For reference to terminology used, please look at technical analysis under our resources section here. Regarding the horizontal lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.here. Regarding the horizontal lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.

Elliott Wave counts are meant to provide context. Each colored count represents the most probable paths given the current price data. There is a pattern unfolding in real-time, one of which will play out. By monitoring price levels that are held/broken, it will help us figure out which one is in play, so that we can better manage risk.

The Big Picture

Many are now calling for the start of a new secular bull market. The consensus went from being excessively bearish in early 2023 to now being excessively bullish. Some of the most prominent bearish voices are even flipping into a much rosier outlook for the coming years.

Though we are open to this scenario, and even game planning for what that would look like, our broad market technical analysis is suggesting caution, for now.  One of the primary tools I use to analyze the broad market is Elliott Wave. It is excellent at providing context as well as price levels that will confirm a thesis or negate it. You can read more about it to help follow along here; however, the foundation states that all markets move in 5 waves up in the primary direction, followed by a 3 wave retrace, which then repeats.

With that in mind, the below chart shows the S&P 500 starting from the March low in 2009.

The pattern this secular bull market has taken is a mature 5 wave pattern that has extended into January 2022. The 3rd wave topped where it was supposed to, and the 5th wave into 2022 even extended. From this analysis, the problem with the thesis that we are starting a new secular bull market is twofold:

1)    We have not had a sufficient 3 wave retrace of the secular bull market that started in 2009. This would take years to develop and likely take us back to the COVID lows. Though we have seen some sharp and complex drops within this large 5 wave uptrend, we have yet to see one sufficient in both time and price to constitute a legitimate retrace of the secular bull market.

2)    This means that is we are starting a new cycle within the secular bull market, we have to be extending the 5th wave that started off the COVID low. The problem with this thesis is that we are already very extended, and 2022 was simply too deep to suggest that we are going to extend too much higher.

This means that the secular bull market that started in March of 2009 likely terminated in January of 2022, or is close to terminating sometime in 2024. We have thus started or are close to starting a secular bear market, which would be the counter move to the 12 year secular bull market that started in 2009.

Where we will pivot, and instead plan for the continuation of this cyclical bull market is.

2024 Price Analysis

If we zoom in on the structure off the 2022 top, I’m counting 2023 as an extended B wave within a larger bear market. The only question is how much longer can this stretched pattern extend into 2024?

There are two interpretations on how I believe the price action can best be explained:

Green – The October 2022 low was the end of the A wave down, and start of the B wave up. The structure of this B wave is in the form of a very complex pattern that is rare to see on such a large scale. If this is playing out, we should see a top in January, followed by a deep retrace into February, which will be followed by one final swing higher into March/April. This will mark a major top.

Red – This count is the same as the above green count. The only difference is that we took a more direct path to the larger top, which would likely end sometime in late January.

2024 Time Analysis

If we analyze the cycles that are in play into the first half of 2024, we can get a good idea on when to expect a major inflection within the markets. These cycles continuously show up at major and minor turns in the market, and tend to have the most significance when they cluster together. Below is the NASDAQ-100, which shows four big clusters of cycles to look for as we in 2024. Two of these are in January and February.

1)    January 17 – 30

2)    February 15 – 29

More times than not, these cycles mark reversals in the trend. So, what is most important is how the market is trending into them. We monitor these dates closely and I discuss them in my weekly webinars as how we trend into them is key to interpreting how the market will play out in the weeks that follow.

2024 Cycle Forecast

W.D. Gann offered an annual forecast based on a combination of major cycles that tend to play out in the markets over time. Most are familiar with the 90 year cycle, for example, which is one of Gann’s cycles that he monitored, which lends credibility to his cycle research. For example, the panic of 1839 led to a painful depression in American economic history. Ninety years later takes you to the 1929 top, and 90 years after that takes you to the COVID top.

So, by combining the major cycles Gann identified into a weighted average, we can get a good approximation of both the trend and turning points within a given year. For example, the below image is a weighted average of these major cycles for 2022 (below), with what the Dow Jones did in 2022 on top. Note how the forecast mapped the major trends and turning points very closely.

