta's top line, and is a little blind-sided to the bottom line as free cash flow and subscription growth were the only touted highlights from last quarter's earnings report.

Okta posted 53% year-over-year growth in subscription services to $108.5 million, while professional services revenue grew 15% to $7 million. Total calculated billings hit $158.9 million, with trailing 12-month subscriptions jumping 55% to $488.2 million.

The increase in net losses from the most recent quarter was under-reported due to subscriptions driving revenue growth of 50% year-over-year.

In the upcoming earnings report, the bar for revenue is set to less than 40%, which is an easy hurdle for a subscription cloud company that has been posting 50%-plus revenue growth for many consecutive quarters.
Also Read: Microsoft Stock Price: Technical Analysis
Under the Hood

In Okta's case, there are two areas I am watching more closely, as spending is substantial and executive decisions are slightly unusual.

The first is sales and marketing expenses, which are nearly two-thirds of revenue. At Workday, sales and marketing comprise 30% of revenue, Twilio is at about a third and Zoom Video Communications is at about half.

This signifies Okta needs to spend a lot to scale and maintain its footing. Selling, general and administrative (S&GA) expenses were nearly 85%, or $107 million, of $125 million in total revenue in the most recent quarter. Notably, Okta's S&GA and research and development (R&D) exceed revenue at 114%.

The second clue is a few recent acquisitions that will hurt Okta's financials. For instance, Okta's $52.5 million purchase of early-stage startup Azuqua will dent operating expenses. (Early-stage startups tend to have thin margins, although exact numbers from Azuqua weren't provided.)

There is also a recently announced $50 million venture fund. Creating venture funds is typically a positive, as companies including Twilio and Workday also have created venture funds to help incubate firms that use its product and services. However, in Okta's case, it's funding startups to help innovate the core product, which is concerning because Okta is not even profitable yet and is already looking for help to iterate the core product, rather than incubate to increase demand in the market.
See: Beth Kindig runs a premium service that includes a forum on tech stocks where she answers questions from readers.
Looking deeper, I believe Okta is throwing a lot of weight into product because the mega-cap cloud server companies are in the identity and access management (IAM) market. Okta has to provide a compelling reason to use an add-on service to Microsoft Azure, Google Cloud, Amazon's AWS and IBM Cloud rather than use the in-house identity and access management service.
Also Read: Roku's Stock Price: Will There Be Another Pullback?
Okta does have a competitive advantage due to its superior product, which is confirmed by third-party analysts Gartner and Forrester. The one issue to consider for the long term is that larger rivals are going to protect their turf. Cloud infrastructure is a revenue segment that will determine the world's most valuable company over the next few years, and Okta has an incredible feat ahead to remain more agile and to iterate faster than opponents that have bottomless amounts of cash. On that note, Okta could make a great acquisition for one of those companies, though any prospective suitor would have to overpay.

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Okta Earnings: More to Squeeze From Valuation? | Beth.technology

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There is ample evidence that, although Okta is priced to perfection, it does not need to report perfection to continue its momentum. This is one red flag for a buy-and-hold strategy at current prices, but a positive sign for momentum trading. Eventually, the market will want perfection for the price it's paying when macro conditions warrant more discernment.

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Slack’s missteps have now made the stock a ‘buy’ at the right price

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Slack’s missteps have now made the stock a ‘buy’ at the right price

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Slack Technologies is the fastest-growing software-as-a-service (SaaS) company of all time and a Silicon Valley favorite, yet the direct public offering (DPO) clearly did not go well for public investors.

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Slack Technologies is the fastest-growing software-as-a-service (SaaS) company of all time and a Silicon Valley favorite, yet the direct public offering (DPO) clearly did not go well for public investors.

The shares WORK, +8.03% opened at $38.50 on June 20, rose to $42 intraday, and have now sunk to a record-low of $26.25 in after-market hours leading into its first earnings report as a public company.

The losses are at 36% from its intraday high, and that occurred when many cloud-software initial public offerings (IPOs) have enjoyed triple-digit returns since going public.

So what went wrong? And, more importantly for growth investors, will things go right for San Francisco-based Slack soon?

Before the company releases second-quarter earnings Sept. 4, here's insight into its revenue, valuation and competitors.

Slower growth

Slack's product - an instant-messaging and collaboration system - has massive potential with a 143% net customer retention rate, yet the financials undermine the company's growth trajectory. For instance, guidance for the current fiscal year is at 47% to 50% revenue growth year-over-year, down from 82% in the prior year. The slower growth, which was revealed in an updated prospectus two weeks before going public, was unlikely to win over many people regardless of how much traction the product has with current users.

Yet, there is impressive traction, with the average user keeping the app open for nine hours on her computer and engaging with it for 90 minutes a day. Compare that with the daily time spent on Facebook FB, +2.60% 58 minutes, Instagram, 53 minutes, YouTube, 40 minutes, Pinterest, 14 minutes, and messaging app WhatsApp, 28 minutes.

As I covered before the DPO, both sides of the debate have valid points when evaluating Slack's future stock performance. However, due to Slack's product strength, my prediction is the stock will have a turnaround as user loyalty will overcome the financial turbulence. The questions that remain: timing and valuation for entry.

Divergence in user base

Slack's revenue grew 110% in fiscal years 2017-2018, and then slowed to 82% in 2018-2019. The company is now forecasting 47%-50% growth in the current fiscal year with revenue between $590 million and $600 million, compared with $400 million in fiscal 2019. This year's estimated adjusted loss is estimated to be 41 cents to 44 cents a share.

On June 3, Slack released an updated prospectus that showed growth in customers worth over $100,000 in contracts, yet revealed a decline across paid user growth from 9,000 in the year-earlier quarter to 7,000 in the current quarter.

In other words, there is a divergence as overall paid users are declining, while customer accounts worth over $100,000 are growing. That could be because of internal efforts to raise revenue and focus on enterprise-level customers, which is a common strategy leading up to public offerings. More quarterly earnings are needed to ultimately decide which direction this will go, and if the larger accounts will pay off as a primary focus for growth.

Slack provided the net dollar retention rate in the S-1 filing, which depicts what percent of revenue from current customers is retained from the prior year, after accounting for upgrades, downgrades and churn. This is helpful in predicting growth for subscription-based companies.

The formula for the net dollar retention rate is: Beginning of period revenue + upgrades - downgrades + churn = y with y/beginning of period revenue.

If the net dollar retention rate is above 100%, then the growth from the existing customer base offsets the losses. If the number is below 100%, then downgrades and churn exceed growth.

Slack published a net retention rate of 143%, which is very good and outperforms most cloud software IPOs that provided this number in the past. This is due to Slack's sticky traction and low churn with the current customer base.

One thing to note about the retention rate is that Slack officially launched in 2014, and has a shorter history than other companies on this list with many having launched 10 years prior to IPO compared with Slack's five years. Typically, the longer the time period, the lower the net retention rate due to more opportunity for customer churn.

See: Beth Kindig runs a forum on tech stocks where she answers readers' questions.

Valuation

Slack's valuation is high - there's no argument there. If we look at the $600 million in estimated revenue for fiscal 2020 at the $14 billion market cap, then Slack has a forward price-to-sales (P/S) ratio of 24.

Of course, we can name a long list of cloud-software companies with comparable price-to-sales or higher, but the difference is that Slack has not won over sell-side analysts, whereas Shopify SHOP, +0.67%, Zoom Video Communications ZM, +1.16% and Okta OKTA, -0.20% have. Certainly, returns are healthier if you can beat sell-side analysts to a winning stock. (For instance, my newsletter subscribers beat sell-side analysts to Roku ROKU, +7.67% for much higher gains.)

We are also seeing some slight exhaustion in the market with regard to cloud-software valuations. Last week, a few companies beat on both top-line and bottom-line estimates, such as Veeva Systems VEEV, -0.82% and Workday WDAY, -0.75%, yet the stocks dipped as much as 6%.

One thing to consider with Slack is that the potential market is nearly impossible to predict as the company is carving out a new category. The global enterprise collaboration market is expected to grow from $34.6 billion to $59.9 billion, with a growth rate of 11.6%.

This is a sizable market for a company with $600 million in revenue. However, it's hard to determine where Slack's product fits. Slack CEO Stewart Butterfield alludes to owning 2% of the software market as a force extender for the other 98% of the software market, and that would equate to a market worth $12 billion in annual enterprise software sales.

Okta is a great example of a company that has similar numbers on its profit-and-loss statement, yet Okta earned its market cap through a series of strong earnings reports and gaining the trust of public investors, whereas Slack demanded a record-breaking price-to-sales right out of the gate. Twilio TWLO, +2.02% also has a similar profit-and-loss statement, but is trading at 16 forward price-to-sales. Slack not only priced itself too high for a new company with slowing growth, but it's also likely the direct public offering didn't help.

DPOs

In August 2018, Slack was valued at $7 billion in its last venture round and listed at nearly double that in June 2019 when it was listed on the public market.

Herein lies the problem with direct public offerings, which are heralded as a way of cutting out middlemen and fees: The lack of a lock-up period allows the company to price high on the public markets for the benefit of insiders rather than fairly price the stock with the understanding that insiders will lose if the company is overpriced and the stock attracts downward momentum.

Many investors are aware that IPOs can be risky, although tech companies have a penchant for proving these risk-averse investors wrong with many recent triple-digit success stories. In this case, however, both Slack and Spotify SPOT, +0.03% have proven that DPOs are not ideal for public investors as the opening valuations have not been sustained in the long term. This could be due to a lack of consequence for listing too high.

Competitors

There are some valid points on the more bearish side of the debate, but using Microsoft MSFT, +1.17% Team's 13 million users as the primary weak point is not of them. As with most David and Goliath battles in tech, the market has this backwards.

Slack is a small, relatively unknown brand that has managed to keep pace with one of the world's most recognized brands - Microsoft. The fact they are almost equal in users at 10 million for Slack and 13 million for Microsoft is a boon for Slack, not the other way around. This proves that Slack is a serious contender and able to attract users with a hundredth of a decimal point in revenue compared with Microsoft's trillion-dollar market cap.

Slack is a stand-alone app compared with Microsoft's legacy enterprise software suite, which is now sold as a subscription in the cloud as Microsoft Office 365, yet was originally launched in 1990. Microsoft Outlook has an estimated 400 million users, primarily enterprise.

To say that Microsoft launched Teams in 2017 and has quickly caught up to Slack is not exactly accurate. Microsoft has owned business communications for nearly 30 years and has spent $35 billion in acquisitions to own the messaging space pre-emptively with the acquisition of Skype for $8.5 billion and LinkedIn for $26.2 billion. Those acquisitions occurred around the same time that Microsoft considered acquiring Slack for $8 billion.

Microsoft then leveraged its hundreds of millions of enterprise software customers and copied Slack's approach. Yet, somehow, Slack should be afraid of Microsoft? I disagree. Investors should be asking themselves why 600,000 organizations are downloading a separate app to hold their business discussions with many being Microsoft Office users.

More importantly, the word Slack is becoming synonymous for business messaging. Like what Kleenex did for facial tissues, "to slack someone" means to send a coworker a message. I do not foresee anyone using Microsoft Teams in this manner, and this is the best free marketing a company can have.

The main product differentiation is Slack's customization. There are over 1,500 standard integrations with Slack, such as with Zoom video-conferencing and Google Drive. However, there are over 450,000 applications developed internally by Slack customers, according to the CEO. Those applications come from developers who want a more advanced alternative to the closed ecosystem that Microsoft provides.

Conclusion

There is a healthy debate on Slack, and both sides have valid arguments. On the one hand, you have a company with slowing growth, and on the other, you have a product with strong industry key metrics and a highly engaged user base.

When looking at valuation for companies that have similar profit-and-loss statements, it becomes clear that Slack came on too fast and too strong with its valuation. This is a mistake the company has paid for, as the momentum is now downward. Better to have listed at a $10 billion market cap and earned the $14 billion market cap than the reverse, as many public investors can be myopic with tech products and are easily scared off.

For opportunists and visionary investors, however, the downward momentum on a product that is becoming synonymous with business messaging is welcomed for an attractive entry.
This article appeared on MarketWatch September 4th, 2019.
Sign up for Analysis on the Best Tech Stocks

I'm an industry insider who writes free in-depth analysis on public tech companies. In the last 12 months, I predicted Facebook's Q2 crash, Roku's meteoric rise, Uber's IPO flop, Zoom's IPO success, Google's revenue miss and more. Be industry-specific. Know more than the broader markets. Sign up now. I look forward to staying connected.
If you are a more serious investor, we have a premium service that offers institutional-level research and entry/exit options. This membership offers a competitive edge in identifying growth opportunities and reducing risk in the tech sector. Learn more here . Join 3,003 other tech investors who receive weekly stock tips:

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Slack's missteps have now made the stock a buy at the right price

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Slack Technologies is the fastest-growing software-as-a-service (SaaS) company of all time and a Silicon Valley favorite, yet the direct public offering (DPO) clearly did not go well for public investors. The shares WORK, +8.03% opened at $38.50 on June 20, rose to $42 intraday, and have now sunk to a record-low of $26.25 in after-market hours leading into its first earnings report as a public company.

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Slack’s missteps have now made the stock a ‘buy’ at the right price

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Slack’s missteps have now made the stock a ‘buy’ at the right price

# data[].attributes.body
Slack Technologies is the fastest-growing software-as-a-service (SaaS) company of all time and a Silicon Valley favorite, yet the direct public offering (DPO) clearly did not go well for public investors.

# data[].attributes.attachment_link.readable_text
Slack Technologies is the fastest-growing software-as-a-service (SaaS) company of all time and a Silicon Valley favorite, yet the direct public offering (DPO) clearly did not go well for public investors.

The shares WORK, +8.03% opened at $38.50 on June 20, rose to $42 intraday, and have now sunk to a record-low of $26.25 in after-market hours leading into its first earnings report as a public company.

The losses are at 36% from its intraday high, and that occurred when many cloud-software initial public offerings (IPOs) have enjoyed triple-digit returns since going public.

So what went wrong? And, more importantly for growth investors, will things go right for San Francisco-based Slack soon?

Before the company releases second-quarter earnings Sept. 4, here's insight into its revenue, valuation and competitors.

Slower growth

Slack's product - an instant-messaging and collaboration system - has massive potential with a 143% net customer retention rate, yet the financials undermine the company's growth trajectory. For instance, guidance for the current fiscal year is at 47% to 50% revenue growth year-over-year, down from 82% in the prior year. The slower growth, which was revealed in an updated prospectus two weeks before going public, was unlikely to win over many people regardless of how much traction the product has with current users.

Yet, there is impressive traction, with the average user keeping the app open for nine hours on her computer and engaging with it for 90 minutes a day. Compare that with the daily time spent on Facebook FB, +2.60% 58 minutes, Instagram, 53 minutes, YouTube, 40 minutes, Pinterest, 14 minutes, and messaging app WhatsApp, 28 minutes.

As I covered before the DPO, both sides of the debate have valid points when evaluating Slack's future stock performance. However, due to Slack's product strength, my prediction is the stock will have a turnaround as user loyalty will overcome the financial turbulence. The questions that remain: timing and valuation for entry.

Divergence in user base

Slack's revenue grew 110% in fiscal years 2017-2018, and then slowed to 82% in 2018-2019. The company is now forecasting 47%-50% growth in the current fiscal year with revenue between $590 million and $600 million, compared with $400 million in fiscal 2019. This year's estimated adjusted loss is estimated to be 41 cents to 44 cents a share.

On June 3, Slack released an updated prospectus that showed growth in customers worth over $100,000 in contracts, yet revealed a decline across paid user growth from 9,000 in the year-earlier quarter to 7,000 in the current quarter.

In other words, there is a divergence as overall paid users are declining, while customer accounts worth over $100,000 are growing. That could be because of internal efforts to raise revenue and focus on enterprise-level customers, which is a common strategy leading up to public offerings. More quarterly earnings are needed to ultimately decide which direction this will go, and if the larger accounts will pay off as a primary focus for growth.

Slack provided the net dollar retention rate in the S-1 filing, which depicts what percent of revenue from current customers is retained from the prior year, after accounting for upgrades, downgrades and churn. This is helpful in predicting growth for subscription-based companies.

The formula for the net dollar retention rate is: Beginning of period revenue + upgrades - downgrades + churn = y with y/beginning of period revenue.

