Broad Market Levels

The broad market is currently range bound between 2900 and 2700. The last couple of weeks has been a notable back and forth between the bulls and bears in an attempt to breakthrough this range. From a purely technical perspective, this is what I’d want to see before saying which way this will go:

• For a bullish trend to resume, I want to see the S&P 500 break above 2950 and then finally 3150 for me to believe that we are in a new bull market. If this is the case, that will likely be the end of 1 of 5 large degree waves off the March low. So, I will look to add to my longs in the wave-2 drawdown, which I see taking us back to the 2800-2600.

Wealth is built in bull market, and if this scenario plays out, we will likely have several years of an uptrend to profit from.

• For the bears, they will need to break below 2630 for me to believe that what we have witnessed over the last month was in fact a bear market rally. If this is the case, my initial target will be between 2250 – 2050. If 2050 breaks, expect a prolonged bear market.

If 2630 is broken, expect tech to be the leaders down this time around. There has been an extraordinary concentration of new assets both directly from retail as well as in passive strategies in tech, which has made the top 6 mega-cap tech names account for over 20% of the S&P 500. With such narrow leadership, the direction of these names will lead the market. As of now, we are positioned for both scenarios.

The below chart offers a visual of the above outlook

Stock Updates

Roku (ROKU)

The above chart shows the long-term structure of Roku since its IPO. It has clearly been trading in a larger degree “leading diagonal” pattern. This pattern is a 5-wave pattern that travels within a trend channel (in gray). Furthermore, each of the 5 waves has an internal structure of 3-waves (A, B, C).

With Roku’s fall in March, it tagged the bottom of the lower channel, and began a 3-wave move up. Once it broke above the 200-day SMA (in red), the probability shifted that the low is in for Roku.

If this is true, it should give way to a B-wave correction back to the $102-$86 region. If the correction holds above this region, and begins a 5-wave pattern up, it is likely that we will no longer see this price range again with Roku. However, if Roku breaks below the $86 region, we will retest the lower end of the gray trend channel and possibly the lows from March.

This chart shows a close-up of where we are. The price is currently at an inflection point. It’s trading at the 200-day SMA, bouncing below a trend line and also trading between key Fibonacci price clusters.

If Roku can break above this region with heavy volume, I’d consider it a buy with a stop just below the $120 region. However, the internals are suggesting that the momentum is weakening while at this key level. I will look to add to Roku on the next pullback if it can hold the blue price box between $102-$86.

One final note – the Accumulation/Distribution line tracks, loosely, what “smart money” is doing. In other words, it factors in the closing price vs. the highs, assuming that the smart money makes allocations in the final hour of trading. As Roku’s price collapsed, notice how the Accumulation/Distribution line held up. The $102-$86 price region seems to be an area that smart money is accumulating, so it should act as strong support.  

Slack (WORK)

Slack is forming a head and shoulders pattern as it continues to attempt a breakout above $30.50. However, until this is confirmed with a breakout on heavy volume, the pressure is still down.

The above structure is suggesting that two scenarios could be playing out:

Red count: WORK is stopping out in a B-wave, and about to give way to the final C-wave down, which should take us to the $17-$14 region. I will want to see the RSI break below 35 and price break below the $19.50 region with force, before making this scenario the most probable. Regardless, we consider Slack within this target zone a buy and hold for many years to come.

Green count: This count has Slack pulling back to the $24-$20 region, holding and then breaking through the $31.50 region to confirm the head and shoulders pattern. If this is confirmed, Slack will be in a larger degree wave-3, which I will target between $60-$70 before completing. We will want to see the RSI break above the 50 line to suggest this scenario is in play.

As of now, if the green count is active, we are in a wave-2, which could be shallow like Zoom’s wave 2 before breaking out over $70. So, if you want to go long, a good stop would be under the $19.50 region. If price closes below $19.50, the red count is in play.

Zoom (ZM)

Zoom has clearly bottomed in its wave-4 and is actively in the final 5th wave (in blue).

Considering this 5-wave impulse has been a textbook impulse, I’m expecting the 5th wave to top out between $195-$225.

We’re starting to see some divergences in the MACD histogram, which is very common in the 5th wave. The MFI, on the other hand, still has room to go and is not showing overbought conditions yet. So, even though we have enough in place for the final 5th wave to be complete, I think it’s likely we tag at least the $195 region.

This will complete the large degree wave 1, and give way to a large degree 2nd wave pullback, which I believe should hold the $100 region. We are now holding our position with no stops.

Datadog (DDOG)

Our trade, so far in Datadog is up about 20%. The structure of DDOG is suggesting that we are in a corrective, larger degree B-wave (in green on the chart). If the price can break above $44.50 on heavy volume, I will be leaning towards the low being in for DDOG and scrap the B-wave count for a more bullish one.

The momentum in the MACD histogram is weakening as price increases. It will be difficult for Datadog to break this resistance on the current attempt with weak momentum. The RSI is also showing a clear trend in green. If this trend fails, and falls below 39, we will likely hit the $37 region.

If price breaks below the $37 region, the green box will be in play, and we will look to add to our position between the $32-$22 region.

Okta (OKTA)

Okta’s price has broken out to new highs. However, we have not initiated on this move. The reason being is that the internal indicators are suggesting a false breakout.

The divergence in the MFI, and MACD are quite large. These 2 indicators act as leading indicators for price on the hourly chart. Also, the volume is not increasing with price, so there is low participation at current prices.  I’m expecting price to either retest the $146 region, hold and then move up with more healthy internals, or it will breakdown, beginning a new downtrend.

If price breaks below $138, the green target boxes will be in play.

We have Okta as a high conviction play, so we will not be too picky with the price we get. However, we do believe that a breakout is premature right now.