If we take the same weighted forecast for 2023, note how closely it tracked both the trend and turning points compared to how the market traded.

So, using the same techniques, if we apply these weighted cycles to 2024, here is what we get:

The cycles forecast suggests a high in January, a low in March/April, followed by another low in May/June. This will lead to a bounce into the end of the year. Once again, what is important to note is trend and turning points.

These forecasts are not perfect, but they tend to help identify the major turning points and direction within the market. I always start the year with a weighted average of all major cycles, and then identify the one or two that are exhibiting the most influence. So, as we move into 2024, we will likely make adjustments as we go along to help us stay on the right side of these major market moves.

Supporting Markets

The markets that I am currently tracking to help us determine whether the red or green count is playing out are below. The below markets either have much cleaner wave counts, or are major markets that tend to lead tech.

NASDAQ-100 (NDX)

NDX has more room to run higher. My upper targets are 17737 – 18050. The main question in determining if it will run higher is dependent on where NDX bottomed. If it bottomed in October of 2022, then we should see a deep correction followed by a bigger push into these targets into late Q1 of 2024. This would be the green count.

If the low was instead in January of 2023, then this would be the top, with maybe one more minor push into late January. This will be the red count. The tell will be the nature of the drop. If it is a 5 wave pattern, then we are dealing with red; if it is a 3 wave drop, then we are dealing with green.

Microsoft (MSFT)

MSFT has a very clean wave count, and is currently trading at a risky spot. If the 2020 breakout was the halfway point for the 5 wave move off the 2009 low, then the $378 price range is the target for the final swing, which is exactly where price is struggling to break above.

What is concerning is that we have completed a full 5 wave move off the 2009 low, and hit our long term target. There is room for an extension to the $415 region, but the risk is elevated considering we are talking about the final 5th wave within a larger 5th

What this means is that the 2023 uptrend was the final 5th wave, which is still playing out. If we zoom in on 2023, MSFT appears to have room for another swing higher. If we are in the minor 4th wave, the minor 5th wave should take us into the $400-$415 region before terminating.

Ark Innovation ETF (ARKK)

Arkk’s structure is very clean, right now. I believe ARKK has one more larger swing higher, which will complete the large corrective bounce off the December 2022 low. If accurate, ARKK still has one more new low to complete the downtrend that started in 2021.

ARKK is currently in the final move of this corrective pattern, which is playing out as a 5 wave pattern. If you note the current uptrend, it looks like it still needs a 4th wave, which I believe we are seeing, and then should get one more 5th wave higher, which would be targeting around $59. As long as the current drop holds $46, then we should see one more swing higher in a final 5th wave push. Below $46, and the odds start favoring the top being in.

Amazon (AMZN)

Amazon hit our major target that we laid out in October. This stock, along with META and the NASDAQ-100, was the primary reason we were not calling for the top in July of last year. They were showing incomplete patterns and needed a final 5th wave higher, which we now have.

Now that we have this 5th wave, and it hit our target, we have a very mature pattern. Like MSFT, we could extend a little higher, but I will be looking for a reversal soon. How the reversal forms will be very telling – 5 waves down is bad, while 3 waves down suggests that we can push higher.

The Dow Jones Industrial Average (DJI)

Note the pattern off the October 2022 low. It’s hard to look at the messy, overlapping pattern as the start of a new bullish uptrend. In fact, it resembles a corrective, 3-wave pattern. This means that once the current 5 wave uptrend is over, we should see a sharp drop that breaks the October 2022 lows.

In order to negate this thesis, we would need to see a vertical break above 40,000. Short of this, the above scenario best fits the price pattern, which suggests that we have, at best, one more swing higher after a small correction.

The Japanese (Nikkei)

It may seem strange that a tech portfolio would follow the Japanese market, but this is a key market to track for tech. The reason for this is that the Nikkei has led the NASDAQ for many years, and it has a history of topping and bottoming just before the NASDAQ.

That being said, the Nikkei appears to need one more minor swing before completing its final 5th wave. If this happens, we will look for the Nikkei to make lower highs while the NASDAQ makes a higher high for the final confirmation that we are close to a major inflection point in the markets.