If the net dollar retention rate is above 100%, then the growth from the existing customer base offsets the losses. If the number is below 100%, then downgrades and churn exceed growth.

Slack published a net retention rate of 143%, which is very good and outperforms most cloud software IPOs that provided this number in the past. This is due to Slack's sticky traction and low churn with the current customer base.

One thing to note about the retention rate is that Slack officially launched in 2014, and has a shorter history than other companies on this list with many having launched 10 years prior to IPO compared with Slack's five years. Typically, the longer the time period, the lower the net retention rate due to more opportunity for customer churn.

See: Beth Kindig runs a forum on tech stocks where she answers readers' questions.

Valuation

Slack's valuation is high - there's no argument there. If we look at the $600 million in estimated revenue for fiscal 2020 at the $14 billion market cap, then Slack has a forward price-to-sales (P/S) ratio of 24.

Of course, we can name a long list of cloud-software companies with comparable price-to-sales or higher, but the difference is that Slack has not won over sell-side analysts, whereas Shopify SHOP, +0.67%, Zoom Video Communications ZM, +1.16% and Okta OKTA, -0.20% have. Certainly, returns are healthier if you can beat sell-side analysts to a winning stock. (For instance, my newsletter subscribers beat sell-side analysts to Roku ROKU, +7.67% for much higher gains.)

We are also seeing some slight exhaustion in the market with regard to cloud-software valuations. Last week, a few companies beat on both top-line and bottom-line estimates, such as Veeva Systems VEEV, -0.82% and Workday WDAY, -0.75%, yet the stocks dipped as much as 6%.

One thing to consider with Slack is that the potential market is nearly impossible to predict as the company is carving out a new category. The global enterprise collaboration market is expected to grow from $34.6 billion to $59.9 billion, with a growth rate of 11.6%.

This is a sizable market for a company with $600 million in revenue. However, it's hard to determine where Slack's product fits. Slack CEO Stewart Butterfield alludes to owning 2% of the software market as a force extender for the other 98% of the software market, and that would equate to a market worth $12 billion in annual enterprise software sales.

Okta is a great example of a company that has similar numbers on its profit-and-loss statement, yet Okta earned its market cap through a series of strong earnings reports and gaining the trust of public investors, whereas Slack demanded a record-breaking price-to-sales right out of the gate. Twilio TWLO, +2.02% also has a similar profit-and-loss statement, but is trading at 16 forward price-to-sales. Slack not only priced itself too high for a new company with slowing growth, but it's also likely the direct public offering didn't help.

DPOs

In August 2018, Slack was valued at $7 billion in its last venture round and listed at nearly double that in June 2019 when it was listed on the public market.

Herein lies the problem with direct public offerings, which are heralded as a way of cutting out middlemen and fees: The lack of a lock-up period allows the company to price high on the public markets for the benefit of insiders rather than fairly price the stock with the understanding that insiders will lose if the company is overpriced and the stock attracts downward momentum.

Many investors are aware that IPOs can be risky, although tech companies have a penchant for proving these risk-averse investors wrong with many recent triple-digit success stories. In this case, however, both Slack and Spotify SPOT, +0.03% have proven that DPOs are not ideal for public investors as the opening valuations have not been sustained in the long term. This could be due to a lack of consequence for listing too high.

Competitors

There are some valid points on the more bearish side of the debate, but using Microsoft MSFT, +1.17% Team's 13 million users as the primary weak point is not of them. As with most David and Goliath battles in tech, the market has this backwards.

Slack is a small, relatively unknown brand that has managed to keep pace with one of the world's most recognized brands - Microsoft. The fact they are almost equal in users at 10 million for Slack and 13 million for Microsoft is a boon for Slack, not the other way around. This proves that Slack is a serious contender and able to attract users with a hundredth of a decimal point in revenue compared with Microsoft's trillion-dollar market cap.

Slack is a stand-alone app compared with Microsoft's legacy enterprise software suite, which is now sold as a subscription in the cloud as Microsoft Office 365, yet was originally launched in 1990. Microsoft Outlook has an estimated 400 million users, primarily enterprise.

To say that Microsoft launched Teams in 2017 and has quickly caught up to Slack is not exactly accurate. Microsoft has owned business communications for nearly 30 years and has spent $35 billion in acquisitions to own the messaging space pre-emptively with the acquisition of Skype for $8.5 billion and LinkedIn for $26.2 billion. Those acquisitions occurred around the same time that Microsoft considered acquiring Slack for $8 billion.

Microsoft then leveraged its hundreds of millions of enterprise software customers and copied Slack's approach. Yet, somehow, Slack should be afraid of Microsoft? I disagree. Investors should be asking themselves why 600,000 organizations are downloading a separate app to hold their business discussions with many being Microsoft Office users.

More importantly, the word Slack is becoming synonymous for business messaging. Like what Kleenex did for facial tissues, "to slack someone" means to send a coworker a message. I do not foresee anyone using Microsoft Teams in this manner, and this is the best free marketing a company can have.

The main product differentiation is Slack's customization. There are over 1,500 standard integrations with Slack, such as with Zoom video-conferencing and Google Drive. However, there are over 450,000 applications developed internally by Slack customers, according to the CEO. Those applications come from developers who want a more advanced alternative to the closed ecosystem that Microsoft provides.

Conclusion

There is a healthy debate on Slack, and both sides have valid arguments. On the one hand, you have a company with slowing growth, and on the other, you have a product with strong industry key metrics and a highly engaged user base.

When looking at valuation for companies that have similar profit-and-loss statements, it becomes clear that Slack came on too fast and too strong with its valuation. This is a mistake the company has paid for, as the momentum is now downward. Better to have listed at a $10 billion market cap and earned the $14 billion market cap than the reverse, as many public investors can be myopic with tech products and are easily scared off.

For opportunists and visionary investors, however, the downward momentum on a product that is becoming synonymous with business messaging is welcomed for an attractive entry.
This article appeared on MarketWatch September 4th, 2019.
Sign up for Analysis on the Best Tech Stocks

I'm an industry insider who writes free in-depth analysis on public tech companies. In the last 12 months, I predicted Facebook's Q2 crash, Roku's meteoric rise, Uber's IPO flop, Zoom's IPO success, Google's revenue miss and more. Be industry-specific. Know more than the broader markets. Sign up now. I look forward to staying connected.
If you are a more serious investor, we have a premium service that offers institutional-level research and entry/exit options. This membership offers a competitive edge in identifying growth opportunities and reducing risk in the tech sector. Learn more here . Join 3,003 other tech investors who receive weekly stock tips:

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Slack's missteps have now made the stock a buy at the right price

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Slack Technologies is the fastest-growing software-as-a-service (SaaS) company of all time and a Silicon Valley favorite, yet the direct public offering (DPO) clearly did not go well for public investors. The shares WORK, +8.03% opened at $38.50 on June 20, rose to $42 intraday, and have now sunk to a record-low of $26.25 in after-market hours leading into its first earnings report as a public company.

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How to pick long-term stock winners in cloud computing

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How to pick long-term stock winners in cloud computing

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Cloud software stocks suffered a reversal that has produced losses of close to 50% from record highs.

The story for those stocks hasn’t changed, but the valuations have, and that could be a good thing for investors who know what they own.

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Cloud software stocks suffered a reversal that has produced losses of close to 50% from record highs.

The story for those stocks hasn't changed, but the valuations have, and that could be a good thing for investors who know what they own.

The biggest risk for investors in cloud stocks isn't the losses that have pummeled prices over the past two weeks, but rather the big reversal that may scare them away from the sector. It's painful to watch large declines in stocks, yet nobody wants to miss out on a potential 10-bagger either. When the market rewards, and penalizes, all cloud software stocks equally, with little differentiation, it's prudent to choose a select group that has compelling stories for a buy-and-hold strategy.

An investing adage is to buy when others are fearful. I would say to buy when others can't differentiate among companies. Clearly, from what we saw over the past two weeks, a broad range of companies are being lumped together, with little recognition as to which are the winners.

To put it simply, this is a great time to know what you own as the story for these stocks is much deeper than the simple descriptor of "cloud software."

In the graphic above, the orange line represents the First Trust Cloud Computing ETF SKYY, +0.12% which holds about 60 positions, all of which dominate the cloud space. The light-blue line is the Consumer Staples Select Sector ETF XLP, +0.41%, which tracks the consumer staples sector, a group that's thought to be impervious to recessions. Those have historically been the laggards in this long, growth-driven bull market. The dark purple line is the benchmark S&P 500 Index SPX, +0.29%.

Before the stock market correction in May, cloud stocks were the leader in the market, while the staples were trailing. However, since that first correction, and up till today, there's been a reversal. Over the past week high-growth leaders in this bull market, mostly cloud, have taken big hits.

For example:

Workday WDAY, -1.26% is down 25% from its high. Twilio TWLO, +3.08%, down 26%. Okta OKTA, -0.20%, down 22%. Zoom ZM, +1.02%, down 27%. MongoDB MDB, -1.57%, down 29%. PagerDuty PD, -0.38%, down 47%. (All prices are current as of 2 p.m. Eastern time Sept. 11.)

Cloud software categories

To start, cloud software needs to be broken up into categories to look more closely at the markets they serve. Here are some examples:

* Twilio is at the intersection of communications and mobile.

* CrowdStrike CRWD, +0.80% and Okta are security companies.

* PagerDuty simplifies operations, and Workday simplifies human resources and the finance department.

* Alteryx AYX, -0.74% and Splunk SPLK, +0.02% are big data analytics.

* Salesforce CRM, +0.43% is customer relationship management (CRM), but the market it serves is the sales and marketing industry.

* Zoom simplifies communications for enterprises and business-to-business (B2B), as does Slack WORK, +1.47%.

* Veeva Systems VEEV, -0.08% serves the life sciences and pharmaceutical industry.

Twilio has more in common with Skype, and even Verizon VZ, +0.50% and AT&T T, -0.93%, than it does with Okta. Workday has more in common with SAP and Oracle ORCL, -4.26% than it does with Alteryx. Yet, cloud stocks experienced a categorical black swan as if they all serve the same markets.

What this means is that some investors don't understand these companies. The viability of a company's product and how it fits the market is not factored into the investments, and this is creating a window of opportunity for investors who take the time to study individual stocks.

Valuations

The more logical explanation is that there was a clearance sale for overpriced stocks, and the common denominator in the sell-off was high valuations. However, the issue with this theory is that some of the companies will go on to be big winners, and higher price-to-sales (P/S) or enterprise-value-to-sales (EV/S) ratios are warranted because of the enormous markets they serve in contrast with their small size.

For instance, Zoom's P/S and EV/S are gut-wrenching (no argument there), but the company's revenue growth is unusual. You'd be hard-pressed to find triple-digit revenue growth for eight straight quarters in the stock market. The prospects of disrupting Cisco and other enterprise telecommunications at a $22 billion market cap is worth more than other companies that are serving smaller, more saturated markets. Zoom's rapid growth, which is unprecedented, makes it hard to pinpoint a fair valuation.

Workday is another example of a company that carries high P/S and EV/S ratios, in this case twice as high as its large competitors, Oracle and SAP. In this scenario, you get a pure-play option that is moving quickly on machine learning to reduce the overhead required in human resources and finance departments. What Workday's software aims to do, which is to reduce the number of employees needed in those departments, delivers a value that is worth many times over the cost of the software. If Workday is successful, the company will be worth much more than two times its current market cap, whereas, Oracle and SAP are essentially defending territory.

See: Beth Kindig runs a forum on tech stocks where she answers readers' questions.

Splunk has P/S and EV/S ratios of eight compared with Alteryx's 24 and 22, respectively, yet both were affected by the sell-off despite being in similar markets. Splunk should have held steady if this was a clearance sale on high valuations.

The evidence doesn't point to a rational reason for the sell-offs. Some stocks are priced high, but knowing which ones deserve to be is going to be more important than ever.

Also Read: Okta Earnings: More to Squeeze From Valuation?

How to evaluate cloud software

* The larger the market, the safer the investment. Can every enterprise employee in the world use the product for maximum scale? Does the product solve a pain and reduce overhead for businesses? These will outlast the more niche markets and products that are considered a convenience. To illustrate, if you are providing software for office communications that replaces office telecom equipment, not only is your product a necessity but it will be the solution to high telecom bills during a time when costs are being cut. There are numerous examples of fulfilling a (non-negotiable) necessity while reducing costs in the cloud software category.

* Ignore earnings estimates. Many estimates were lowered this past year, and when companies "beat" earnings estimates, they were actually declining year-over-year, sometimes substantially. Apple AAPL, -0.23% is a prime example of this. The stock continues to reach all-time highs and "beat earnings" despite two straight quarters of negative growth and mere 1% growth in the most recent quarter. That may work for Apple, but smaller-cap companies that are declining won't last long, especially in a value rotation. Another example is Okta, which I believe had weakening fundamentals yet beat earnings estimates. Okta is now one of the hardest-hit cloud software stocks over the past two weeks, with a 22% drop since the end of August.

* We hear a lot about competitive moats, yet high switching costs is a protective buffer that serves two purposes: It locks in subscription revenue and staves off competitors. Often, switching from a cloud software provider will cost a customer time and resources. Look for companies that have high switching costs.

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

The best companies in the category of "cloud software" will continue to post rapid growth regardless of economic conditions, and the investors who run from this sector will suffer bigger losses from missed opportunities than investors who know their winners.
This article appeared on MarketWatch September 12th, 2019. Also Read: How to Pick Growth Stocks in the Tech Sector
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How to pick long-term stock winners in cloud computing

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Cloud software stocks suffered a reversal that has produced losses of close to 50% from record highs. The story for those stocks hasn't changed, but the valuations have, and that could be a good thing for investors who know what they own.

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The path to profitability for Uber and Lyft looks more like a dead end

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The path to profitability for Uber and Lyft looks more like a dead end

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Below, I look beyond the earnings reports to review a few of the systemic issues that affect Uber and Lyft. It’s important to look for the cause of the losses.

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The ride-sharing companies are subsidizing rides and overspending on technology, and soon their very business model may be upended in California.

Ride-share company earnings prove that if you lower the bar to the ground, it's easy to leap over.

Uber and Lyft each reported staggering losses recently, yet the reports were delivered with positive spins.

Lyft released "record second-quarter results" while losing roughly the same amount of money as in previous years. Lyft's improving loss guidance was meant to look attractive at $850 million to $875 million per year, compared with the $1.15 billion-$1.175 billion previously forecast. But that amount is higher than in both 2016 and 2017.

Uber had an epic $5 billion quarterly loss, which is about $1.3 billion when adjusted for certain items. In what universe does a company with a $58 billion market cap report any losses at all, let alone what's projected to be $4 billion for a full year.

Below, I look beyond the earnings reports to review a few of the systemic issues that affect Uber and Lyft. It's important to look for the cause of the losses.

1. Ride subsidies destroy potential profits

The S-1 filings disclosed a risk that overshadows the path to profitability for both companies. An excerpt from Lyft's S-1 filing says:

"We grow our business by attracting new riders to our platform and increasing their usage of our platform over time. ... We also offer incentives for first-time riders to try Lyft, as well as incentives for existing drivers and riders to refer new riders. ... We often also provide incentives to existing riders to encourage them to expand their use of our platform. If we fail to continue to attract riders to our platform and grow our rider base, expand riders' usage of our platform over time or increase our share of riders' transportation spend, our results of operations would be harmed."

In 2017, Reuters published that Uber passengers pay only 41% of the actual cost of their trips, citing research from transportation consultant Hubert Horan. At the time, Reuters warned that this creates an "artificial signal about the size of the market" after Uber had released limited financial data as a private company that showed losses of $708 million per quarter. Four years later, with a $1.3 billion quarterly loss, there's no evidence anything has changed.

The problem with subsidizing rides is that investors aren't able to determine what would be required for profitability, how much the cost of a ride would have to increase to cover expenses, and if increasing prices would negatively affect demand. Therefore, the real-world revenue is unknown, and the losses reflect the effects of subsidies.

2. Business model under threat in California

Lyft and Uber have scaled their companies, but it comes with the variable cost of human labor. Ideally, you want fixed costs for R&D on platforms, software, hardware and other products to create the margins that technology is known for.

Lyft and Uber are mobile applications, but the business model is more of a large-cap human-resources department with many variables around wages, and now, regulations due to independent contractor classifications.