Inseego (INSG)

Inseego has had a tremendous run off the March low. The March low tagged the lower level of the wave 4 target we were tracking prior to the sell-off in prior market updates. It has now moved rapidly into the final 5th wave. I can see this 5th wave topping anywhere between $14-$23 before we see the larger degree wave-2 pullback. This pullback should respect the March lows when it plays out.

Dynatrace (DT)

Our position in Dynatrace is currently up 25%. Like Datadog, DT is moving in a clearly corrective pattern. The internals on the hourly chart are diverging sharply as it approaches the $30 resistance region.  If DT breaks below the $23.20 support in red, the (C) wave target boxes will be in play.

On the other hand, if DT can close above $34 with heavy volume, it will signal that the bottom is likely in for this stock. As of now, we are holding our position without a stop, and will look to add in strength or weakness.

Shopify (SHOP)

Shopify is in an interesting position. After falling back to the $296-$280 support zone in March, a region that has held 3 major tests over the last year, it has moved in what appears to be a clear corrective uptrend – i.e., 3-waves and overlapping. However, a 3-wave pattern can turn into a 5-wave pattern, especially when the 3-wave tags the 161.8% extension of wave-1, like Shopify has done. So, to keep it simple, there are two scenarios I see playing out:

Green count: SHOP pulls back to $517-$460 region and holds. It will then move up in a 5-wave pattern to new highs. If this happens, we will be in a renewed 5-wave uptrend, and it will signal that the lows will likely be in.

Red count: if Shop breaks down below the $460 region and holds below this price. Then the prior uptrend to new highs was a very large B-wave, and the C-wave should take down to the prior target box.

The internals on the hourly chart are suggesting weakness, so we should know what count we are in within the next week or two.

Lyft (LYFT)

There is nothing encouraging about Lyft’s chart if you are long. Each up move in the 3-leg uptrend off the bottom is clearly corrective – i.e., overlapping and 3 waves. 

The internals are mixed. For one, the MACD is forming a coiling pattern, which is typically what we see prior to a breakout. It’s building strength for a move up. It’s not always a bullish pattern, but it’s worth noting. The MACD histogram is showing a notable divergence with price. Each time price makes a new highs, it’s doing so with less force.

I see the $33 resistance as the main resistance overhead, and it will also be where we are placing a reduced stop. We’ve made a combined 70% in our two Lyft shorts, so far, and I want to protect those gains. The easy money in shorting is over, so if we get stopped out with a small loss, we will look to reload at higher levels or when the downtrend commences.

Snap (SNAP)

Our short in Snap is currently down about 15% as we speak. We are early to what we believe will be a reset of the ad-tech market’s valuations, but we do believe this will play out. Snap traded just below our stop and then began to trade down. If our stop is triggered, we will close this position and look to reload with further confirmation. I will want to see Snap close above $17.50 before stopping out the following day.

What’s interesting is the symmetry of Snap’s move up. Corrections are counter moves in a larger trend. What we know about corrections is that they tend to be symmetrical in nature, and move in a 3-wave with overlapping pattern. Look at the 3-wave move in Snap’s move off the low. The first leg went up 58.8%. The 3rd leg, or final move up, went up 58%. It doesn’t get more symmetrical than this.

The same trading plan is in place as we last outlined. But, we believe it is likely Snap has topped, and the final C-wave down has just begun.

This is an especially important earnings season as we hear from executives for the first time since the pandemic. I’ve provided a summary of the earnings reports from this week and my takeaways.

In this update, I cover Texas Instruments, SAP, Lam Research, and Xilinx and the insights they provide on the data center. I also cover Snap’s earnings report and Netflix. I’ll cover Intel’s report on the forum tomorrow evening.

Main Takeaways:

• Data center is coming in strong as we forecasted. There are many instances that confirm this below.
• Despite Snap’s breakout, I don’t see anything that invalidates what I’ve published about ads being weak post-covid. In fact, Snap saw significant drop off between Jan/Feb ad revenue and April. I detail this below.
• Pay attention to SAP’s guidance around software. I had mentioned that instead of guessing on the various software players that it may be stronger to go to the infrastructure level and SAP could be the beginning of a few reports in weakening software. 
• I cover Netflix below. Roku will see solid user growth while revenue in Q2 for Roku could go either way.

Texas Instruments:

Per the earnings call, Texas Instruments believes there is a “significant chance for a recession” and is modeling their forward guidance on the 2008 recession. In summary, the 2008 recession snapped back in two quarters time. 

TI plans to run factories in Q2 2020 and Q3 2020 in the same way the company ran in Q1 2020 with the expectation they will be sitting on inventory when the demand returns in an effort to maximize optionality for customers who may not be able to forecast at this time. 

Q1 revenue was $3.3 billion, down 7% from a year ago, with EPS of $1.24 per share. Texas Instruments guided for Q2 revenue in the range of $2.61 billion to $3.19 billion and earnings per share to be in the range of $0.64 to $1.04. 

Although the company did not provide much insight into how Covid-19 affected various revenue segments, TI did confirm that “enterprise systems increased double digits based on strong data center demand.” The company also stated that Industrial and PCs increased while Automotive and Mobile decreased. Communications equipment declined 50% year-over-year but there was an increase quarter-over-quarter. 

SAP:

SAP missed on revenue by about $10 million with Q1 revenue at 6.52 billion Euro. The company stated that cloud revenue is expected to continue with rapid growth in 2020 backed by a 25% expansion in the current cloud backlog. 

Regarding Covid-19, the company stated that a “significant amount” of new business is being postponed and with software licenses revenue most impacted and falling 31% year-over-year. As of now, the company is guiding for revenue in 2020 to be in the range of 27.8 to 28.5 billion Euros down from 29.2 billion to 29.7 billion Euros.

JP Morgan came out with downgrades to software in a similar category as SAP this week.  

Netflix:

Netflix added 15.7 million new subscribers compared to expected 8.2 million. The company reported mixed results, however, with EPS of $1.57 and $5.77 billion in revenue compared to expected EPS of $1.65 and sales of $5.76 billion. Earnings rose 107% and sales rose 28%. Netflix is guiding for new subscribers of 7.5 million compared to estimates of 4.1 million. The second half of the year is expected to be light on subscriber growth. 

Some of Netflix’s strength is the company’s arsenal of content, which interesting enough, the debt load to create this content is what has fueled criticism of Netflix for the past few years. Free cash flow will improve from negative $2.5 billion to negative $1 billion. 

I’ve covered Netflix’s additional strengths in previous editorials. 

Snap:

Snap is up 35% on strong Q1 subscriber growth and a revenue beat. The company reported $462 million in revenue compared to analyst estimates of $428.8 million. Average revenue per user was at $2.02 versus $1.68 per user in the year-ago quarter. Daily active users are up 11 million users to 229 million total. In the past, Snap reported relatively flat DAU growth so the 11 million stands out despite being quite low compared to other social sites from Covid-19 usage. For comparison purposes, Pinterest is expected to add 30 million users from 335 at end of Q4 to 365 million users in Q1.

In the earnings call, management discussed the lower levels of ad demand in more detail. Revenue growth was very strong in January and February at 58% year-over-year before falling to 25% year-over-year in March – essentially slashing revenue in half.

In April, the decline continued at 3-4% per week to 15% year-over-year growth through April 19th and 11% year-over-year growth in the current week. This means revenue growth was slashed by 80%. 

If the decline continues, this will put Snap at negative YoY revenue by May. 

“Like everyone, we’re hearing from advertisers that the global outbreak has dramatically shifted the way that they’re thinking about marketing. Some have paused while they’re rethinking their messaging and others are cutting funding to save jobs.” -Jeremi Gorman, Co-founder and Chief Business Officer, Snap

Meanwhile, Twitter guided for negative revenue in March so it makes sense Snap would join Twitter on this trajectory. 

Despite the weak forecast for Snap based on April growth, the stock surged 35%. Knox will be updating the forum on the chart and status of the short position. We may have been early on this one but I don’t see anything in the earnings report that invalidates the thesis.

Lam Research

Previously, Lam withdrew fiscal Q3 guidance in March stating it may not reach previously announced targets. Some of this was due to factories in Malaysia being shut due to government directives to shut businesses. Lam missed slightly on revenue at $2.5 billion compared to $2.58 billion expected from the December quarter. EPS of $3.98 was in-line with the revised consensus. The company has $5.6 billion in cash after drawing $1.25 billion from its revolving credit facility. 

Most importantly, Lam Research confirmed that cloud and enterprise-demand remains strong while consumer markets are weak. 

“The need for equipment and capacity to support work from home initiatives is causing cloud service providers to increase CapEx, creating the potential for a surge in server demand. Third-party estimates suggest that cloud capacity would need to increase 10-fold to service the peak workloads seen as shelter-in-place rules went into effect. Although these heightened workloads are likely a short-term phenomenon, this event will underscore the need for companies to invest more in infrastructure and business continuity capabilities as the daily economy and our dependence on technology continues to expand over time.”  -Tim Archer, CEO

The company is exiting March with record backlog as the demand environment is strong yet the supply is constrained. 

“And we haven’t seen those plans change and that demand remains kind of at the same level it was in January. And which means that we have a full order book, and we’re – really, our challenge is how to get these tools to customers. And I would say 100% of my conversation with customers right now are about how to get the tools they need to them. And I think that will continue for some period of time. And as Doug said, we will reassess after that period to see how demand is being affected.” -Tim Archer, CEO

Lam is forecasting for June revenues in fiscal Q4 to be higher than March with current operational performance. With that said, Lam is not providing exact financial guidance due to covid uncertainties. 

Xilinx

Xilinx beat earnings but issued soft guidance. Revenue came in at $833 million and EPS of $0.94 cents compared to expectations of $827 million and $0.92 cents EPS. Revenue growth was 12% year-over-year and EPS growth of 8%.

Xilinx guided for revenue of $660 million to $720 million in the current quarter, down 19% year-over-year and down 9% QoQ. This is due to weakening demand for communications products and “macro-related weakness.” Xilinx did note there was strong overall growth in the data center. The company is guiding for full year revenue of $3.21 billion to $3.28 billion compared to previous full-year sales of $3.4 billion. 

Xilinx is seeing issues with demand. We should know more with Intel’s report if this is a trend across semis or unique to Xilinx. Areas of weakness for Xilinx include Automotive, Broadcast and Consumer. Areas of strength included data center and wired/wireless group.

“The Data Center Group performed as expected with strong sequential growth primarily due to contributions from compute acceleration, driven by a mix of both cloud and high performance compute customers. We saw notable strengths from a hyperscaler deployment of a FPGA-based SmartNIC and our DCG opportunity pipeline continues to grow at double digits, particularly in video, HPC, database and fintech applications.” -Victor Peng, CEO

I will be offline for a few days. The website and responses may be a little slower prior to earnings coming in at the end of April. Pablo is our admin and will be checking email if there are any technical concerns. He can be reached: pablo@beth.technology. Knox will continue to be available on the forum and email knox@beth.technology . There will be premium blog updates as we go through earnings and updates on technicals if the market makes any major moves.

The blog post I published for the April spreadsheet sums up my fundamental thesis for Q2.

As published in January, one major thesis for 2020 has been hybrid cloud and and the migration of larger enterprise and B2B budgets. This thesis hasn’t changed and the work-from-home trend will support the growth already being predicted in this category. Behind every Docusign, Slack, Zoom Video, Netflix, Ring Central, etcetra is cloud infrastructure and cloud monitoring. You’ll notice the top 7 or so stocks on the April conviction list are at the cloud infrastructure/data center level. We also added Okta to this coverage recently. 