The systemic issue is that the mobile app holds very little intellectual property, with the primary value of the product resting in the mobilization of a massive workforce of nearly 1.9 million people, per Lyft's S-1 filing, and 3.9 million drivers with Uber. We know there isn't intellectual property in ride sharing, as there are many such companies globally: China's Didi, Singapore's Grab, India's Ola, Europe's Bolt (previously Taxify) and MyTaxiApp, and Dubai's Careem (which is being bought by Uber).

Therefore, the value of the companies is in the workforce, not the technology. This also happens to be the biggest risk.

Uber and Lyft face legislation in California that may require them to reclassify independent contractors as employees. The ride-share companies maintain they are exempt from the law, which is set to go into effect in January. That could lead to a statewide ballot initiative in 2020.

It's a stretch to think California taxpayers would side with Uber and Lyft. California is especially burdened by workers who make less than minimum wage in a state with high living costs. The lack of health care, and Social Security and tax withholdings from a workforce the size of Uber's and Lyft's means costs must be absorbed by taxpayers. Meanwhile, hundreds of Uber and Lyft drivers have organized protests in the state, which doesn't help for voter sentiment.

Most importantly, these companies have no profits to absorb a change in the business model, such as being required to pay minimum wage or health care. Uber is offering $21 per hour as a compromise, instead of facing the overhead of becoming an employer, but it's unclear how much Uber pays per hour now to calculate the impact. This would also set a precedent for workers in other states, who might pursue a similar arrangement.

On the one hand, the companies are subsidizing rides up to 60% to lure customers, and on the other, workers are protesting. That is not a good formula.

3. Autonomous vehicles are farther away than they appear

This leads us to the only hope for ride sharing to become profitable: To remove the human driver through autonomous vehicles (AV). Over a year ago, I wrote that regulation hurdles between levels 2 and 3, and delayed deployments, will put immense pressure on stocks that are overvalued based on AV speculation.

For background, we are at Level 2 for commercial purposes. Audi was set to be the first company to release a Level 3 system, which was denied by regulators in early 2019. To remove the driver, we will need to be at Level 4 or Level 5. (See this article for AV levels.)

ABI Research, an advisory firm that reports on market-foresight trends, predicts 8 million consumer vehicles with Level 3 to Level 5 autonomy will ship in 2025. Compare this to the 94.5 million vehicles sold in 2017, which equates to 8.5% of sales.

This is a small and fairly insignificant percentage of market share to be chasing six years ahead of deployment. Yet, headlines are a continual churn of autonomous vehicle "moments" - every partnership, every mile driven, every make and model that adds another feature. The headlines don't make it clear we are not able to commercially release Level 3 AV right now - and that includes Tesla and Google's Waymo.

It's surprising Uber and Lyft would attempt to fund autonomous vehicles. After all, they're not high-tech companies with robotics and artificial-intelligence experience. They certainly don't have the reserves to fund R&D, as Google/Waymo do, or the talent to compete with AV specialists that have been working on this problem for over a decade, such as Torc Robotics, which works with industrial systems for companies including Caterpillar and Daimler Trucks.

Keep in mind, Tim Cook of Apple has called autonomous systems one of the most difficult AI projects to work on. Ideally, there is a successful, core business funding autonomous R&D - as Google has operated at a loss on its AV projects for a long time. Instead, Uber is losing $1.3 billion from the core business, yet has the resources to pursue flying taxis.

From an investment perspective, the better bet is a successful core business that can absorb the R&D on other projects.

4. Uber lockup expiration is looming

In July, Lyft's stock was trading at $67. After the Aug. 19 lockup expiration, in which early investors could sell their shares, it's now at $48.

Early investors have lost a lot of money on Lyft, whose shares traded at $79 the day the company went public. On March 14, I warned my readers two weeks in advance of the IPO that these weak fundamentals and product-market-fit issues were insurmountable, even when Wall Street analysts predicted the stock would reach $100.

My next warning is the Uber IPO lockup, which expires the first week of November. While I don't expect an immediate dump on day one of the lockup expiring, there should be a noticeable unwinding in the months that follow. This is a possibility for all IPOs, even ones with solid financials. So one can only imagine what might happen to a large-cap stock that's losing $4 billion per year while potentially facing deeper losses from California legislation.
This article appeared on MarketWatch September 20th, 2019.
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I'm an industry insider who writes free in-depth analysis on public tech companies. In the last 12 months, I predicted Facebook's Q2 crash, Roku's meteoric rise, Uber's IPO flop, Zoom's IPO success, Google's revenue miss and more. Be industry-specific. Know more than the broader markets. Sign up now. I look forward to staying connected.
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Path to profitability for Uber and Lyft looks more like a dead end

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Ride-share company earnings prove that if you lower the bar to the ground, it's easy to leap over. Uber and Lyft each reported staggering losses recently, yet the reports were delivered with positive spins. Lyft released "record second-quarter results" while losing roughly the same amount of money as in previous years.

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Governments won’t be able to stop Facebook and Google from abusive tracking on smartphones — but Apple could

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Governments won’t be able to stop Facebook and Google from abusive tracking on smartphones — but Apple could

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The only force that can stand up to the complex tracking methods used by Google and Facebook will be an opposite, yet equal, force. It will not come from governments, which think that paying for search results is the problem. Rather, the problem is the pervasive code and software that continually tracks people, which no competitor can compete with.

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Another day, another headline saying Alphabet's Google and Facebook are being investigated for allegedly breaking privacy laws and engaging in anti-trust behavior.

Google GOOG, +0.95% GOOGL, +0.98% has been the subject of three antitrust investigations conducted by the European Union, resulting in more than $8 billion in fines.

Now the company, which controls 31% of global digital ad dollars, will face the U.S. on anti-trust matters. A big question is if governments will be effective, as they may not understand how social-media and internet businesses operate.

In April 2018, Congress tried to piece together how Facebook's FB, +2.74% platform works. It ended up being a disaster. Anyone who works in the mobile-ad industry knows that the mobile device, notorious for its massive data leakage, could be used to collect thousands of data points daily to reveal personal thoughts, behaviors and political preferences.

When Facebook CEO Mark Zuckerberg answered a question on how Facebook makes money - "We sell ads, senator" - he wasn't fooling the ad industry. It's well aware that Facebook sells audiences and identities, as the company's ads would be worthless without extracting data points from the mobile device and aggregating them for targeting.

This isn't your typical targeting of pizza (or beer) ads during football games. This targeting knows you better than you know yourself, as it monitors your actions with data science and look-alike modeling.

The only force that can stand up to the complex tracking methods used by Google and Facebook will be an opposite, yet equal, force. It will not come from governments, which think that paying for search results is the problem. Rather, the problem is the pervasive code and software that continually tracks people, which no competitor can compete with.

Turns out, there is an opposite and equal force in magnitude that has chipped away at the anti-competitive tracking that occurs in the browser with Intelligent Tracking Prevention (ITP). Yet it has not done so on the leakiest device of all: mobile. And that would be Apple AAPL, +0.85%.

Pervasive tracking is anti-competitive

Facebook and Google aren't the only companies that track users on mobile and browsers. They simply have software and code in more places. For instance, Facebook's software is in 32% of the top 500 app market - and up to 800,000 applications. They track billions of non-Facebook users with software that can track you whether you have navigated one of their digital properties or not.

There is no way to opt out of Facebook or Google from tracking you, as their tracking is simply everywhere. In fact, security experts, including Bruce Schneier of the Berkman Center for Internet and Society at Harvard, call such tracking outright surveillance.

The incredible depth of information those giant companies have on mobile and internet users is the "moat" that generates unprecedented cash flow in advertising. Both ad-dollar machines have inertia from the data being collected, and it doesn't appear that the EU's General Data Protection Regulation (GDPR), anti-trust lawsuits in Europe and the U.S., or the Cambridge Analytica scandal is going to slow those companies.

The flow of data is provided by tracking code across websites. Those include the Facebook "like" button and sign-in. It's also done through software development kits (SDKs), such as Facebook Audience Network, which is installed in 32% of the top 500 apps on the market. Google simply acquired Android to have tracking across the majority of mobile, and then went further, acquiring AdMob in 2009. That ad network was especially popular on the Apple iPhone.

The moat that Google and Facebook have enjoyed comes from having first-party relationships with nearly every user who has a smartphone. This is called first-party data and is a loophole used to collect data even after a user is on another property where there is no relationship. For instance, Facebook uses first-party data to power ads on streaming service Hulu, but at this point, the first-party relationship does not exist with Facebook's social network once someone is on Hulu, and this is done without explicit consent (by both Facebook and Hulu). Easy-to-navigate opt-ins are not offered, as it's unlikely Hulu viewers, who pay for the app, would want Facebook accessing their viewing data if they had to opt-in.

Privacy issues aside, there is no way for another ad company to compete when Google and Facebook collect that much data. Other companies are copying their approach by tracking users with universal ad IDs, including leveraging Apple's Identification for Advertisers (IDFA).

Apple's ITP prevents browser tracking

To understand how technology can neutralize tracking, it's important to look at Apple's Intelligent Tracking Prevention measures, which were launched in 2017. Apple's ITP placed a limit on how long cookies are available for third-party contexts by removing third-party cookies after 24 hours.

At first, ITP did not have an effect on Google, as users of its search service and other properties visit those sites daily and, therefore, are not considered third-parties. Some critics say ITP strengthened Google as one of few remaining options to target niche audiences.

In 2018, Apple continued to battle data collection on the Safari browser by shutting down finger printing, a method of triangulating a user's identity through fonts, screen dimensions and plug-ins.

In March 2019, Apple announced ITP 2.1, which limited first-party cookie storage to seven days. To put that in perspective, a Google Analytics cookie, in theory, would last for up to two years. Safari can now delete it within a week.

Finally, in May 2019, Apple limited tracking to 24 hours, including Google and Facebook.

We've seen statistics from publishers where they get half the CPM value - cost per thousand impressions - as a result of ITP's impact. If they can't have good targeting, some of their sites become less worthwhile for their advertisers.

Google and Facebook are the companies most affected by ITP 2.2, which was released in May 2019. Still, the companies reported record second-quarter ad revenue - $16 billion for Facebook and $38 billion for Google.

That may be due to Apple's Safari and Mozilla having a small share of browser activity, or it could be because Facebook and Google have daily first-party relationships with users. A third possibility is that it's too soon to understand the effects of ITP.

Keep in mind, the browser is not nearly as powerful as the mobile device.

Also Read: Apple's Stock Price is at Inflection Point

More on Apple's IDFA

At the Advertising Week conference in New York last week, there was a presentation by Gadi Eliashiv of Singular titled "A World Without IDFA: The Implications for Marketers." I caught up with him after the presentation to get more background on Apple's Identifier for Advertisers, or IDFA, and the possibility of Apple restricting the identifier. Unlike cookies on the web, where there is a tag on the browser, mobile identifiers have much stronger tracking capabilities. The identifier belongs to the device and works across applications and devices.

Eliashiv pointed out that attribution, or the tracking of advertising's effectiveness, will always be a reality as it's important for advertisers to track return on investment (ROI), and this ultimately supports the mobile ecosystem for the development of new apps and features. He also thought the recent iOS 13 upgrade, which offers users the option to sign into apps via an email address that Apple generates, is a way of logging into apps and getting personalized experiences without having to give up personally identifiable information.

As Eliashiv said, if it were an easy decision, then Apple would have already made it.

Apple's chance to make a statement

As of now, Apple has no plans to remove the IDFA, although for a company that insists it is a protector of privacy, at the very least, there should be better opt-ins. The changes made with ITP on the browser may not have had a big effect. However, the implications of Apple restricting IDFAs on iOS becomes more serious with the iPhone having a global penetration of up to 20% of smartphone sales.

Even companies that have fancier IDs, such as Trade Desk TTD, +3.04%, with its Unified ID, relies on IDFA to some extent, and any changes to IDFA would limit the ability to collect and stitch together fragments about the user.

That said, perhaps Apple should have addressed those issues before hyping its privacy efforts. As of now, Apple is enabling a lot of tracking with the IDFA, and this may not be an appropriate compromise for attribution as users are completely unaware their activity can be tracked across the entire device.

Furthermore, users don't have any method for approving the software development kits, from Facebook's Audience Network or Google's AdMob.

Even with anti-trust regulations, this level of tracking will continue. That is, unless Apple steps in.
Also Read: Apple is Not a Growth Company Anymore
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I'm an industry insider who writes free in-depth analysis on public tech companies. In the last 12 months, I predicted Facebook's Q2 crash, Roku's meteoric rise, Uber's IPO flop, Zoom's IPO success, Google's revenue miss and more. Be industry-specific. Know more than the broader markets. Sign up now. I look forward to staying connected.

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Apple could stop Facebook and Google from abusive tracking

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Another day, another headline saying Alphabet's Google and Facebook are being investigated for allegedly breaking privacy laws and engaging in anti-trust behavior. Google GOOG, +0.95% GOOGL, +0.98% has been the subject of three antitrust investigations conducted by the European Union, resulting in more than $8 billion in fines.

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Why no streaming company will be able to dethrone Netflix

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Why no streaming company will be able to dethrone Netflix

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For investors, it could be a costly mistake to be on the wrong side of that debate, as Netflix stock’s 52-week low is $231 and the high is $385, a sizable spread for a $125 billion market-cap company. In the two weeks that followed the streaming company’s second-quarter earnings release in July, Netflix shed $24 billion in market value. The Los Gatos, Calif.-based company releases third-quarter results Oct. 16.

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Netflix critics see mountains of debt and bleeding free cash flow. Opportunists see a company with the world's best track record for beating the odds in disrupting traditional media.

For investors, it could be a costly mistake to be on the wrong side of that debate, as Netflix stock's 52-week low is $231 and the high is $385, a sizable spread for a $125 billion market-cap company. In the two weeks that followed the streaming company's second-quarter earnings release in July, Netflix shed $24 billion in market value. The Los Gatos, Calif.-based company releases third-quarter results Oct. 16.

Investors are on edge with over-the-top (OTT) stocks, with whipsaw reactions to news of any kind that a new entrant has emerged. (An OTT media service offers TV shows and movies directly to viewers via the internet.) And with more than 190 OTT providers in the U.S., there are plenty to keep track of. These days, competition is becoming a daily threat. We've seen new services by Apple AAPL, -0.23%, NBCUniversal and Disney DIS, +0.05% challenge investors' conviction on Netflix.

Second-quarter earnings results added to the debate, as Netflix said the net number of subscribers declined in its home market for the first time. The company also reported fewer-than-expected new international subscribers. Never mind the fact that Netflix is the top streaming service by a wide margin, with 87% of OTT households in the U.S. subscribing to the service.

The OTT growth opportunity is global. Cable companies are primarily holding on to subscribers with live sports and news, suggesting there's an opportunity for OTT live content. For subscription video on demand (SVOD) content, such as Netflix's, the domestic market is mature - the company has 60.1 million subscribers, compared with 128 million households. What remains is global.

The international opportunity is clearly indicated in earnings and subscriber growth, and Netflix is primarily in the red with free cash flow due to producing content for various regions. However, the market is myopic with this particular stock, overlooking the simple facts around broadband penetration rates and the lack of viable competitors on a global scale.

Global OTT market

According to Digital TV Research, the global over-the-top market will grow from $68 billion in 2018 to $159 billion in 2024. Subscription services will climb by $51 billion between 2018 and 2024, reaching a total of $87 billion.

Netflix is the clear leader globally. The streaming service has done an excellent job penetrating Western Europe, which has fast broadband speeds. English-speaking countries represent 70%-87% of Netflix subscribers, while non-English-speaking countries, such as Italy, France and Spain, stand at between 55%-64%.

Asia-Pacific offers growth opportunities as the OTT market is complicated for rivals, yet early in the maturation phase. Some challenges are outside of Netflix's control, such as in India, where only 1% of the population watches Netflix due to the cost of the service and low broadband speeds. In that country, where 61% of Indians watch pirated content, an ad-supported service is more likely to succeed than a subscription service.

As Asia's population represents the majority of the world's, gains of 2%-3% can be more impactful than double-digit increases in North America. According to eMarketer, Netflix's penetration of Asia-Pacific will advance from 11.8% in 2018 to 14.3% in 2020.

Regions such as China have high barriers to entry for stand-alone services, yet Netflix has secured a promising licensing deal with iQiyi IQ, +2.41%, which is owned by Baidu BIDU, +1.65%. Netflix's share in Japan remains at 17%, despite launching in 2015, as the country has an older population that is averse to new technologies.