I believe ad-tech has an adjustment in its future. You’ve seen me cover this quite extensively. The current ad demand is highly unusual and with sports, live events, and travel being slow to comeback, advertising companies have a long year ahead of them. Typically, in the past, ad exchanges feel a lull in ad demand the most (i.e. The Trade Desk and Rubicon). We could get some positive spins on Q1 but look for a withdrawal of guidance as these companies try to get a handle on the situation. I’ve asked Knox to hold out longer on these companies for any new positions and I know he discussed a Snap short. We think Snapchat is particularly weak. We may look at hedging with The Trade Desk.

Regarding tech growth valuations, I would be cautious in thinking that tech will be immune to the current situation. We are seeing significant layoffs across startups. Also, institutional investors who perform channel checks are forecasting for higher software churn rates. Estimates right now are higher churn rates from enterprises of 3%-5% and higher churn rates of SMBs of 20%. Blended would be about 10%-12% higher churn rates. Effects from enterprises will be felt in the cross-sell and up-sell. Net new bookings may see a softening of 30% or more. Here’s some more information from Gainsight about the expected increase in churn. The companies who use Gainsight include Anaplan, Tableau, VMWare, Splunk, RingCentral, Yext, SailPoint, MuleSoft, Workday and Citrix.

Our Coronavirus picks are Zoom Video, Slack and DocuSign for their strength over the long haul. Institutional and funds also like Smartsheets, Ring Central, and Teladoc. 

In the most recent April update, we did indicate that Inseego was getting positive press. It’s due to 4G hotspot demand from governments and schools.

We’ve seen reports that Twilio and ServiceNow are continuing to hire. Zoom Video and DocuSign are hiring, as well. This may be an indication of strength in these companies.

Knox’s technical analysis of Okta is below. Thanks, Beth

Okta Technical Analysis

By Knox Ridley

Looking at the daily chart, Okta has been trading within a range for several months. The $140 range and the $95 range is where the price is bound. The volume spikes give a clear sign at the price at which institutions are liquidating shares and also accumulating shares.

So far, between $100-$90, we see heavy volume spikes, indicating that institutional money is defending this level. On the sell side, we see heavy volume spikes between $120-$145. Until we can get volume spikes breaking through one of these 2 ranges, we will stay range bound.

From the prior lows, we see weaker volume push the stock back up to the upper end of this range. This indicates potential retail investors bidding the stock back up.

Over the last several months, this range has formed a cup & handle pattern. If we can see a breakout above the $146 on heavy volume, followed by a retest and hold of that level, that would be an indication that institutions are willing to pay higher prices and we will initiate a long position.

Furthermore, the RSI is showing weakness. We are approaching oversold levels. If you track where the RSI was last time the price was this high, it was at a lower level. This means that we needed more buying pressure to reach the same price level. Also, notice the RSI trend outlined by the green dashed line. If this breaks, that will be an early tell that we may get a local top and continued drawdown.

As of now, my primary count is that we are in a B-wave, within a larger A,B,C pattern. It would be rare to see a larger degree 2nd wave only tag the 23.6% retrace level off the all-time lows. It usually targets the 50% – 61.8% retrace levels. But, with the potential for growth being minimal in this market, coupled with the runway in front of Okta, we believe a retest of the 23.6% retrace level, which is around the $95 region, is a strong buy.

Weekly Chart

The bigger the pattern, the more significance it holds. The weekly trend is much more ominous than the daily trend, and because it’s a longer length of time, it holds more weight than the daily patterns.

We can see the clear uptrends noted by the green dashed lines on all of the momentum indicators – MFI, MACD.

At the same time, we can see large negative divergences on the MFI and MACD. As the price is making higher highs, the momentum indicators are making lower highs. This is also confirmed by the lack of volume in the current uptrend and shows  that the current rise in price is being built on shaky ground.

This does not support a breakout. In fact, it tends to support a breakdown. I’d be careful buying around the highs as long as we stay below the $146 region without a breakout on heavy volume.

My Elliott Wave count is also present from the all-time low. I see us topping out and completing the larger degree first wave in red. This would put us in the 2nd wave as discussed prior. The price regions I’d look to begin layering in are colored on this chart: $105 (yellow), $96-$90 (red), $72-$67 (green). We do not see the green zone coming into play, but think it likely we see the yellow and red.

0722c012-6ea6-4805-ba0e-87e05efb29a2_Okta-Premium-Research.pdf

Okta Premium Research

IAM Overview

Identity and access management (IAM) helps to make sure the appropriate people access the appropriate networks and applications. Features include authentication, authorization, trust and security auditing for both onpremise and cloud-based systems. 

Defining and managing roles is needed for both customers and employees. The goal is to have one digital identity per user, and to maintain, modify and monitor this digital identity to allow access to the appropriate assets and in the right context. This may include onboarding or offboarding the user. IAM systems allow for the administration of user access across an enterprise and ensures compliance.

IAM became more complicated once employee’s began to use their own devices and as companies transitioned to the cloud. This is because there was no longer a perimeter. Today there are on-site employees, off-site contractors, hybrid cloud environments, software-as-a-service applications, bring-your-own-device users, UNIX, Windows, Mac, iOS, Android – and soon there will be billions of machine to machine connections (internet of things) communicating through APIs. 

IAM is important because these devices, user credentials and access points are where the majority of security breaches occur. According to IBM, 60% of data breaches are caused by an organization’s own employees.  

According to Forrester, IAM is broken down into six technologies that have high business value. 

•       API Security: Allows for easy, single sign-on (SSO) access for B2B ecommerce and API integrations. This is especially useful for IoT, or the internet of things, device authorization as many devices must communicate seamlessly. This is important for machine-to-machine communication.  

•       Customer identity and access management (CIAM) enables organizations to capture and manage customer identity and profile data. Features include customer registration, self-service account management, access management, and directory services. Customer retention is much higher when there is less sign-on friction and fewer required steps. This is also important for omnichannel sign-in, such as switching from mobile to laptop.  

•       Identity Analytics (IA): Identity analytics evolved from the use of cloud and allows behavior analytics to identify usage and access patterns in data collected from the IAM. This creates risk profiles for the user behaviors and helps manage risk profiles based on application usage.

•       Identity-as-a-Service (IDaaS): This provides single-sign on and identity management as a software service. The benefit is to remove servers, purchase/upgrade/install software, data backups and hosting fees from the provisioning process.  

•       Identity Management and Governance (IMG): IMG helps to minimize the risk of data breaches and improve end user productivity. Offers control and visibility into inappropriate access or policy violations. Helps to achieve compliance.

•       Risk-based authentication (RBA): Allows for a variation of single-sign on and two-factor authentication.  

Overview of Okta:

Okta is the preferred name brand in identity access management (IAM). When speaking to security professionals, the company is highly regarded. Okta’s Identity Cloud is an independent and neutral cloud-based identity platform that allows its customers to integrate with any application or scalable platform. One obvious benefit is that Okta does not lock customers into an ecosystem, like Microsoft or Salesforce, hence the word “independent” is frequently used in their marketing materials. 

Workforce Identity simplifies the way an organization’s employees, contractors and partners connect to its applications and data from any device. This is the majority of the business. 

Customer Identity Cloud enables organizations to transform their own customer’s experience making use of API- level access and seamless customer experiences. There is a large product range including Universal Directory, Single Sign-On, Adaptive Multi-Factor Authentication, Lifecycle Management and API Access Management.

The company recently launched new products, such as Access Gateway or advanced server access Dynamic Scale. This helps enterprises handle traffic bursts with up to 500,000 authentications per minute. 

This month, the company announced end-to-end passwordless access with Okta FastPass. This will allow for a passwordless login experience across iOS, iPadOS, macOS, Android and Windows. The goal is to reduce friction while increasing security. The company believes that early access to FastPass will be available in Q4 2020.

There are a few reasons companies are more likely to go with a proven brand like Okta for identity access management. For one, IAM allows access to the company’s most critical systems and assets. Also, in order for IAM to work effectively, Chief Information Security Officers (CISOs) must put all of their eggs into one basket, as One Identity points out. Therefore, they will lean towards the independent solution that is also best in breed. 

There are additional concerns and costs to integrating IAM with both on-premise and the cloud, and whether internal admins can properly work with IAM. Once IAM is implemented, CISOs and security teams want a solution that works effectively and does not duplicate workloads. In other words, this isn’t the place where a company cuts corners or goes with discounted solutions. 

On the larger corporate-level, Microsoft is one of Okta’s main competitors. However, Microsoft’s goal of locking businesses into Azure, Skype and Office 365 is not ideal for all companies. Many prefer the freedom of multi-cloud and multiple vendors/cloud software solutions. Ping Identity is a competitor on the SMB level, yet does not have near the revenue growth or suite of products/solutions. Salesforce also has their hat in the ring but similar to Microsoft requires vendor lock-in with their software suite.

Addressable Market & Customer Use Cases

When Okta went public in 2017, the Workforce Identity addressable market was at $18 billion. According to Okta’s

Investor Day Presentation, Workforce Identity has now grown to $30 billion and Customer Identity has grown to $25 billion. Over the past three years, Okta’s revenue has grown at a CAGR of 54% from FY 2017 to FY 2020.  

Okta derived 84% of its total annual revenue from the United States. The company believes that global demand will be a long-term opportunity.

Use cases for Okta:

•       New Corp put 75% of its computer power into the public cloud and extended their workforce operations with applications like Google Apps and Dropbox. There are a total of 150 apps across all of News Corp’s digital sites and work flows. News Corp uses Okta’s single-sign on (SSO) access for easy access to applications, secure access with multi-factor authentication, and automates provisioning for new employees to onboard quickly.

•       In the third quarter, the company won a workforce identity contract for Berry global, a Fortune 500 manufacturing and packaging company with tens of thousands of employees. The company wanted to protect itself from modern security threats. The company will improve the sign on experience for employees, reduce helpdesk request by enabling self-service password requests and enhanced security with multi-factor authentication.

•       A Fortune 50 telecommunications company for its business customers to securely access key business services. Okta was selected over Microsoft to lower maintenance and infrastructure costs and provide faster time to value.

•       Recently, Autodesk selected Okta Identity Cloud to centralize identity and access management for its customers. AutoDesk is the global leader in design and engineering software (Source: 4Q FY 2020 Earnings call transcript).

•       Fortune 500 financial services company upgraded to Okta’s Access Gateway to UniFi access to both cloud and on-premise applications and enhanced security for its over 10,000 employees.

•       For customer identity, a European film and television studio and distributor with over 8 million subscribers was recently onboarded. 

•       NTT data, a global top 10 global business and IT services provider, was a notable upsell in the quarter. 

Coronavirus Effects

Although Okta has stated that billings will face headwinds this year, the company is not revising Q1 revenue guidance of $171 to $173 million. As of now, revenue guidance for fiscal 2021 ending  January remains at $770 million to $780 million. The FY 2021 loss per share is slightly improved from $0.37-$0.42 to $0.31-$0.36.

The company expects slightly improved earnings per share of negative $0.16 to $0.17 compared to $0.23-$0.24 due to the reduced costs in Sales and Marketing from Okta’s employees working from home.  

Despite the strength in Okta’s product during the work from home trend, a few analysts have placed a hold on the stock due to valuation concerns. Canaccord Genuity states they are on the sidelines due to valuation and Needham analyst Alex Henderson recently downgraded Okta due to little room for improvement in valuation. 