International markets such as Central and Eastern Europe, the Middle East and Africa have upside for acquired titles, an area of strength for Netflix.

If Netflix continues to dominate globally, then the company could be serving 50%-70% of developed countries and 20% of the developing world. With the limitations of broadcast and linear television, it's unprecedented to have a truly global media company. We will see the full effects of this long after the United States is saturated.

See: Beth Kindig's premium service for entries and exits on technology stocks

Broadband penetration

The OTT market in the U.S. took a decade to surpass pay TV, with Hulu launching in 2007, popular set-top boxes starting circa 2008 and Netflix's streaming service beginning in 2010. (Netflix was founded in 1997 as a DVD-rental service.) This growth has been assisted with the wide availability of high-speed broadband.

The global market will take twice, or maybe three times, that long. Broadband is slow to non-existent in many countries, although progress is being made. Brazil, for instance, reports a 20% annual improvement in households with 4 Mbps (megabits per second) or more. (Netflix requires at least 3 Mbps.)

Japan and South Korea have nearly 50 million people with speeds of 100 Mbps or higher. Fiber technology and broadband are prominent in Japan and South Korea, along with Australia, Hong Kong, Malaysia, Singapore, Taiwan and Vietnam. There is room for growth once higher broadband rates are achieved in New Zealand, Indonesia, Thailand, India and the Philippines.

Overall, OTT video is projected to grow to 6.4% of emerging market households, or 103 million in total, by the end of 2019. That is up from 19.4 million in 2014. By 2025, digital growth will add over 1 billion middle-tier consumers for telecom companies, which will help to open the market for OTT players.

There is no evidence that another streaming service will dethrone Netflix as those broadband services are built out. Disney+, the streaming service set to launch in November, may be a viable global competitor. However, Netflix is still projected to be in first place by a wide margin by 2024.

Media is a universal staple for quality of life, and OTT delivers cheaper content than broadcast or linear television. Some forecasts place 2040 as the pivotal point when essentially every person on the planet will have internet access, up from roughly 50% today. With the same data, others are more optimistic and are forecasting 2030.

Gene Munster, an analyst at Loup Ventures, told CNBC that "Netflix is not going to make a dramatic change to our lives in the next decade." He misses the point entirely that Netflix is set to make a dramatic change for the remaining 6.5 billion people outside the U.S. and Western Europe.

The price of being No. 1

Clearly, Netflix has had to pay huge bills for becoming a global streaming service. The company spent $8.9 billion on content in 2017, $12 billion in 2018 and will pay a projected $15 billion in 2019. Reed Hastings, one of the best entrepreneurial tech CEOs of the past decade, is clearly gunning for global territory. Naysayers may be right about high-risk debt becoming an albatross for the company, but the first-mover advantage that Netflix has secured is going to be hard to shake. In that way, the barriers to going global is protection from other competitors, albeit at a cost.

There is plenty of evidence that domestic OTT players will not be able to handle the logistics of going global. For instance, while the TV shows "Friends" and "The Office" are leaving Netflix in the U.S., many will remain with Netflix internationally. According to Amy Reinhard, vice president of acquisitions at Netflix, only Disney is able to compete in international distribution at this time. Netflix also partners with companies like Warner Bros. for international film rights.

Netflix had 19 of the top 20 most-streamed shows in 2018. The sole exception was Hulu's "The Handmaid's Tale." According to Christy Ezzell, senior director of TV Time, this is partly due to Netflix's investment in global audiences, including significant regional investments in foreign-language content and licensing partnerships. For instance, "Dark" and "Elite" are foreign-language originals that topped the top 20 list and beat out Amazon AMZN, +1.78% Prime on all accounts, including "The Marvelous Mrs. Maisel." Notably, two of those are Marvel originals and will count for Disney+ in the future.

Amazon Prime may be reporting large subscriber numbers, but the company most certainly is not doing well on engagement. In fact, Amazon is reportedly in the No. 2 spot for OTT services yet is entirely absent from the top 20 list for content. I suspect subscriber numbers are skewed with Amazon Prime members who are more interested in free shipping or Whole Foods Market discounts.

Interestingly, some criticize Netflix for maintaining its lead at about 87% of subscribers projected through 2023, as if the share should rise toward 100% with new entrants gunning for the company.

Pivot possibilities

I'm sure Hastings, a CEO I wouldn't bet against, is aware of the many pivot possibilities. Netflix could offer a cheaper subscription tier for catalog content while keeping prices high for newer originals. The company could add video feeds similar to Google's GOOG, +2.13% GOOGL, +2.01% YouTube or TikTok for three-minute curated content consumption. Or Netflix could continue to meet Disney on its turf and release originals for theaters. With that said, if history is any indication, Netflix is likely to execute well on anything the company attempts.

Global OTT is not a market we've seen before, and there's nothing to compare it to in terms of scale and subscription revenue potential, coupled with the universal, global need for entertainment. To think Netflix is in trouble due to domestic competitors is to misunderstand the opportunity and the slow process of OTT proliferation owing to broadband access.

It could be that Netflix's $12 billion debt overhang and the competitive landscape will spook the market a few more times and drive down the stock price. For investors who wants a global OTT pure-play company for the long haul, that scenario should be welcomed.
This article appeared on MarketWatch October 15th, 2019.
Sign up for Analysis on the Best Tech Stocks

I'm an industry insider who writes free in-depth analysis on public tech companies. In the last 12 months, I predicted Facebook's Q2 crash, Roku's meteoric rise, Uber's IPO flop, Zoom's IPO success, Google's revenue miss and more. Be industry-specific. Know more than the broader markets. Sign up now. I look forward to staying connected.
If you are a more serious investor, we have a premium service that offers institutional-level research and entry/exit options. This membership offers a competitive edge in identifying growth opportunities and reducing risk in the tech sector. Learn more here . Join 3,437 other tech investors who receive weekly stock tips:

# data[].attributes.attachment_link.title
Why no streaming company will be able to dethrone Netflix

# data[].attributes.attachment_link.description
Netflix critics see mountains of debt and bleeding free cash flow. Opportunists see a company with the world's best track record for beating the odds in disrupting traditional media. For investors, it could be a costly mistake to be on the wrong side of that debate, as Netflix stock's 52-week low is $231 and the high is $385, a sizable spread for a $125 billion market-cap company.

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Microsoft Earnings Likely to Prove Cloud Isn’t Slowing Down

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Microsoft Earnings Likely to Prove Cloud Isn’t Slowing Down

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Microsoft earnings will be important because they will provide a picture about whether this sell-off and pessimism is warranted. Microsoft is important because it is the biggest cloud computing company in the world. It’s impressive growth in cloud has pushed it to become the second-biggest company in the world with a valuation of more than $1.07 trillion. Don’t be surprised if the sector ignores the market sentiment and reports impressive earnings.

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This week, Microsoft's earnings will shed light on whether the fear over cloud valuations is warranted or not.

Just last week, IBM results showed that its cloud segment grew by just 14%, boosted by its Red Hat acquisition. In more signs of trouble in the industry, Workday (WDAY) stock declined sharply last week after the company said that growth in its once-lucrative human capital management was slowing to 20%. This led to analyst cuts from Stifel, Deutsche Bank, and RBC. Morgan Stanley (MS) and Evercore ISI analysts have also rushed to downgrade the cloud industry ahead of the busy earnings extravaganza. Companies like Slack, Okta, Splunk, and Salesforce have dropped by 27%, 25%, 20%, and 8% respectively in the past three months.

This week, Microsoft earnings will be important because they will provide a picture about whether this sell-off and pessimism is warranted. Microsoft is important because it is the biggest cloud computing company in the world. It's impressive growth in cloud has pushed it to become the second-biggest company in the world with a valuation of more than $1.07 trillion. Don't be surprised if the sector ignores the market sentiment and reports impressive earnings.

Microsoft will provide a good indication of the cloud sector because of its broad offerings. The company has a large portfolio of cloud software (SaaS) and cloud infrastructure (IaaS) products. The IaaS and SaaS industries have grown to almost $40 billion and $95 billion in the past decade. This growth is expected to accelerate in the coming years as global corporation and governments embrace the efficiency of cloud. The industry revenue could double in the next three years. Although there will be many winners in the cloud race, Microsoft is well-positioned because of its scale and its approach of the industry. Just this week, the company acquired Mover, a small company that will help it simplify and speed migration to Microsoft 365.

Cloud Cycle

The cloud sector has had impressive growth in the past decade. This growth is just getting started. According to Gartner, cloud spending will accelerate at nearly three times the rate of the overall IT sector through 2022. The research firm expects IaaS sector to grow by 27.5% in 2019 to $38.9 billion. It is expected to reach $76.6 billion by 2022, which is an incredible growth.

Not only this, Gartner expects other cloud sectors like Platform-as-a-Service (PaaS) and SaaS to nearly double. Another estimation is that 90% of companies will purchase these products from a single company. As a market leader, with a diverse suite of PaaS, IaaS, and SaaS products, Microsoft will likely be a potential beneficiary in the cloud cycle.

To be clear. Quarterly results will be inconsistent. It has been like this in all fast-growing sectors.

Source: Gartner

Microsoft

The past few months have been challenging for technology stocks. Yet, Microsoft has been a better performer. In the past one year, Microsoft's stock has soared by 27% compared to Amazon's 1.2%, Alphabet's 13%, and Apple's 9.6%.

Microsoft has beaten its peers mostly because of its approach to the cloud sector. The company was early to embrace hybrid cloud strategy, which started to take hold in 2018. This was two years after the company's first technical preview in 2016.

This growth has happened even as the company's valuation has gotten cheaper. The company has a trailing PE ratio of 27.5, which is much lower than last year's ratio of 46. This implies that the 27% stock gain has been well-earned.

In the past quarter, the company reported great results. Its revenue of $33.72 billion beat the consensus estimates by $920 million. The EPS rose to $1.37, which was 16 cents better than what the market was expecting. In the previous quarter, Microsoft's revenue of $30.57 billion was $760 million higher than the consensus estimates. Since 2014, the company has had just one EPS miss and three revenue misses.

In the most-recent quarter, the company's growth momentum continued. Commercial cloud grew by an annualized rate of 39% while Azure grew by 64%. Dynamics 365 grew by 45% while Office 365 grew by 31%. These are excellent numbers for a company that was ignored and ridiculed by the investment community.

Investors should pay close attention to hybrid cloud when looking at Microsoft. Looking at it carefully will give them perspectives about how the company is positioned to set itself apart from other cloud companies like Microsoft and Google.

Hybrid cloud is a technology which enables companies to store some of their data on their own servers while simultaneously sending other data to the private and public cloud. Companies love hybrid cloud because it is cost-efficient, transparent, and safe. Azure's strength in hybrid computing has made it the main player in the industry. The product is used by 95% of Fortune 500companies.

Government agencies like the Department of Defense are starting to invest in this technology. Last year, I wrote a long-form article explaining why Microsoft would be a better contender for the $10 billion Joint Enterprise Defense Infrastructure (JEDI) contract. In August, the department, which had favored Amazon paused the procurement process on Amazon security concerns. There were also concerns over why single-sourcing was used for such a sensitive contract.

The decision by the DoD to pause means that Microsoft could be at play to win the contract. Microsoft is a leading contender because of its track record with the DoD. Recently, the department awarded the company a software computing contract worth about $7.6 billion. The Defense Enterprise Office Solution (DEOS) will provide productivity tools to the U.S. military.

Microsoft's cloud products are also used widely in the country's intelligence sector. In May 2018, the U.S. Intelligent Community announced that it would continue to use Microsoft's products like Azure Government, Office 365 for US Government, and Windows 10. In the announcement, Microsoft said that its Microsoft Cloud for Government solutions were used by over 10 million government customers.

In 2018, the company won a $480 million contract to supply about 100k augmented reality devices to the US military. The company won this contract after competing with other companies like Magic Leap, Lockheed Martin, and Raytheon. The military bought these devices because it wanted to incorporate night vision and thermal sensing in its training.

The U.S. Department of Defense has partnered with Microsoft on more projects. This means that there is a possibility that the company could be a leading contender on the JEDI project.

Conclusion

Microsoft will release its Q1'20 earnings on Wednesday. Analysts expect the company's earnings to increase to $1.24 from $1.14 a year ago. Revenue is expected to jump from $29.08 billion to $32.24 billion. As with all of its earnings, the market will be focusing on the cloud segment. There is no evidence that this revenue will slow down. While uncertainties on trade and economic growth could lead to some fluctuations, Microsoft has an advantage because of its cloud strategy and execution.

A version of this article originally appeared on MarketWatch October 22nd, 2019.

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Microsoft Earnings Likely to Prove Cloud Isn't Slowing Down

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This week, Microsoft's earnings will shed light on whether the fear over cloud valuations is warranted or not. Just last week, IBM results showed that its cloud segment grew by just 14%, boosted by its Red Hat acquisition.

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I grew critical of Apple earlier this year when it became clear the company would decline in revenue year-over-year, yet investors and analysts alike continued to pump the stock. With yesterday’s earnings report, we have further confirmation that Apple is not a growth company anymore although it continues to trade at growth valuations.

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I grew critical of Apple earlier this year when it became clear the company would decline in revenue year-over-year, yet investors and analysts alike continued to pump the stock. With yesterday's earnings report, we have further confirmation that Apple is not a growth company anymore although it continues to trade at growth valuations.

While many celebrated yesterday's earnings report, there were notable signs of erosion. To start, Apple has lost $5 billion in revenue year-over-year, from $265 billion to $260 billion. This is despite having the "best fourth quarter ever," according to Tim Cook. The truth is that the EPS was higher due to buybacks.

My analysis in MarketWatch published prior to earnings, pointed out that the iPhone was exposed to macro smartphone saturation. Those numbers showed a deeper decline than overall revenue with a $22 billion decline reported year-over-year.

Although Apple has ceased reporting smartphone unit sales, the numbers reveal there are fewer smartphone units being sold. Moving forward, with the recent release of the iPhone, Apple will contend with a lower average sales price. This is bound to affect smartphone device revenue moving forward, which declined at a rate of 15% year-over-year.

Overview of Mobile Saturation:

The smartphone market contracted to 1.462 billion units in 2017 and to 1.420 billion units last year. While almost 1.5 billion smartphones sales a year globally is substantial, the law of saturation drives down prices. I wrote about the price effects of mobile saturation in March, prior to Apple lowering prices for the first time with the iPhone 11.

China represents about one-third of smartphone penetration compared with the U.S., at one-12th. Pricing wars are evident in Asia, where China's Huawei has grabbed market share to become the world's fastest-growing smartphone seller. The company has seen a 66-fold increase from 3 million units sold in 2010.

Samsung may be the true bellwether for mobile, as the company is in first position for total smartphones shipped and is the world's largest manufacturer of memory chips. In the first quarter, the company reported a 60% drop in operating profits, followed by a 56% decline in the second quarter. Analysts expect another decrease in the third quarter. Smartphone units have been making lower highs and lower lows over the past two years.

Samsung's disappointing performance hints at the ties between smartphone sales and consumer confidence as China's confidence index is languishing at a two-year low.

Notably, IDC forecasts the pricing wars will continue with 5G handsets in Asia, as low-cost models are expected to hit the market next year. In the U.S., Latin America and Japan, the average selling price (ASP) of a 5G handset will be around $1,000, while it will be $600 in China.

Don't Believe the Earnings Beat:

The fiscal Q4 earnings beat is at odds with overall performance. Although profit topped expectations, this is the first time since Tim Cook took over in 2011 that Apple declined in profit in all four quarters of a fiscal year.

The media touts the services revenue as the answer to the iPhone decline. As we saw this year, double digit declines on the segment responsible for $165 billion in revenue (iPhone) is not easily staved off by a revenue segment posting $40 billion per year (services).

If one did not look closer at the numbers, it would easy to think services was a major growth segment. We see the growth was at 18%, which is below the 20% traditional benchmark that defines growth. As of now, this doesn't appear to be the answer to the gaping iPhone decline. This is proven by the annual decline in overall revenue.

Wearables growth of 55% to $24 billion in revenue is decent. However, again, the iPhone decline was steep enough at $22 billion to wipe out the entire Wearables category.

I had pointed out in a Fox Business News interview prior to earnings that its unlikely lightning strikes twice with the iPhone as it's not only one of Apple's best growth drivers historically, but it's also one of the best growth drivers we've seen across the tech industry. This is evident in last year's smartphone revenue of $165 billion, which I also pointed out will be Apple's peak year in mobile.