Financials:

On March 5th, Okta reported Q4 and fiscal year 2020 results. Total revenue in the recent quarter grew 45% yearover-year to $167.3 million. In the previous quarter, revenue grew 45% YoY to $153 million. 

Subscription revenue grew 46% to $158.5 million. Remaining Performance Obligations (or subscription revenue backlog) grew 66% YoY to $1.21 billion and calculated billings grew 42% YoY to $225 million.

Subscription revenue makes 94% of FY 2020 revenue while professional services and others make up 6%.

Okta is not profitable yet with non-GAAP loss per share of negative $0.01 EPS in the recent quarter compared to negative $0.04 EPS in the year-ago quarter.  

Full year revenue grew 47% YoY to $586.1 million. Subscription revenue grew 49% YoY to $552 million and calculated billings grew 44% YoY to $703 million. Non-GAAP EPS was negative $0.31 EPS compared to negative $0.32 EPS in the previous year. 

Revenue guidance for fiscal 2021 ending January remains at $770 million to $780 million. The FY 2021 loss per share is slightly improved from $0.37-$0.42 to $0.31-$0.36. This will represent a growth rate of 31% to 33%.

Consensus estimates for Okta is $771.65 million in FY 2021 and $1.0 billion in FY 2022.  

In the earnings call, CEO and Co-Founder Todd McKinnon stated the company is investing in growing its base of large enterprise customers. The company added 142 customers with annual contract value greater than $100,000 bringing the total number figure to 1,467 – or an increase of 41% y-o-y. Total customer base is 7,950. 

Operating cash improved 266% from $15.2 million to $55.6 million. Free cash flow also saw a big improvement from negative -$6.8 million to $36.3 million for fiscal year 2020. The company ended the year with $1.4 billion in cash, cash equivalents and short-term investments. Okta carries current liabilities of $546 million and long term debt of $837 million.

The company has been expanding internationally over the past two years, namely, Stockholm, Munich, Amsterdam, Paris, and Toronto. 

Prior to the Coronavirus, the company’s operating expenses were expected to rise due to an increase in headcount. The company’s headcount rose 40% in the first half of FY 2020 and 44% in the second half of the year.  

Valuation:

As stated, a few analysts pointed out that Okta is reaching maximum valuation. I believe most tech growth stocks will go through a valuation adjustment this year. Okta will not be an exception, although the company should fare better than most. 

By my estimation, Okta will fare better than most because its core business of IAM for the cloud is a stable market (comparatively to others right now). We know Okta is not reducing guidance as of yet and I imagine this will be an anomaly come May/June when the majority of companies will have revised guidance or will decline to offer guidance. 

When considering Okta’s valuation, it’s important to note that Okta spends more than 50% of its revenue on sales and marketing. I’ve been critical of this in the past and continue to question the runway of a few cybersecurity companies. Some companies spend heavily to stave off competition (this is my thesis for cybersecurity). Others move very quickly and spend heavily to gain market share while the opportunity is nascent. This is essentially what Amazon did and Netflix has been doing. I am initiating coverage on Okta because of the company’s name brand status in the B2B/enterprise world and because I believe it will be the de facto IAM company. 

Okta has a current price to sales of 26 and a forward price to sales of 20.7. During the Q4 2018 selloff, Okta was at a current price to sales of 14-15 and its lowest forward price to sales has been 17. This would place Okta at a market cap of $12 to $13 billion with an addressable market around $50 billion (combining both workplace and customer identity markets).

Keep in mind, a $12-$13 billion market cap places Okta where the stock traded during the momentum rotation in Sep/Oct 2019; which was a 1-year low for many cloud stocks. Therefore, this is not a drastic discount given the current economic uncertainty. 

However, you have to balance the fact that Okta’s customer base and market is more likely to stay intact this year compared to other tech companies. Assuming forward revenue will remain in the $770M range in the current fiscal year (as the company has stated it will) and $1 billion in the next fiscal year, then Okta will stand apart from companies that are lowering guidance.

Catalysts and Competitors:

Ping Identity carries a much cheaper valuation yet the low growth reveals a company that struggles to compete. Ping is forecasting full year revenue growth of 9%-11% from $242 million to $263 million. This growth is too low for me to personally consider, especially considering total addressable market in IAM has been growing rapidly.

It’s important to note that Gartner and Forrester place Okta above the competition. This matches the overall reputation of Okta in the tech industry. When I speak to companies about products, Okta is well received and spoken of very highly.  

Regarding Salesforce, Microsoft, IBM and Oracle, many of these companies require vendor lock-in and are not able to innovate as quickly. Okta’s FastPass is a good example of how Okta is innovating.  

On the topic of catalysts, Okta is a Coronavirus shopping list stock. Millions of employees will work from home this year and this will present operational challenges. Products like Okta will ensure only authorized users access their cloud applications. The CEO, Todd McKinnon, stated in a recent interview that the company is seeing an 80% increase in the amount of strong authentications. 

We are covering Okta as a buy-and-hold due to hybrid cloud migrations, the popularity of multi-cloud (which prevents vendor lock-in) and the company’s future potential in blockchain. These are the more important catalysts, in my opinion, as valuing companies based on the Coronavirus is beyond my scope. 

I feel fairly confident that blockchain will take off in the financial markets within a reasonable time span of 1-3 years and that Okta will be very well positioned when this occurs. Gartner and a few others place 2023 as the year when blockchain will be mainstream. The market will reach $3 trillion by 2030 (not all of this will be IAM, of course). Basically, I like Okta now for hybrid and multi-cloud and the $50 billion TAM …. but I really like Okta for the much bigger TAM that includes blockchain down the line.

Technical Analysis by Knox Ridley to follow this week.