Note: although I provide an entry price for Apple on Fox Business News, this is something Knox Ridley specializes in and covers as a contributing analyst to our premium site Tech Insider Research. You can catch his detailed technical analysis published on Seeking Alpha next week.

Here is a snapshot of Apple's performance over the past year. If the stock ticker was not attached to the graph, it would be hard to guess this is the world's most valuable company.

As most investors know, Apple has plenty of cash. It produces about $50 billion-$60 billion a year in free cash flow and has over $100 billion in cumulative reserves to fund new projects. While analysts are optimistic about many new pivots, these will weigh on margins. This is especially true for Apple TV+, which comes with a high content bill and low subscription revenue, as the OTT streaming service will be bundled for free or priced at $5.

Keep in mind, Apple's cash reserves are seeing the effects of the buybacks, and Alphabet has now surpassed Apple in cash reserves. Apple has $102 billion compared to Alphabet's $117 billion. This is due to Apple spending $122 billion on stock buybacks since the beginning of 2018. Alphabet is growing, as well, at a rate of 20% year-over-year.

Analysts who are raising Apple's price target based on fiscal 2020 cite Apple TV+ revenue as a primary reason with little discussion of the forecast for Apple's main growth driver. Apple TV+, which will compete with Amazon Prime Video, Netflix and other TV-streaming services, is more likely to cause bottom-line losses in the short term as Verizon is offering the subscription for free while requiring costly original content from headliners such as Oprah. (She doesn't come cheap.)

In my opinion, these new price targets seem more like an attempt to cover current positions, as the majority of institutions are holding this stock at lower entry points.

EPS not as Relevant Due to Buybacks

Many Apple proponents will use the stock as an income stock, yet the company trades at growth valuations. The buybacks Apple is doing on a consistent basis is alarming for a tech company, who should be innovating with cash reserves rather than propping up the stock price to beat earnings per share.

In the most recent quarter, Apple disclosed it had spent $17.9 billion to buy back 92.6 million shares during the fiscal fourth quarter. During the three prior quarters in the fiscal year, Apple had spent $49.2 billion. There is $78.9 billion remaining in its stock buyback program. The reduced share count this year has helped Apple beat earnings per share of $2.91 with $3.03 reported with fewer outstanding shares as a result of the buyback.

Apple has bought a total of 2 billion shares over the past six years, which brings the shares outstanding to their lowest level since 1999, according to Charlie Bilello, who is also a Seeking Alpha contributor.

Conclusion:

Apple will be particularly exposed to lower consumer confidence when this occurs. Mobile saturation is already showing its effects with a $22 billion loss in iPhone revenue year-over-year. In fact, the saturation of the iPhone could prove to be one of Apple's biggest challenges to date, as the company attempts to make many pivots, all of which will add noise to the big picture that mobile's golden days are behind it. This will not be resolved by a single quarter's earnings "beat," nor will it be absorbed by services revenue until at least 2023.

If your investment thesis is to focus on primarily cash reserves and cash flow, while ignoring growth and the leverage of buybacks to boost EPS, then Apple is likely in your portfolio. As a tech analyst, who look towards future growth for the highest gains, this is a company where I am personally on the sidelines and is not a company I can recommend long-term.
A version of this analysis appeared in MarketWatch on October 29 th, 2019. It has been updated and lengthened post-earnings.
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I'm an industry insider who writes free in-depth analysis on public tech companies. In the last 12 months, I predicted Facebook's Q2 crash, Roku's meteoric rise, Uber's IPO flop, Zoom's IPO success, Google's revenue miss and more. Be industry-specific. Know more than the broader markets. Sign up now. I look forward to staying connected.
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Apple is Not a Growth Company Anymore | Beth.technology

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I grew critical of Apple earlier this year when it became clear the company would decline in revenue year-over-year, yet investors and analysts alike continued to pump the stock. With yesterday's earnings report, we have further confirmation that Apple is not a growth company anymore although it continues to trade at growth valuations.

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Apple’s Stock Price is at Inflection Point

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Apple’s Stock Price is at Inflection Point

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As Apple’s stock price powers to new highs, returning over 60% YTD and touting the highest market cap in history, now might be a good time for investors to reflect as Apple trades at resistance.

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As Apple's stock price powers to new highs, returning over 60% YTD and touting the highest market cap in history, now might be a good time for investors to reflect as Apple trades at resistance. With upwards of $260 billion in revenue, a profit margin of 22%, Apple is a cash-generating machine. It produces around $50-$60 billion in free cash flow annually, with reserves of over $100 billion. It is extremely kind to shareholders, with one of the largest buyback programs on the Street. In fact, Apple has spent around $120 billion in stock buybacks since the beginning of 2018, and kicks out a dividend. Apple is, without question, one of the greatest businesses the world has ever seen.

However, there are times where great businesses do not always make great stocks at times. If we look at the current valuations, Apple's stock price is trading with a P/S of 4.5, a P/E ratio of around 25 and a price to free cash flow of 20, as of the writing of this report. While these valuations are relatively mild compared to some of the valuations being shopped around in the tech industry, for a company with a market cap of $1.3 Trillion, these valuations suggest future growth in order to justify current prices. It is here, with their future growth prospects that I see caution.

In 2019, the company had revenue of $260 billion, down from $265 billion in the previous year. Analysts originally expected the company's revenue to grow to $274 billion, or 5.3% this fiscal year, and around $294 billion or 7% in the following fiscal year. This will be slightly below the 7.2% growth that is expected among information technology stocks.

In the latest quarter, its growth rate was just 1.8%, significantly lower than what other FAANG companies reported. Facebook revenue grew by 28% while Amazon rose by 23%. Netflix and Google had revenue growth of 31% and 20%, respectively. Even Cisco grew by almost 5%. And for further comparison, the US economy expanded by 1.9%.

Apple's poor growth would have tanked any technology stock, yet Apple's stock price is up 60%. Though I believe Apple has the cash as well as the capability to pull numerous pivots in its future, the loss in revenue will likely accelerate before these pivots can manifest, which will compress margins, and thus affect current valuations.

If we dig deeper into their latest revenue report, we discover that smartphone sales declined YoY by 15%. Saturation is an inevitable phenomenon for revolutionary inventions. For example, Utilities and wireless phone coverage were once considered hyper growth sectors at one point in time, but the inevitable saturation took hold, leading these companies to now be considered defensive value plays. Saturation appears to be taking hold in the smartphone market, which is why we are seeing a deceleration in smartphone sales YoY; with an expected 2% fewer sales per year going forward.

Furthermore, with saturation, we see manufacturers start to slash prices to capture fewer units sold. This quarter, Apple reported that iPhone sales declined by 9% since the previous year and that they are also reducing the price of their new iPhone 11. Both news items point to the reality of market saturation.

The iPhone is arguably the greatest tech driver in history, as well as Apple's primary source of revenue. So, Apple will have to cover the losses with their other products to make up the difference. This is where I see the inconsistency between the stock's valuations and their current offerings.

Services

Apple's services generate revenue through various subscription fees. These fees come from several well-known Apple services, including iCloud, iTunes, Apple Music and various types of apps.

Although these services grew by 18% this last quarter, the total revenue generated was only 37% the size of iPhone sales. This level of growth is simply not enough to cover decreasing revenues from Apple's iPhone sales.

Furthermore, there are also concerns in the service sector. The problem is that the services that Apple offers have relatively lower margins than the iPhone. A good example of this is Apple Music. Apple doesn't disclose Apple Music's gross margins, but going by Spotify's own margins, we have every reason to believe that Apple is similar. Spotify's gross margin is just 26%, which is smaller than Apple's iPhone net profit margin. It's important to note that the services segment of Apple is tied to the iPhone and may experience slower growth as the smartphone market continues to saturate.

Apple +

There's also a lot of hype around Apple TV+'s potential at filling the growth gap. According to the Wall Street Journal, Apple is spending more than $6 billion on new content, and it's only likely to go up as the streaming war continues.

At current prices for the service, it's impossible for Apple to make a profit even with a hundred million subscribers. Apple can still be a contender in this crowded space, but it will likely take time, and be more of a cash drain than a generator in the short-term. Meanwhile, smartphone saturation is only going to continue, which means that Apple TV+ will not be able to solve Apple's current revenue problems.

Apple Pay

Apple Pay is another service that Tim Cook talks about repeatedly. During the latest earnings call, he revealed that the service had surpassed PayPal in terms of volume of transactions. The service is also expanding into various markets. Additionally, Cook also praised Apple Card, a new product developed in collaboration with Goldman Sachs that promises to expand Apple's revenue.

Apple Pay has the potential to generate a large cash flow, but there are questions about how big it can get. In the trailing twelve months, PayPal had a gross revenue of $17 billion and a net income of $2.53 billion. Visa and Mastercard had a combined revenue of $38 billion and a net income of $17 billion. So even if Apple were to dominate this market, its consolidated net income will not be sufficient to cover the loss in iphone sales. And, more importantly, it will take time to take market share, which will not solve the revenue issues Apple currently faces.

Apple Wearables

Another area that's worth looking at are Apple wearables. In the last quarter, revenue from wearables, home and accessories rose by 54% to $6.5 billion. This growth was driven by the success of various Apple products, particularly Apple Watch, Airpods, and BIS products.

These wearables are great products that do have higher margins, just like the iPhone. The big question, however, is if they can grow fast enough to offset losses in iPhone sales. Despite its great performance, Apple's wearables, home and accessories business is still behind the Mac division, which earned $6.9 billion during the fiscal fourth quarter.

Meanwhile, Apple's iPhones generated $33.36 billion in revenue this final fiscal quarter, despite a 9% decrease year on year. So the important point in all this is that, despite their tremendous growth, Apple wearables and accessories are just not in the same league as iPhones.

Any other tech company with decelerating revenue, and the likelihood of continued deceleration in the near term, while facing an end of cycle environment that will eventually affect the consumer, would not see their share price increase to such valuations. So, it's worth noting the importance of one of Apple's key components in their current strategy, which is not a permanent solution.

Apple has turned to buybacks to boost its stock and spend its cash hoard. Since January last year, the company has spent more than $120 billion on buybacks. The question, though, is how effective these buybacks are to retail investors.

Large companies with growth problems have used buyback programs as short-term solutions for sluggish performance. In the short-term, share repurchases can help boost a stock price. However, in the long-term, Apple's share price growth will depend on the performance of certain specific segments. The chart below shows Apple's diluted EPS growth in the past five years.

Source: Ycharts

Structure

As a technical analyst, I do not go against the trend until I see either a rewarding risk/return set-up at key levels, or a noticeable shift in trend emerges. Apple is currently in an incredibly strong uptrend since bottoming in December of 2018; however, Apple's stock price is at a significant level.

It's worth noting that it's 2019 uptrend appears to be in a corrective fashion - a series of 3 waves up, which is always point of caution. Typically, when I see this, it points to a correction in a larger degree prevailing trend.

Furthermore, if we take the length of the first wave up off the December low to its peak in May of 2019, it went up 51.63%. After bottoming out in July of 2019, Apple's stock price began the current wave up. You'll notice that Apple's share price is at the symmetrical percentage growth of the first wave - 51.63%, which coincides with the 100% extension.

In technical analysis, the market tends to move in symmetry, especially in corrections, and the $258-$262 range will act as major resistance for Apple's continued charge up. This is exactly what we have seen as well, as Apple's stock price has been hovering around this level for many trading days. If it can close above the $262 range and hold on to that region, I believe there is a strong possibility that it will trade up to the 250% extension of the 30-year cycle uptrend of around $300.

However, if Apple cannot break above the $260 range, it could retest the $222 price range. If it falls below this range then the yellow target box will be in play, thus confirming that the uptrend from the December low was merely a powerful correction in a much larger decline.

Internal Strength

If we look at Apple's internals, a few points jump out. For one, the volume is decreasing as the stock price is increasing, suggesting there's not broad participation in this uptrend, and that may be the result of weak buying volume on top of even weaker selling pressure. If this is the case, as soon as buyers get exhausted, we could see a sharp decline.

The MACD is currently at its highest point in Apple's history, the second highest was in September of 2018. An elevated MACD is a bullish sign, but when we hit extremes, it becomes a point of caution. The RSI is in a current uptrend along with price. If this uptrend breaks along with the price, we could be in for a retest of important support zones. I will be watching the RSI for a clue to a change in momentum.
Knox Ridley runs a premium site alongside Beth Kindig . You can check out her fundamental analysis on Apple on this site.
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If you are a more serious investor, we have a premium service that offers institutional-level research and entry/exit options. This membership offers a competitive edge in identifying growth opportunities and reducing risk in the tech sector. Learn more here . Join 4,009 other tech investors who receive weekly stock tips:
Knox Ridley provides free technical analysis by drawing on in-depth Elliott Wave, MACD and RSI analysis and by evaluating technical patterns and trends. He compliments Beth Kindig's fundamental analysis and her strong record on predicting the best tech stocks by providing scenarios for entries and exits. Sign up for free analysis here. We look forward to staying connected!

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Apple's Stock Price is at Inflection Point | Beth.technology

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As Apple's stock price powers to new highs, returning over 60% YTD and touting the highest market cap in history, now might be a good time for investors to reflect as Apple trades at resistance. With upwards of $260 billion in revenue, a profit margin of 22%, Apple is a cash-generating machine.

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Top Momentum Stocks Affected by Cash Rotation in Q3

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Top Momentum Stocks Affected by Cash Rotation in Q3

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It has been a difficult quarter for many top momentum stocks like Slack (WORK), Veeva Systems (VEEV), Alteryx (AYX) and Zoom Communications (ZM). The companies have continued to execute well but their stock prices have declined. These companies reported better-than-expected third quarter earnings, impressive growth, and boosted their forward guidance.

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It has been a difficult quarter for many top momentum stocks like Slack (WORK), Veeva Systems (VEEV), Alteryx (AYX) and Zoom Communications (ZM). The companies have continued to execute well but their stock prices have declined. These companies reported better-than-expected third quarter earnings, impressive growth, and boosted their forward guidance.

In an analysis in MarketWatch this week, I reviewed why Momentum stocks are down and I look beyond the assumption it's due to a "value rotation." Instead, as I point out, there is a lot of volume that suggests institutional selling directly after earnings reports. This volume in momentum stocks exceeds what we saw during the Q4 sell-off.

Overview of Momentum Stocks Following Q3 Earnings:

Many YTD gains have been erased as investors rush to value stocks. Indeed, value stocks, as gauged by the iShares S&P 500 Value ETF (IVE) have started to outperform momentum stocks as gauged by the iShares Edge MSCI USA Momentum ETF (MTUM). While it is true that some investors have moved to value stocks like Caterpillar (CAT) and Target (TGT), the real concern is that many investors are rotating to cash.

In January this year, WSJ reported that investors were increasing their cash holdings at the fastest pace in a decade. In July this year, CNBC reported that the wealthy were moving to cash. Just recently, a report by DataTrek showed that this trend was continuing. The report found that there was $3.4 trillion in US money market fund in October 2. This was 14% higher than in January this year.

Narratives Driving the Momentum Market

A common narrative is that the best momentum stocks and companies are overvalued. When you look at price-to-sales and price-to-earnings, it is true they are at record highs. However, as I had pointed out in a separate analysis on MarketWatch, cloud software has also been reporting record high revenue growth. There is not a divergence between valuations and revenue that you typically see in bubbles; they've been aligned.

Most certainly, if the market decides to reward profitability over growth, we will see lower price-to-sales across cloud software.

Another narrative is that these companies will be affected by the soft spending on IT. In reality, IT spending in the United States and internationally has been increasing as evidenced by the increasing sales reported by AWS, Azure, and other IT-related companies (although percentages have declined due to the law of large numbers). A report by Gartner has said that IT spending will rebound by 3.7%, driven by increased spending in enterprise software spending. IDC has also forecasted that IT spending will continue to increase.

Alteryx: Momentum Stock

Many momentum companies have continued to see impressive growth. A good example of this is Alteryx (AYX), a company that offers data science solutions to companies. The company's stock has declined by more than 21% in the past three months. Yet, Alteryx is a rare company. It is a fast-growing company, a market-leader, and one often has positive EPS.
Also Read : Alteryx Stock Price
In the most recent quarter, the company's revenue grew by 90%. Net income grew to $16 million. The company also boosted its forward-guidance. It now expects to make between $389 million to $392 million this year. This is an annual growth rate of between 53% to 55%, but on the other hand, AYX management tends to be conservative.
In the above chart, the large volume spikes coupled with noticeable price movements suggests institutional positioning. We see sell-off volume (red spikes) is much higher over the last two months than during the Q4 selloff.