Last week was eventful. Unemployment rose by another 6 million claims on Friday bringing the estimated unemployment rate anywhere between 10-14%. The Federal Reserve announced an unprecedented program, which included shoring up the high yield bond market. Standard & Poor’s is projecting a default rate in this cycle to be around 10% by year end, with some estimates approaching 13%. This is higher than what we saw in 2008. The SPX also broke the 2750 level, an important level we have been tracking since the expected bounce off the March lows.

We have been tracking a 5-wave pattern down, where the current bounce was the 4th wave bounce. This would eventually lead the final 5th wave to new lows. This was the game plan, as long as the market stayed below the 2750 mark, which failed on Friday.

Please note, we have been discussing more on this topic in the forum under predicting bottoms. predicting bottoms. 

The 4th wave scenario topping out from current levels, and thus taking us down to the 2100 region in a quick fashion is still technically valid below the next resistance price of 2855; however, the probability of this has become much lower than the other potential scenarios at this point, one of which is now the possibility of a renewed bull market.

I find this scenario has low probability as long as we stay below 3150 on SPX. And if we do confirm this pattern, it will not be a straight shot, so there will be plenty of time and room to adjust. However, any responsible technician has to acknowledge this potential.

For one, it can’t be understated the amount of stimulus thrown at this market. Both the treasury and the Fed have and will continue to unload as much stimulus into this event. This event will be the ultimate test for the popular phrase, “don’t fight the FED.”

Considering the record breaking outflows from equities, the large short interest in the market, coupled with the elevated put/call ratio being tilted towards purchasing more puts right now, the “pain trade” for the larger market would be a continued move upward.

We will monitor the market this week and release an update on the technicals once we have more information. However, the scenario I am now tracking has us in a more complex bear market and I personally believe there will be a re-test of the lows. Of course, feel free to invest as you see fit and what matches your investment thesis for this market.

A few things Beth has been watching and wants to make you aware of:

• She wrote an article for Forbes on weakening ad demand that has similar information that she had published prior on the premium site. Recently, there was a report by Gupta Media that she did not include in the editorial. The report states, “As of data available Tuesday, Facebook’s worldwide CPM fell an all-time low of $1.95, according to data analyzed by Boston-based agency Gupta Media.data analyzed by Boston-based agency Gupta Media.The article comes from MediaPost, a reliable source. Keep in mind, Facebook usage is up so this should help some. However, her concern is for the smaller players in ad-tech, notably TTD, RUBI, PINS, SNAP and perhaps Roku although Roku has licensing fees/commissions from content apps.
• May is going to be a pivotal month for the tech industry. As of now, we saw startup layoffs increase 4X from 4,000 to 16,000. Per RBC Capital, “We view May as a critical month – if the majority of the workforce is not back to business as usual, we believe significant cuts (of people, not just numbers) are increasingly likely in software.”
• If the shelter in place continues into May, net bookings for Q2 and Q3 could be cut between 20-50% on average.

As of now, these are the major points to acknowledge:

• Now that we have closed above 2750, The next major resistance level will be the 2855.
• If we clear this zone, look for a topping pattern between 2950 -3100. The 2950 resistance will be the price region that I will look to build up my short positions (if we reach it), with a stop at the 3130 area.
• If we close above 3130, the probability that we are in a new bull market shifts.
• If the market closes below 2500, the bear market will continue.
• The bear market targets are still the same as of now.
• A final leg in this bear market is still the higher probability outcome.

Stock Updates

Dynatrace (DT)

Dynatrace is a position we recently started to build out along with our hedge in a Lyft short. The structure still suggests that the target box we outlined will likely be hit. We are witnessing weakening internals as outlined by the MFI and RSI, which are both making higher highs while price makes a lower high. We like this company and are raising the price range.

Datadog (DDOG)

We recently went long on Datadog, as posted on the forum. Per reader feedback, we are working on a system that differentiates between trades and buy and holds. Our targets on the spreadsheet are our buy and hold targets.

Like DT, we like this stock for the long haul. The structure of the stock is suggesting that we will retest the lows, after likely failing to close the gap above around $40. We are raising our target entry for DDOG to $30.

Chainlink (LINK)

Chainlink has had another impressive run recently. I offered my recent chart in terms of Elliott Wave analysis, which is still expecting the opportunity to pick up shares sub-$2 once the corrective move we are in completes. However, I wanted to show you what my Gann analysis is suggesting, as well.

Notice how the price reacts to the Gann ratios. We have several tops at various ratios as well as supports. We bottomed on the 8/1 in red, and pushed through the 4/1 in purple. I believe we will test the 3/1 in gold, which will likely mark a top to this move. If we can close above the 3/1 in gold, I will likely look to go long with tight stops.

Snap – short position

On weakening momentum and volume, Snap keeps pushing higher in a clear corrective pattern. It has found resistance at the 61.8% retrace level from the entire drawdown. This level also coincides with the 50% extension of the A wave within the corrective move off the March lows. Another Fibonacci confluence zone is the 100% extension of the C-wave equaling the length of the A-wave, which will also coincide with the 85.4% retrace level around $17.25.

We believe that Snap will find a top within this range, and give way to the final C-wave down. The first target for this drawdown will be $11. Below $11, and the $8 region comes into play. I will look to hold a stop at $17.50. If we close above this level, I will close my position the next day.

With shorts, I target between 20% – 40% as the target gain. Shorts gains can turn into losses in a matter of days while the VIX is this elevated.

Lyft – short position

The setup with Lyft is very similar to Snap. We are in an even more clearly recognized corrective structure, which I believe could push as high as $45 before finally giving way to a new downtrend.

The internals are supporting a weakening uptrend, with less participation as noted by the volume. Like with Snap, once we hit the $23 range, I will look to cover some of the position. If we break below $22, expect the recent lows to come back into play. If we close above $45, the next day I’ll close my position.