Alteryx's shares were down in the days after the strong earnings report.

Roku
Also Read : Roku Q3 Earnings The above chart also shows large volume, suggesting institutional positions. We see the sell-off volume is much higher than during the Q4 selloff.
Roku (ROKU) is another company that saw some irrational sell-off. Revenue of $360 million rose by more than 50% and the company raised its outlook for the year. It expects its revenue to grow to about $1.106 billion, or 46% YoY. This is impressive growth for a company that has a strong runway for growth as I wrote before. Although Roku recovered, there was still high volume after the earnings report.

Zoom Video (ZM) is another example. The company's stock tanked and is now trading 30% below its all-time high. You would think that ZM had a very bad quarter. In reality, the company reported that revenue grew by 96% to $146 million. The company's clients with at least 10 employees grew by 76%. Also, the company increased its Q3 guidance to between $155 million and $156 million.

I also covered Veeva in the MarketWatch analysis. Veeva Systems' operating margins have expanded from 17% in 2016 to 27% in the most recent quarter. Veeva beat on earnings with 55 cents per share compared to estimates of 48 cents per share. Company full year guidance also exceeded analyst estimates. Veeva is also strong on cash flow, increasing from $40 million in 2014 to almost $400 million in the most recent quarter. The company has $1.4 billion in cash reserves and no debt. Despite this, Veeva's stock price has dropped 12% from its 3-month high of $168.42 and was immediately down 3% after earnings in late August.

Pinterest, too, had a minimal miss and lost $3 billion in market cap.

While these momentum stocks have been hammered, investors have cheered slow-growing companies like Apple (AAPL) and Intel (INTC) due to buybacks. Apple's stock price has risen by 25% in the past three months and is now near its all-time high. The company had revenue growth of negative 2% year-over-year.

Way Forward for Momentum Stocks

In a previous analysis on MarketWatch, I had cautioned investors to know their winners as the market clearly did not have a method for differentiating beyond traditional valuation metrics. The safest way to trade tech stocks is to align investments with an overall macro technology trend in addition to fundamental analysis (the macro trend will prevail), and to have an exit strategy, such as a trailing stop, for risk management.
An earlier version of this article appeared in MarketWatch on November 21st, 2019 entitled Momentum stocks are down, but not for the reason you may have thought If you are a more serious investor, we have a premium service that offers institutional-level research and entry/exit options. This membership offers a competitive edge in identifying growth opportunities and reducing risk in the tech sector. Learn more here . Join 4,009 other tech investors who receive weekly stock tips:
We've seen some stocks quickly recover, such as Roku, and others that haven't rebounded, such as Veeva and Alteryx. Even the more solid recoveries suggest they are boosted by momentum and swing traders as they remain between support and resistance, as well as retail investors, as implied by lower volume.

The true test will be the upcoming cloud-software earnings reports to determine if the pattern will continue.

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I'm an industry insider who writes free in-depth analysis on public tech companies. In the last 12 months, I predicted Facebook's Q2 crash, Roku's meteoric rise, Uber's IPO flop, Zoom's IPO success, Google's revenue miss and more. Be industry-specific. Know more than the broader markets. Sign up now. I look forward to staying connected.

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Top Momentum Stocks Affected by Cash Rotation in Q3 | Beth.technology

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It has been a difficult quarter for many top momentum stocks like Slack (WORK), Veeva Systems (VEEV), Alteryx (AYX) and Zoom Communications (ZM). The companies have continued to execute well but their stock prices have declined. These companies reported better-than-expected third quarter earnings, impressive growth, and boosted their forward guidance.

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Alteryx Stock Price: More Downside Before Taking Off

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Alteryx Stock Price: More Downside Before Taking Off

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After soaring 147% to reach an all-time high of $147 per share, Alteryx’s stock price has been on a freefall and is currently trading around $98. Alteryx (AYX) fell victim to the cloud sell-off, which happened as the result of nose bleed valuations popping due to heightened recession fears. Other SAAS companies like Slack, Zoom Video, and Twilio have been declining as well, and so far with no end in sight.

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After soaring 147% to reach an all-time high of $147 per share, Alteryx's stock price has been on a freefall and is currently trading around $98. Alteryx (AYX) fell victim to the cloud sell-off, which happened as the result of nose bleed valuations popping due to heightened recession fears. Other SAAS companies like Slack, Zoom Video, and Twilio have been declining as well, and so far with no end in sight.

What's interesting is that the Alteryx stock price declined even as the company did everything right. In other words, when a growth company in a hyper growth sector has elevated valuations, it's typically priced to perfection. On November 1, the company released its quarterly earnings that historically have exceeded the consensus expectation for perfection.

Revenue came in at $103.4 million, which was up by 65.20% YoY same-quarter while GAAP EPS came in at $0.24. The EPS was $0.15 higher than the consensus estimates. The company also raised its outlook. It expects revenue to be between $389 million to $392 million. This represents an annual growth rate of between 53% 55%. This guidance was higher than the previously guided range of between $370 million and $375 million. It also raised non-GAAP operating income.

To make it more interesting, what we know about Alteryx is that they tend to be conservative on guidance, so a raise of this level should've at minimum instilled new buying pressure. Yet, the AYX stock price fell the day of the announcement, and has been treading water ever since. The price action in Alteryx stock price is a lesson in the power of sentiment, and once it shifts, no amount of countervailing news seems to change its course.

A retrace for growth stocks producing triple digit returns is healthy and inevitable. The ultimate question is due to recession fears. In a recession, obviously, the expected growth trajectory for AYX and other cloud based companies will be interrupted, pushing prices down much lower. Sentiment can shift irrationally, and right now the emotional trend is down.

However, one factor I've noticed that has led to undue pressure for AYX is that it appears that the market does not have a good understanding of what Alteryx does, which has allowed for price dislocations. I think it's crucial to understand the space it operates in as well as the advantages it has over competitors, so that when the trend does change, you can hold it with confidence.

Alteryx is a company that offers data science and machine learning services. Their particular niche in the tech ecosystem involves providing the best tools and data to companies that specialize in business intelligence and other related services. In short, their services are complementary to those businesses, not their competition.

Also Read : How to pick long-term stock winners in cloud computing

Despite this, investors compare AYX with companies that are either not its peers or are not in direct competition with. Most Alteryx stock analysts have compared Alteryx to companies like Tableau, which was recently acquired by Salesforce. In fact, Alteryx's stock price declined when Tableau announced its new product, Tableau Prep, which signals how much the consensus misunderstands AYX.

I believe this is a mistake because, as I've mentioned already, Alteryx specializes in data science, machine learning and analytics, whereas Tableau is primarily a business intelligence company that also handles data visualization. In reality, Alteryx does not compete with Tableau. In fact, the two companies are partners. You can see this on the Gartner's magic quadrant for Business Intelligence solutions here. The company is not there, and this is because Altryx is not in the business of using data to provide visualization purposes.

Contrary to what many people believe, there is a key difference between data science and Cloud Business Intelligence (BI). A good Alteryx stock analysis needs to differentiate between data science and BI. BI is simply a process of analysing past data. Data Science, on the other hand, uses multiple sciences and sources of data to help make future predictions. In short, data science will help automate most of BI tasks in future.

A good example of data science at work was what the New York Times (NYT) reported in 2012. A Target customer went to complain that the company was sending baby and mother care coupons to his home. He later found out that his daughter was pregnant. This is the kind of problem that data science can handle but BI cannot.

Alteryx is more than a business intelligence platform. It is a data science and machine learning platform that provides more useful results to its companies. This is evident on the Gartner quadrant that is shown below, which shows companies that the company competes with.

Source: Alteryx

Alteryx provides companies with information that is more useful than what is provided by other data platforms like Tableau. In short, its capabilities are more in depth and powerful than other options in this field. Designer helps companies profile, prepare, blend, and analyse products and create visual workflows. Server helps to schedule, share, and run analytic processes and applications in a web-based environment. Meanwhile, Connect helps customers discover information assets and share recommendations in companies while Promote helps data scientists build and deploy predictive models in real time. This suite of products helps companies automate and converge various fields of data science.

The cost savings and the usefulness of Alteryx is the main reason why its products cost more and companies are willing to pay for them. The cost per employee for Alteryx suite of products is $5,200 per year or $4,000 per year when on a 3-year contract. Tableau's Data Prep on the other hand costs $840 per year. This is a significant premium and companies are prepared to pay for it. According to Alteryx, more than 5,600 global companies are using its products.

Therefore, while Alteryx is not a cheap company, the reality is that it is very misunderstood, especially in its role as the true leader in data science and machine learning. This is evident in its ongoing growth. This means that the Alteryx share price would more than likely appreciate if the consensus truly understood the capabilities of the company vs. its true competition as well as the massive runway in front of it.

Also Read : Top Momentum Stocks Affected by Cash Rotation in Q3

Just because I believe the company is mispriced based on current understanding and future growth, doesn't mean it cannot make lower lows. Sentiment is a powerful force, and arguably the tide that drives movement in the market. It is obvious that the sentiment has shifted in AYX as well as most cloud stock (Microsoft excluded).

My primary Elliott Wave count has AYX completing a clear 5-waves up in an extended uptrend. It's possible that it can recover and extend further, but the weight of evidence is suggesting more downside. In a longer timeframe, I have AYX completing its primary wave 1, shown in the circled red number, and now in the middle of its primary wave-2.

What we know about 2 nd waves is that they are typically harsh, and reverse sentiment by retracing to the 50% - 61.8% retrace levels. This is based on averages, so it's simply a guidepost. I'm not expecting a company as strong as AYX to retrace to these levels, and my own models have it as a long-term buy in the upper region of the green box on the chart, which coincides with q confluence of Fibonacci price clusters.

AYX has completed a sharp move down, touched the 23.6% retrace level and is now in a corrective retracement, which appears to be the B wave in the larger degree wave-2. The evidence for this is that the structure of this retrace up is overlapping, which is not typical of a 5-wave trend change and strongly suggests corrective.

Furthermore, I anchored a volume weighted average price (VWAP) to the all-time high, and this is highlighted in dark blue. This moving average, which factors in the average price along with the amount of shares purchased at each price point, offers a precise understanding of who is in control of the current trend.

As of the writing of this post, the price is trading right at the VWAP, with the RSI in overbought territory. Furthermore, we have a classic negative reversal pattern unfolding in the RSI, where the RSI is making higher highs while the price is making lower highs. I expect this resistance to be difficult for AYX to break, especially in overbought territory, and this could signal the beginning of the final C-wave in the larger degree wave-2.

Any sharp reverse down will confirm that we are in a C-wave correction, and my target zone is in the green box. It's a confluence of Fibonacci extensions based on the length of the initial A-wave down, and retrace levels based on the length of the larger degree wave 1. I will likely begin layering in buys as it hits this target zone.

I will look to invalidate my current thesis if AYX can: first, break the current VWAP, with the RSI resetting in a bullish posture - i.e., bottoming above the 50 line and heading back up. Secondly, develop an impulsive 5-wave move up as it moves back the $138 price zone with elevated volume. At this point I will look to go long AYX with tight stops to play out any remaining momentum in this stock before the larger degree wave-2 begins.

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Knox Ridley provides free technical analysis by drawing on in-depth Elliott Wave, MACD and RSI analysis and by evaluating technical patterns and trends. He compliments Beth Kindig's fundamental analysis and her strong record on predicting the best tech stocks by providing scenarios for entries and exits. Sign up for free analysis here. We look forward to staying connected!
If you are a more serious investor, we have a premium service that offers institutional-level research and entry/exit options. This membership offers a competitive edge in identifying growth opportunities and reducing risk in the tech sector. Learn more here . Join 4,009 other tech investors who receive weekly stock tips:

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Alteryx Stock Price: More Downside Before Taking Off | Beth.technology

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After soaring 147% to reach an all-time high of $147 per share, Alteryx's stock price has been on a freefall and is currently trading around $98. Alteryx (AYX) fell victim to the cloud sell-off, which happened as the result of nose bleed valuations popping due to heightened recession fears.

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Roku Q3 Earnings: Choppy But Unshakeable Long-Term

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Roku Q3 Earnings: Choppy But Unshakeable Long-Term

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Roku is a company that has proven nearly every bearish prediction wrong with consistent revenue growth despite being surrounded by steep competition and tech heavyweights in over-the-top media.

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Roku is a company that has proven nearly every bearish prediction wrong with consistent revenue growth despite being surrounded by steep competition and tech heavyweights in over-the-top media.

Roku investors that have been long since its IPO have lived through three fifty-percent drawdowns. Therefore, the reaction to earnings this quarter was unlikely to phase anyone who has followed this stock for any length of time.

I encouraged my readers to not be phased by market reactions when Roku was priced at $30, when it was priced at $60, and when it was priced again at $30. During that sell-off, I said the company would become a tech darling and reach $100 in stock price in two years, which was bold to predict 200% returns. Of course, the company went on to reach 350% returns in a short time span of about one year.
A version of this article appeared in MarketWatch on November 6th.
The market received Roku earnings report on Wednesday after the market closed. Streaming hours passed 10 billion hours in the third quarter, while active accounts increased to more than 32.3 million. The most impressive number in the Roku quarterly earnings was the average revenue per user, which increased to $22.58. This number has more than doubled since the second quarter of 2017.

The Roku earnings report showed that quarterly revenue increased to more than $261 million. Platform revenue grew by 79% while ad revenue more than doubled. This was a 50% YoY growth and was above the consensus estimates of $256.9 million. The company lost 22 cents a share, which was 6 cents above the consensus estimates of 28 cents a share.

Overall, the company beat the consensus estimates, raised guidance, reported strong user growth, and increased ARPU.

However, Roku has double-digit negative EPS and will for some time. Roku financial statements show that EPS is declining QoQ. Its consensus EPS forecast of -$0.28 compared to -$0.09 in the year ago quarter. Annual EPS won't improve either, per analyst consensus, with -$0.50 ending in fiscal year December 2019 and -$0.43 ending in fiscal December 2020.

Source: CNBC

We've already seen a few companies get crushed by the market if they have a small miss, which is the paradox for growing tech companies who are often penalized by the market by foregoing earnings to capture peak growth, which in turn, becomes rewarded by the market once it materializes into earnings. In other words, if Roku misses anytime in the next couple of years, it'll be with EPS rather than revenue. The market, which is confused by the many OTT streaming services and hardware players, will penalize Roku. This most certainly will not be the last time the stock sees double-digit pullbacks.

I also foresee the market abandoning Roku and many other solid tech stocks that aren't profitable yet during the inevitable value rotations. Keep in mind, investors also did this with Netflix, Google, Apple, Microsoft and Amazon during 2009.

As is always the case, the market has a record of underestimating small companies that are battling with other big companies like Apple, Disney, Google, and Comcast. This is why Roku still remains one of the most volatile stocks in the market. This also proves the affinity investors have towards brands rather than technology. Yet, it is the latter that drives growth in new markets.

The nuances in strategy and technology are terribly important to understand in the crowded OTT space as it helps to have conviction when a stock drops 50% or more, yet then goes on to be the best performing stock of the 712 stocks with a market capitalization over $10 billion in 2019.

Let's break down what I mean by Roku having very little direct competition.

SVOD vs. Connected TV Ads

Roku does not compete with Disney+, Netflix, or HBO Go because these are subscription services. Subscription video on demand (SVOD) is in a category of its own as the opportunity Roku is capitalizing on is Connected TV ads (CTV Ads). Advertisers are paying a premium for CTV ads, which is Roku's market. The distinction between markets is important, and one that Wall Street missed when discounting Roku as a long-term opportunity by labeling it a hardware company for its first couple of years on the market.

Roku directly competes with Amazon and Hulu, as they compete for Connected TV ad dollars. However, as the market is well aware, data is king as it allows for better targeting. Hulu has to barter data as it's a single application without a platform or hardware (i.e., it shares and connects third-party data, including with Facebook). Third-party data is always weaker targeting than first-party data and could be subject to privacy issues.

Razor-Razor Blade Model

Discounting the hardware and taking a loss is an excellent strategy to maintain a moat on data for advertising. Both Amazon and Roku own the hardware, and at current prices, the hardware likely causes negative or very thin margins. This is similar to the razor-razor blade model, where you discount the razor to sell the razor blades for life.

This positions Amazon and Roku for first-party data across OTT applications. Anything data related is subject to privacy issues and anti-trust issues. This is at the core of the controversy with Facebook and Google.

Roku is again set apart here, as the company only does OTT. The company does not share the data beyond the OTT player it owns. Amazon, however, is collecting data in a way that could come under anti-trust scrutiny as they take e-commerce data and broker this on the OTT player, which is anti-competitive with other ad exchanges.

Amazon is well aware of this, and is being proactive rather than reactive by opening up its demand-side platform to other DSPs, such as The Trade Desk, which was announced in July of this year. On a side note, Facebook learn from Amazon's playbook as reputational damage is hard to shake.

Roku, however, does not need to worry about this as data never leaves the OTT hardware that they own, where they have a first-party relationship.

Valuation:

Connected TV ads are ballooning because they combine audience data with the viewability and completion rates of linear television. Roku's valuation at 14 price-to-sales seems high at first, yet the one-year forward price-to-sales is trading at 9.3 due to the forward growth opportunity in Connected TV ads. Roku earnings estimates for 2020 and 2021 are $-0.29 and $0.6178 respectively. Therefore, the market may still be lukewarm with knee jerk reactions throughout 2020.

For example, last November, video-first SSP Beachfront reported that ad requests for CTV had increased 1,640% from November of 2017. While this is only one company's growth in a single segment, the opportunity is so ripe, it's hard to quantify. More astonishing is that Connected TV ads surpassed mobile last year for capturing the largest number of impressions and video completion rates.

Roku's revenue growth will be exciting; however, the company is not likely to be profitable until 2021. In the third quarter Roku income statement report showed that revenue grew by almost 60%. This was almost double that of Netflix and triple that of Google.

Traditional metrics show that Roku is not a cheap company to own. Its forward EV to EBITDA ratio of 393, which reflects the lack of profitability. It's not surprising the stock is trading in the range of $127-$131 following earnings, which was former support.
Knox Ridley, technical analyst, will be covering Roku in-depth with technicals next week. He has guided many successful entries on this stock for our premium members, including entries lower than $100.
Depending on macro trends, we could see Roku trade around $100 again as this is an important psychological level, as shown below. It is also along the 50% Fibonacci Retracement level and along the 200-day exponential moving average. Long-term, I see Roku as one of the most promising tech stocks on the market and have provided projections to my premium subscribers.

A version of this analysis appeared in MarketWatch prior to earnings on November 6th, 2019. It has been updated and lengthened post-earnings.

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If you are a more serious investor, we have a premium service that offers institutional-level research and entry/exit options. This membership offers a competitive edge in identifying growth opportunities and reducing risk in the tech sector. Learn more here . Join 4,009 other tech investors who receive weekly stock tips:
I'm an industry insider who writes free in-depth analysis on public tech companies. In the last 12 months, I predicted Facebook's Q2 crash, Roku's meteoric rise, Uber's IPO flop, Zoom's IPO success, Google's revenue miss and more. Be industry-specific. Know more than the broader markets. Sign up now. I look forward to staying connected.

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Roku Q3 Earnings: Choppy But Unshakeable Long-Term | Beth.technology

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Roku is a company that has proven nearly every bearish prediction wrong with consistent revenue growth despite being surrounded by steep competition and tech heavyweights in over-the-top media. Roku investors that have been long since its IPO have lived through three fifty-percent drawdowns.

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Apple’s Stock Price is at Inflection Point

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Apple’s Stock Price is at Inflection Point

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As Apple’s stock price powers to new highs, returning over 60% YTD and touting the highest market cap in history, now might be a good time for investors to reflect as Apple trades at resistance.

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As Apple's stock price powers to new highs, returning over 60% YTD and touting the highest market cap in history, now might be a good time for investors to reflect as Apple trades at resistance. With upwards of $260 billion in revenue, a profit margin of 22%, Apple is a cash-generating machine. It produces around $50-$60 billion in free cash flow annually, with reserves of over $100 billion. It is extremely kind to shareholders, with one of the largest buyback programs on the Street. In fact, Apple has spent around $120 billion in stock buybacks since the beginning of 2018, and kicks out a dividend. Apple is, without question, one of the greatest businesses the world has ever seen.

However, there are times where great businesses do not always make great stocks at times. If we look at the current valuations, Apple's stock price is trading with a P/S of 4.5, a P/E ratio of around 25 and a price to free cash flow of 20, as of the writing of this report. While these valuations are relatively mild compared to some of the valuations being shopped around in the tech industry, for a company with a market cap of $1.3 Trillion, these valuations suggest future growth in order to justify current prices. It is here, with their future growth prospects that I see caution.

In 2019, the company had revenue of $260 billion, down from $265 billion in the previous year. Analysts originally expected the company's revenue to grow to $274 billion, or 5.3% this fiscal year, and around $294 billion or 7% in the following fiscal year. This will be slightly below the 7.2% growth that is expected among information technology stocks.

In the latest quarter, its growth rate was just 1.8%, significantly lower than what other FAANG companies reported. Facebook revenue grew by 28% while Amazon rose by 23%. Netflix and Google had revenue growth of 31% and 20%, respectively. Even Cisco grew by almost 5%. And for further comparison, the US economy expanded by 1.9%.

Apple's poor growth would have tanked any technology stock, yet Apple's stock price is up 60%. Though I believe Apple has the cash as well as the capability to pull numerous pivots in its future, the loss in revenue will likely accelerate before these pivots can manifest, which will compress margins, and thus affect current valuations.

If we dig deeper into their latest revenue report, we discover that smartphone sales declined YoY by 15%. Saturation is an inevitable phenomenon for revolutionary inventions. For example, Utilities and wireless phone coverage were once considered hyper growth sectors at one point in time, but the inevitable saturation took hold, leading these companies to now be considered defensive value plays. Saturation appears to be taking hold in the smartphone market, which is why we are seeing a deceleration in smartphone sales YoY; with an expected 2% fewer sales per year going forward.

Furthermore, with saturation, we see manufacturers start to slash prices to capture fewer units sold. This quarter, Apple reported that iPhone sales declined by 9% since the previous year and that they are also reducing the price of their new iPhone 11. Both news items point to the reality of market saturation.

The iPhone is arguably the greatest tech driver in history, as well as Apple's primary source of revenue. So, Apple will have to cover the losses with their other products to make up the difference. This is where I see the inconsistency between the stock's valuations and their current offerings.

Services

Apple's services generate revenue through various subscription fees. These fees come from several well-known Apple services, including iCloud, iTunes, Apple Music and various types of apps.

Although these services grew by 18% this last quarter, the total revenue generated was only 37% the size of iPhone sales. This level of growth is simply not enough to cover decreasing revenues from Apple's iPhone sales.

Furthermore, there are also concerns in the service sector. The problem is that the services that Apple offers have relatively lower margins than the iPhone. A good example of this is Apple Music. Apple doesn't disclose Apple Music's gross margins, but going by Spotify's own margins, we have every reason to believe that Apple is similar. Spotify's gross margin is just 26%, which is smaller than Apple's iPhone net profit margin. It's important to note that the services segment of Apple is tied to the iPhone and may experience slower growth as the smartphone market continues to saturate.

Apple +

There's also a lot of hype around Apple TV+'s potential at filling the growth gap. According to the Wall Street Journal, Apple is spending more than $6 billion on new content, and it's only likely to go up as the streaming war continues.

At current prices for the service, it's impossible for Apple to make a profit even with a hundred million subscribers. Apple can still be a contender in this crowded space, but it will likely take time, and be more of a cash drain than a generator in the short-term. Meanwhile, smartphone saturation is only going to continue, which means that Apple TV+ will not be able to solve Apple's current revenue problems.

Apple Pay

Apple Pay is another service that Tim Cook talks about repeatedly. During the latest earnings call, he revealed that the service had surpassed PayPal in terms of volume of transactions. The service is also expanding into various markets. Additionally, Cook also praised Apple Card, a new product developed in collaboration with Goldman Sachs that promises to expand Apple's revenue.

Apple Pay has the potential to generate a large cash flow, but there are questions about how big it can get. In the trailing twelve months, PayPal had a gross revenue of $17 billion and a net income of $2.53 billion. Visa and Mastercard had a combined revenue of $38 billion and a net income of $17 billion. So even if Apple were to dominate this market, its consolidated net income will not be sufficient to cover the loss in iphone sales. And, more importantly, it will take time to take market share, which will not solve the revenue issues Apple currently faces.

Apple Wearables

Another area that's worth looking at are Apple wearables. In the last quarter, revenue from wearables, home and accessories rose by 54% to $6.5 billion. This growth was driven by the success of various Apple products, particularly Apple Watch, Airpods, and BIS products.

These wearables are great products that do have higher margins, just like the iPhone. The big question, however, is if they can grow fast enough to offset losses in iPhone sales. Despite its great performance, Apple's wearables, home and accessories business is still behind the Mac division, which earned $6.9 billion during the fiscal fourth quarter.

Meanwhile, Apple's iPhones generated $33.36 billion in revenue this final fiscal quarter, despite a 9% decrease year on year. So the important point in all this is that, despite their tremendous growth, Apple wearables and accessories are just not in the same league as iPhones.

Any other tech company with decelerating revenue, and the likelihood of continued deceleration in the near term, while facing an end of cycle environment that will eventually affect the consumer, would not see their share price increase to such valuations. So, it's worth noting the importance of one of Apple's key components in their current strategy, which is not a permanent solution.

Apple has turned to buybacks to boost its stock and spend its cash hoard. Since January last year, the company has spent more than $120 billion on buybacks. The question, though, is how effective these buybacks are to retail investors.

Large companies with growth problems have used buyback programs as short-term solutions for sluggish performance. In the short-term, share repurchases can help boost a stock price. However, in the long-term, Apple's share price growth will depend on the performance of certain specific segments. The chart below shows Apple's diluted EPS growth in the past five years.

Source: Ycharts

Structure

As a technical analyst, I do not go against the trend until I see either a rewarding risk/return set-up at key levels, or a noticeable shift in trend emerges. Apple is currently in an incredibly strong uptrend since bottoming in December of 2018; however, Apple's stock price is at a significant level.

It's worth noting that it's 2019 uptrend appears to be in a corrective fashion - a series of 3 waves up, which is always point of caution. Typically, when I see this, it points to a correction in a larger degree prevailing trend.

Furthermore, if we take the length of the first wave up off the December low to its peak in May of 2019, it went up 51.63%. After bottoming out in July of 2019, Apple's stock price began the current wave up. You'll notice that Apple's share price is at the symmetrical percentage growth of the first wave - 51.63%, which coincides with the 100% extension.

In technical analysis, the market tends to move in symmetry, especially in corrections, and the $258-$262 range will act as major resistance for Apple's continued charge up. This is exactly what we have seen as well, as Apple's stock price has been hovering around this level for many trading days. If it can close above the $262 range and hold on to that region, I believe there is a strong possibility that it will trade up to the 250% extension of the 30-year cycle uptrend of around $300.

However, if Apple cannot break above the $260 range, it could retest the $222 price range. If it falls below this range then the yellow target box will be in play, thus confirming that the uptrend from the December low was merely a powerful correction in a much larger decline.

Internal Strength

If we look at Apple's internals, a few points jump out. For one, the volume is decreasing as the stock price is increasing, suggesting there's not broad participation in this uptrend, and that may be the result of weak buying volume on top of even weaker selling pressure. If this is the case, as soon as buyers get exhausted, we could see a sharp decline.

The MACD is currently at its highest point in Apple's history, the second highest was in September of 2018. An elevated MACD is a bullish sign, but when we hit extremes, it becomes a point of caution. The RSI is in a current uptrend along with price. If this uptrend breaks along with the price, we could be in for a retest of important support zones. I will be watching the RSI for a clue to a change in momentum.
Knox Ridley runs a premium site alongside Beth Kindig . You can check out her fundamental analysis on Apple on this site.
Sign up for Analysis on the Best Tech Stocks
If you are a more serious investor, we have a premium service that offers institutional-level research and entry/exit options. This membership offers a competitive edge in identifying growth opportunities and reducing risk in the tech sector. Learn more here . Join 4,009 other tech investors who receive weekly stock tips:
Knox Ridley provides free technical analysis by drawing on in-depth Elliott Wave, MACD and RSI analysis and by evaluating technical patterns and trends. He compliments Beth Kindig's fundamental analysis and her strong record on predicting the best tech stocks by providing scenarios for entries and exits. Sign up for free analysis here. We look forward to staying connected!

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Apple's Stock Price is at Inflection Point | Beth.technology

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As Apple's stock price powers to new highs, returning over 60% YTD and touting the highest market cap in history, now might be a good time for investors to reflect as Apple trades at resistance. With upwards of $260 billion in revenue, a profit margin of 22%, Apple is a cash-generating machine.

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Roku’s Stock Price: Will There Be Another Pullback?

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Roku’s Stock Price: Will There Be Another Pullback?

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Roku’s stock price is up by almost 500% over the past two years. Compare this to the S&P 500, which is up less than 25%. That’s 20X more returns than the average stock.

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Roku's stock price is up by almost 500% over the past two years. Compare this to the S&P 500, which is up less than 25%. That's 20X more returns than the average stock.

The upward trend has not been on a straight line. Roku's stock price has had four major drawdowns that average about 52%. Two of these drawdowns were greater than 60%. Being long a volatile company like Roku since its IPO is not easy, and it especially takes increased conviction to stay long Roku as we approach the end of the current cycle. However, for those that were insightful enough to see that Roku is not a hardware play, nor a content generating OTT play, but instead a Connected TV Advertisement play from inception, have been able to hold Roku through the drawdowns despite market noise.

In this report, I will look at the fundamental case for buying Roku stock. I will also perform a technical analysis of the company's stock price as entry and exit is crucial for high-growth stocks. This technical analysis reflects the choppy reaction to the company's third-quarter earnings report.

Roku is one of the most misunderstood names in technology. A common argument against Roku is that it is a small company with no moat in the streaming industry. They also argue that competition from cash gushing companies like Apple, Google, and Amazon will threaten its lead. In reality, the opposite is true. Roku may be small in comparison, yet it still leads with 39% market share in OTT hardware in the United States compared to Amazon in second place at 30%.

In the most recent quarterly release, the company announced that its users had grown to more than 32.3 million. This is nearly double what the company had in Q2 2017 with 15 million users. The average revenue per user has grown from $11.22 in Q2'17 to more than $22.

The ad platform segment of Roku's business is the fastest growing and most important. It is also a high-margin business. In the 2017 financial year, the segment had more than $225 million in revenue. This revenue rose to $416 million in 2018. In the most recent quarter, the platform segment grew by 79% to more than $179 million.

Another misconception about Roku is that Roku is in competition with the likes of Disney+, Netflix, and HBO Go because of the subscription service it offers. In reality, the company does not compete directly with these companies, even with its SVOD platform. This is because Roku is mostly in the business of serving adverts and using its data to provide a better ad experience. My partner, Beth Kindig, covers this in more detail in her fundamental analysis ( here, here, here) .

The closest competitors to Roku are Amazon and Hulu. Comcast's Peacock, which will be an ad-supported streaming platform, will also be a competitor, but only domestically. This is because these companies compete for connected TV ad dollars.

Roku has an added advantage because of the vast data it has on its consumers due to owning the hardware. Also, the agnostic nature of Roku's business makes it favorable for smart TV manufacturers. This is because it does not compete with them on the level that Google or Amazon does.

One final not on Roku, valuation is a constant issue that bears have talked about. It is true that the company appears to be overvalued. The company is valued at more than $15 billion. This is a premium for a loss-making company that is expected to make more than $1.1 billion this year. The company has a forward P/S ratio of 9.9, which is a significant premium. Consider that companies like Amazon, Netflix, and Spotify have a forward PS ratio of less than 6.

Roku Volume Report

The volume activity in Roku tells us a lot about the current environment we are in, as well as what institutions are thinking. "Smart money," or institutions, have teams of analysts and professional traders moving large amounts of cash. This typically shows up as massive volume spikes, coupled with noticeable changes in the stock price. The price at which they decide to buy in bulk, or sell in bulk, typically acts as new support/resistance that the price must push through.

What's noticeable is that around the $127 region, we went from seeing predominantly green volume spikes, to predominantly red volume spikes. The zones in which we are seeing these large liquidations is between the $158-$127 region.