The link for April’s spreadsheet is below.

Please reference the forum for Knox’s updates and charts to supplement the spreadsheet and also the blog we wrote yesterday to supplement the spreadsheet.

We increased the rank for cloud infrastructure and data center companies while also raising cloud infrastructure monitoring. For now, we adtech is ranked lower as there are too many unknowns as to when demand will return. These are great companies so we will continually monitor as we go along.

ACCESS APRIL 2020 SPREADSHEET HERE

Please ping us on the forum if you have any questions.

Thanks, Beth 

Please note: April Spreadsheet coming tomorrow! Please note: April Spreadsheet coming tomorrow! 

Nobody knows how the pandemic will play out. Many of our readers have said on the forum that “finding the bottom” is not the goal, and we couldn’t agree more. 

If you were to press me for an answer, my belief is that a recovery in Q3 is being very optimistic. I know that some banks and institutions have forecast this. In my perspective, the demand in tech is unknown – will buyers resume at previous levels? The employment situation in tech is certainly not immune either. A few more cracks appeared this week with a report of 4,000 layoffs in the startup sector. Startups are big consumers of cloud software, so it has a domino effect. 

Our approach is to make educated decisions based on product knowledge/competitive positioning (my analysis) and probabilities (Knox’s technical analysis). We do not have strong bear or bull opinions. I personally get fatigued with the “buy buy buy my portfolio” analysts and the “world is ending” analysts. That’s part of why Knox is so instrumental. He presents the index numbers and the stock movements, uses a methodology to manage risk and remove emotions, and we go from there. 

When looking at the month ahead, our company’s portfolio has this general plan:

• Buy at the high end of the targets for data center stocks: cloud at the infrastructure level and cloud at the platform level should do well. One of the reasons I focused on cloud for the premium site during the sell-off is that it’s insulated from trade wars and recessions. My article at the time said, “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 crosshairs of anti-trust and are susceptible to consumer spending changes.”

On that note, I think a solid cloud coronavirus portfolio would include: Nvidia, AMD, Microsoft, Alibaba, Datadog, and Dynatrace. I plan to add Okta this month. I’m not a fan of Intel myself as their innovation lags, but I would listen to an argument here. You could make an argument for Amazon too, as the e-commerce, grocery and data center are all strong segments right now. 

We covered LAM recently, which is more on the memory side. I’m looking for cash-cow havens that position well for a renewed trend and can also weather the year ahead. LAM has impressive levels of cash. There is some crossover with the data center but mainly powers mobile and electronics. That last part could be stalled but I’d like to get into the stock during this year’s respite from the semiconductor rally.

• Buy at the mid-low end of the targets for ad-tech: This may take through next quarter (Q2) to see the full effects. I’ll be listening closely on the earnings calls. This is Pinterest, Roku, The Trade Desk, Snap, Twitter, Google, Facebook, Rubicon/Telaria. Here is some follow up information in addition the premium blog post I wrote recently:
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To recap, ad-tech companies could have a positive earnings surprise but it’s not probable they will get through the three long months of Q2 unscathed. Patience here is going to pay off. Usage going up well over double digits and revenue being flat to down is not something to get hasty with. 

Disney is a great example of a big brand having to furlough workers. You can imagine what this did to Disney’s ad spend, and we know Roku was a favored ad platform for Disney. Basically, whatever we see for Q1, we can expect this impact to double or triple in Q2. 

You’ll see some conviction downgrades across ad-tech for April.

• Buy at the mid-low end of the targets for consumer related stocks. Apple, of course, falls into the consumer category. On another note, Inseego was on CNBC this past week on seeing an increase in demand for hotspots. This boost could be a one-time event. 
• Buy at the high end of the target for enterprise stocks with excellent cost-benefit ratios: Alteryx is very expensive, so it’ll be interesting to see if they can maintain the $4500 product cost as we (potentially) face more layoffs in tech.As stated, I plan to look closer at Okta as identity access management is likely doing well in the current environment. They’ve got the special sauce with the product, and in times of stress, companies will go with the brand name that works well rather than undercut with cheaper competitors. Identity management could go under the data center category, as well. 

Cloud work-from-home: As you know, I like Slack. The market will likely question Slack bc the company is bottom heavy with it’s freemium model; meaning paid accounts aren’t offsetting the free accounts. “Will the product monetize?” — this is what financial institutions are unsure of. I am not as worried about this. It’s common to gain as much traction as possible and give up gains in the beginning stages. Monetizing is easier than building a product that works well and can scale. 

Docusign should have some staying power too this year. Really great product for legal, real estate, and finance industries who are now working from home. These industries don’t typically work from home so a true growth opportunity and perhaps a change or reinforcement around documents for digital management. We will be covering Docusign soon and officially adding this company to our coverage and portfolio. 

Regarding Zoom Video, don’t get confused about this company as the press starts to lump it into a Coronavirus fad. The company has a rare combination of strong financials and perfect product-market fit. I also covered the security issues on the forum – not concerned with this and actually quite common (and easily fixable). 

Please subscribe to any chat rooms on the forum where you’d like more information. forum where you’d like more information. 

Regarding Knox’s targets, he is holding fast on the ranges, and will update if he sees a need to raise them. Also, if the market is signaling a potential turn, and our stocks have not hit the respective targets, we will update you in a blog post. 

Our goal is utilize this opportunity to setup great long-term positions. However, due to the uncertainty in the global economy, we will lean towards being cautious. What this translates to, is that we feel the 2300-2750 region in the S&P 500 carries too much risk. If a vaccine hits the market tomorrow, we will get back in with more confirmation of an upward trend. Please keep in mind, if we do re-enter a bull market, our projections of where that will take us will make up for being a little late. If we continue to see the ripple effects of closed businesses and (mind-blowing) unemployment, then we will look below 2300.

Thanks!