This will be a lot of liquidity to make up, and we usually will see a shift in momentum when the reverse occurs, - i.e., large green volume spikes coinciding with a noticeable shift in price. Until I see us break through the $158-$163 region, with new increased volume spikes, I would be cautious of the current retracement back to new highs.

However, it's worth noting that this shift could be starting to occur with rising green bars suggesting a renewed interest. I'd like to see institutions take out large positions at current levels before getting excited. So far, the only large volume spikes in this region has been to the downside.

Insider Activity

Insider buying is significantly more notable than insider selling. This is especially true when dealing with a high growth company that just went public; also, there could be numerous personal reasons why insiders are selling. But, it's worth noting that all the insider activity in Roku since its IPO has been selling with zero buying. Nobody knows this business better than the insiders, and what they do, or do not do, can give insight to where they see growth vs market valuation. It's worth noting that no insiders are buying their shares at current prices, which I'd agree makes sense if you are a buy and hold investor with a long time frame. However, in the short-term, there could be plenty of momentum left in Roku.

Internal Strength of Roku's Stock Price

Going into earnings, we had cautioned our readers that $131-$127 was support and resistance was at the $156-$158 region. Any trades in this region on this stock were higher risk. We were correct, as the stock dropped to $119 but quickly bounced back. It has now been climbing and has even posted some marginal gains since prior earnings drop, and we are approaching a critical price cluster.

Simply put, if the stock price breaks $163 and closes well above this price, then I'll be targeting the above the $200 region before any major drawdown occurs. However, this will require a broader macro bull market. I think it is more likely Roku remains choppy with lower entries available than where it is priced right now.

The internals support this position as well, as of now. In the above chart, the MACD has rolled over, and just recently flipped back up, suggesting strong short-term momentum. Until it breaks above the most recent high on the MACD, this could be a fake-out. The RSI is confirming caution as well. Until we can break the 70 line, which has historically indicated a bullish posture, I'd be cautious on the current uptrend as Roku continues to trade between support and resistance. We are currently oscillating between the 40 line, which has been bullish support and the 70 line, which has been bullish resistance.

Elliott Wave Counts and Internal Strength

Many investors are playing momentum with Roku right now, and we believe this is the correct strategy at current prices. Going long Roku today should be done with stops in place or a systematic exit strategy to protect any gains. Therefore, Elliott Wave is the preferred method for increasing the probability for successful entries on long positions for a momentum trade, as well as set ideal targets for a more long-term time frame.

Above is the 30-minute chart of Roku going back from it's all time high. My Primary Elliott Wave count has Roku's stock price completing its larger degree Wave 3 push just above the 138.2% extension at its all-time highs. This is historically a lower top for a typical target for a 3 rd Wave, which usually targets the 161.8% extension.

If Roku can break back above the 78.6% retrace and then take back the 138.2% extension around $163, we will likely see a push to the 168.2% extension before any significant drawdown that would constitute a 4 th Wave correction (this is shown as an "alt (3)" and "alt (4)" on the chart). As of now, the evidence supports that Roku is in its 4 th Wave correction, and as long as it stays below to current resistance, there will be chances for lower entries on a more long-term basis. However, if we close above $163, I will likely add to my current position with tight stops to play renewed momentum as Roku powers to new highs.

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Roku's Stock Price: Will There Be Another Pullback? | Beth.technology

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Roku's stock price is up by almost 500% over the past two years. Compare this to the S&P 500, which is up less than 25%. That's 20X more returns than the average stock. The upward trend has not been on a straight line. Roku's stock price has had four major drawdowns that average about 52%.

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This week, Microsoft’s earnings will shed light on whether the fear over cloud valuations is warranted or not.

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This week, Microsoft's earnings will shed light on whether the fear over cloud valuations is warranted or not.

Just last week, IBM results showed that its cloud segment grew by just 14%, boosted by its Red Hat acquisition. In more signs of trouble in the industry, Workday (WDAY) stock declined sharply last week after the company said that growth in its once-lucrative human capital management was slowing to 20%. This led to analyst cuts from Stifel, Deutsche Bank, and RBC. Morgan Stanley (MS) and Evercore ISI analysts have also rushed to downgrade the cloud industry ahead of the busy earnings extravaganza. Companies like Slack, Okta, Splunk, and Salesforce have dropped by 27%, 25%, 20%, and 8% respectively in the past three months.

This week, Microsoft earnings will be important because they will provide a picture about whether this sell-off and pessimism is warranted. Microsoft is important because it is the biggest cloud computing company in the world. It's impressive growth in cloud has pushed it to become the second-biggest company in the world with a valuation of more than $1.07 trillion. Don't be surprised if the sector ignores the market sentiment and reports impressive earnings.

Microsoft will provide a good indication of the cloud sector because of its broad offerings. The company has a large portfolio of cloud software (SaaS) and cloud infrastructure (IaaS) products. The IaaS and SaaS industries have grown to almost $40 billion and $95 billion in the past decade. This growth is expected to accelerate in the coming years as global corporation and governments embrace the efficiency of cloud. The industry revenue could double in the next three years. Although there will be many winners in the cloud race, Microsoft is well-positioned because of its scale and its approach of the industry. Just this week, the company acquired Mover, a small company that will help it simplify and speed migration to Microsoft 365.

Cloud Cycle

The cloud sector has had impressive growth in the past decade. This growth is just getting started. According to Gartner, cloud spending will accelerate at nearly three times the rate of the overall IT sector through 2022. The research firm expects IaaS sector to grow by 27.5% in 2019 to $38.9 billion. It is expected to reach $76.6 billion by 2022, which is an incredible growth.

Not only this, Gartner expects other cloud sectors like Platform-as-a-Service (PaaS) and SaaS to nearly double. Another estimation is that 90% of companies will purchase these products from a single company. As a market leader, with a diverse suite of PaaS, IaaS, and SaaS products, Microsoft will likely be a potential beneficiary in the cloud cycle.

To be clear. Quarterly results will be inconsistent. It has been like this in all fast-growing sectors.

Source: Gartner

Microsoft

The past few months have been challenging for technology stocks. Yet, Microsoft has been a better performer. In the past one year, Microsoft's stock has soared by 27% compared to Amazon's 1.2%, Alphabet's 13%, and Apple's 9.6%.

Microsoft has beaten its peers mostly because of its approach to the cloud sector. The company was early to embrace hybrid cloud strategy, which started to take hold in 2018. This was two years after the company's first technical preview in 2016.

This growth has happened even as the company's valuation has gotten cheaper. The company has a trailing PE ratio of 27.5, which is much lower than last year's ratio of 46. This implies that the 27% stock gain has been well-earned.

In the past quarter, the company reported great results. Its revenue of $33.72 billion beat the consensus estimates by $920 million. The EPS rose to $1.37, which was 16 cents better than what the market was expecting. In the previous quarter, Microsoft's revenue of $30.57 billion was $760 million higher than the consensus estimates. Since 2014, the company has had just one EPS miss and three revenue misses.

In the most-recent quarter, the company's growth momentum continued. Commercial cloud grew by an annualized rate of 39% while Azure grew by 64%. Dynamics 365 grew by 45% while Office 365 grew by 31%. These are excellent numbers for a company that was ignored and ridiculed by the investment community.

Investors should pay close attention to hybrid cloud when looking at Microsoft. Looking at it carefully will give them perspectives about how the company is positioned to set itself apart from other cloud companies like Microsoft and Google.

Hybrid cloud is a technology which enables companies to store some of their data on their own servers while simultaneously sending other data to the private and public cloud. Companies love hybrid cloud because it is cost-efficient, transparent, and safe. Azure's strength in hybrid computing has made it the main player in the industry. The product is used by 95% of Fortune 500companies.

Government agencies like the Department of Defense are starting to invest in this technology. Last year, I wrote a long-form article explaining why Microsoft would be a better contender for the $10 billion Joint Enterprise Defense Infrastructure (JEDI) contract. In August, the department, which had favored Amazon paused the procurement process on Amazon security concerns. There were also concerns over why single-sourcing was used for such a sensitive contract.

The decision by the DoD to pause means that Microsoft could be at play to win the contract. Microsoft is a leading contender because of its track record with the DoD. Recently, the department awarded the company a software computing contract worth about $7.6 billion. The Defense Enterprise Office Solution (DEOS) will provide productivity tools to the U.S. military.

Microsoft's cloud products are also used widely in the country's intelligence sector. In May 2018, the U.S. Intelligent Community announced that it would continue to use Microsoft's products like Azure Government, Office 365 for US Government, and Windows 10. In the announcement, Microsoft said that its Microsoft Cloud for Government solutions were used by over 10 million government customers.

In 2018, the company won a $480 million contract to supply about 100k augmented reality devices to the US military. The company won this contract after competing with other companies like Magic Leap, Lockheed Martin, and Raytheon. The military bought these devices because it wanted to incorporate night vision and thermal sensing in its training.

The U.S. Department of Defense has partnered with Microsoft on more projects. This means that there is a possibility that the company could be a leading contender on the JEDI project.

Conclusion

Microsoft will release its Q1'20 earnings on Wednesday. Analysts expect the company's earnings to increase to $1.24 from $1.14 a year ago. Revenue is expected to jump from $29.08 billion to $32.24 billion. As with all of its earnings, the market will be focusing on the cloud segment. There is no evidence that this revenue will slow down. While uncertainties on trade and economic growth could lead to some fluctuations, Microsoft has an advantage because of its cloud strategy and execution.

A version of this article originally appeared on MarketWatch October 22nd, 2019.

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I'm an industry insider who writes free in-depth analysis on public tech companies. In the last 12 months, I predicted Facebook's Q2 crash, Roku's meteoric rise, Uber's IPO flop, Zoom's IPO success, Google's revenue miss and more. Be industry-specific. Know more than the broader markets. Sign up now. I look forward to staying connected.
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Microsoft Earnings Likely to Prove Cloud Isn't Slowing Down

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This week, Microsoft's earnings will shed light on whether the fear over cloud valuations is warranted or not. Just last week, IBM results showed that its cloud segment grew by just 14%, boosted by its Red Hat acquisition.

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This article will lean exclusively on Technical Analysis as we start from a monthly chart and zoom into a daily chart to reach the conclusion that Microsoft’s stock price may have some upside left in the trend, but a sharp decline is in the near future, followed by a multi-year renewed uptrend.

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Unlike most tech stocks, Microsoft's stock price has over 30 years of trading action to analyze. With more data to analyze, I tend to lean heavier on Elliott Wave theory to predict Microsoft's future. stock price because of the many layers of wave patterns that will naturally unfold over time.
This is a guest post provided by Technical Analyst, Knox Ridley
This article will lean exclusively on Technical Analysis as we start from a monthly chart and zoom into a daily chart to reach the conclusion that Microsoft's stock price may have some upside left in the trend, but a sharp decline is in the near future, followed by a multi-year renewed uptrend.

Multi-Decade Picture of Microsoft's Stock Price (monthly charts)

The red extensions are based off the length of Wave I, and then placed at the base of Wave II. The extensions are thus measurements of Wave 1 combined with the internal Fibonacci Ratios (outlined on the right of the chart).

Above is the monthly chart on Microsoft's stock price going back to its IPO. We have a massive 5-wave pattern unfolding that perfectly aligns with Fibonacci ratios. The exact ratios we use on a daily chart are thus present on a monthly chart, and if you follow the ratio lines in red, you can easily see how the price reacts to these specific levels. It's because of this that I lean on Elliott Wave as an estimation for the overall direction of Microsoft's stock price, especially when we can analyze so many layers, and especially considering we are on the final leg of a 30 year 5-wave cycle.

The red extensions are based off the red cycle count that started at MICROSOFT's IPO. The Fibonacci circles are based off the 3rd wave high and the 4th Wave low.

Not only can we use Fibonacci ratios to estimate support and resistance zones, but we can also use the same ratios to gauge the timing of an uptrend. I only use this technique on large trends, but as you can see above, Microsoft's stock price tends to warp, bend and react to these levels, as well. In some instances, they act as strong resistance and support.

From my estimation, the price is coming to an inflection point between time and price. The price is moving closer to the 400% resistance circle in black, and is currently hovering between the red 350% and 338.2% price levels in red.

I'm expecting Microsoft's stock price to make a distinct move within the coming weeks as we approach this inflection point. Either the price will turn down in a corrective fashion, or after bouncing around the resistance levels, we should see the price continue to the next level.

2009 Bull Market (weekly chart of stock price)

Each count has its own internal extensions, which match the color of the count. Red indicates the extensions of the large cycle count, blue represents the primary count off the 2009 low, and the orange represents the retrace level of 3rd wave within the primary count.

If we dive deeper into Microsoft's price action on a weekly chart, we can see the uptrend from the 2009 low until now. Keep in mind, the large cycle uptrend that started from the IPO, which is highlighted in red, is composed of its own 5-wave structure. Since 2009, we have been in the final 5 th wave of the red cycle count, and that count is comprised of the 5-wave primary count, which is highlighted in blue, circled numbers.

My best estimation of this primary count has us pushing to the end of a 3 rd wave and possibly just now entering the 4 th wave correction. Third waves are typically accompanied by peak technical and is present in the MACD, which is another indicator that we may be close to topping. Also, the 3 rd wave will typically reach the 161.8% extension. In this case, we have an extremely extended 3 rd wave that reached the 223.6% extension as well as the top of the trend line in blue.

I'm expecting the 4 th Wave to correct to the target zone I've highlighted in the green box eventually, which is between the $120 - $92 price range. Keep in mind, the $92 price range, though may seem extreme, but it is only the 23.6% retrace level.

It's worth noting the big picture ahead of us, and the inevitable downside we will face. However, it's also worth noting that this could take months to play out before we hit a final bottom in the 4 th wave drawdown. In the mean-time, I believe the daily chart offers some clues to the short-term direction of Microsoft's stock price.

If we zoom-in further using the daily chart, we are looking at the final push of the 5 th Wave of the 2009 uptrend. What's worth noting is how well Microsoft has held up as the bulk of cloud stocks are experiencing significant drawdowns. That alone is a show of short-term strength, which should be noted.

Furthermore, Microsoft is trading into an upward sloping triangle pattern, which is highlighted in blue. Price has virtually been rangebound, sloping upwards in a narrowing band. Notice how the RSI has been moving in its own triangle pattern. When I see this, it tells me that the RSI is resetting for the next move higher. The internals are coiling, building up strength, while price is staying stable.

Seeing consolidation of both the price and RSI at all-time highs is bullish, in the near term. Today, Microsoft gaped through the upward resistance, making all new highs, which means we will likely see a continuation of the extension to new highs.

However, if we close below the $128.5 support region, I expect the 4 th wave correction to be in effect. If we break to the upside, and close above the $146. 50 region, I expect the bull market in Microsoft to resume as we extend further in this 3 rd Wave push.

Conclusion

Cloud is priced for perfection, even after a large rotation out of the sector that is still in progress. Microsoft's earnings and short term technicals show that the price probable will extend further, extending the 3 rd wave push of the primary count off the 2009 lows. If you want to play the long side, I would place a stop just under the $128.50 support region, and consider that the time to invest for the long haul is not at current prices.

This market environment is about playing momentum with tight stops. Even though the long-term analysis is showing a pullback in the future, there is still some opportunity to ride the remainder of this bull market with momentum, as Microsoft leads the way.

The big picture is to capture the final 5 th Wave push after the 4 th Wave correction takes place. When we bottom, Microsoft will be one of my core holdings as we get the final push of this 30-year cycle trend.

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Knox Ridley provides free technical analysis by drawing on in-depth Elliott Wave, MACD and RSI analysis and by evaluating technical patterns and trends. He compliments Beth Kindig's fundamental analysis and her strong record on predicting the best tech stocks by providing scenarios for entries and exits. Sign up for free analysis here. We look forward to staying connected!
If you are a more serious investor, we have a premium service that offers institutional-level research and entry/exit options. This membership offers a competitive edge in identifying growth opportunities and reducing risk in the tech sector. Learn more here . Join 4,009 other tech investors who receive weekly stock tips:

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Microsoft Stock Price: Technical Analysis | Beth.technology

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Unlike most tech stocks, Microsoft's stock price has over 30 years of trading action to analyze. With more data to analyze, I tend to lean heavier on Elliott Wave theory to predict Microsoft's future. stock price because of the many layers of wave patterns that will naturally unfold over time.