In conclusion, the above markets are some of the key markets that can help us identify what larger count in the broad market is playing out – green or red. It appears that stocks like AMZN and the Japanese Nikkei are very close, while MSFT, ARKK and DJI suggest that they have one more swing higher before completing their uptrend. Like all tops, I imagine this one will be a process. Look for divergences as some markets and stocks will top before others. If this happens and we see any continued push higher with fewer names making new highs, then we will have a strong early warning sign.

Macro

In November, the FOMC was steadfast on their stance that rates will stay higher for longer. In December, they shocked the markets with an about-face, claiming victory of inflation with the expectation of 3 rate cuts in 2024. This announcement sent markets vertical, as risky high beta stocks led the way.

What the FED and markets are pricing in is a true soft landing. In other words, inflation got out of control and the FED was able to successfully raise rates at the right speed to bring inflation down from the demand side, while avoiding a recession. Whether this will actually play out is yet to be seen. However, we thought it would be helpful to our readers to see what needs to happen in 2024 in order for this scenario to play out:

1)    Economic data needs to continue to soften. However, it has to soften into a sort-of goldilocks range. The balance will be weakening the employment market just enough to reduce core inflation, but not too much to cause a recession.

2)    Unemployment needs to go higher, but not too high. As unemployment goes higher, the historic disinflation that we have seen in 2023 will be able to actually reach the FED’s 2% target. As of now, core inflation is still at 4%, which is double what the FED is targeting. Rising unemployment will slow spending, and get core inflation back to the 2% target.

3)    Household checkable deposits are strong, and need to stay this way in order to propel the business cycle forward. Though the trend is down, the long-term trend suggests that households are still flush with cash, which is necessary to both avoid a recession and continue the business cycle.

4)    Energy has to stay within a sideways trend or continue to trend lower. This is key, as energy was the primary reason for the level of disinflation that we saw throughout 2023. Note below how core inflation has been stubborn between 5-4% throughout most of 2023, yet the headline CPI number kept moving lower.

The reason for this is because energy prices have been in a steep bear market since August of 2022. This has been the primary reason why the CPI number has continued lower, and it needs to stay this way in order for inflation to hit the FED’s 2% target, and therefore succeed in an actual soft landing.

History says this is a tall ask. There has never been an instance going back to WWII where inflation gets out of hand, and then gets back in line without a recession. However, so far, all the economic data in December supports the soft landing scenario. Corporate earnings have reaccelerated, and economic data remains non-recessionary. Households and businesses still have ample amounts of cash, and the employment market, though softening, still remains above the pre-COVID peak in many metrics. Energy prices are trending sideways, and have yet to breakout in a major way. So, until the data shows otherwise, we expect the market to continue pricing in the soft landing scenario.

I/O Fund Portfolio

We are still positioned defensively and will likely look to spread some of our cash into crypto positions as well some of our equity positions that have the clearest path higher. This will be dependent on whatever broad market count has the highest probability of playing out as we move into 2024.

For those wanting information from the analyst team on how we are positioned going into Q1, then keep an eye out for an invitation for two webinars: a 2023 Year in Review webinar and a Q1 Earnings Kickoff Webinar over the next 1-2 weeks. This is when the team will discuss in more detail how we are positioned in terms of fundamentals.

We are holding a defensive position in cash, and will be looking to our hedge signal to help navigate any coming volatility. As stated last year, we do not believe current prices justify a buy and hold mentality, so continuing to be nimble will be what guides any moves we make into early 2024.

Advanced Micro Devices (AMD)

AMD hit our target of $148, and has now seen a sharp decline. It’s worth pointing out the gap down from this region and vertical drop. This is most likely a 5 wave pattern, which is pointing down. For this reason, I am adding an alternative blue count, which has us starting a larger C wave that would retest the 2022 lows. This is not my primary thesis; however, due to the nature of this drop, I have to risk manage for it.

The blue count has a low likelihood as long as AMD stays above $130. As long as we stay above this region, we can see a local bottom and push higher towards $156. This would be my red count, which has us in the final dip before the final swing higher.

The green count would also see us bottom soon, followed by a push towards $158, and a final push into the $170 range.

Based on the AI trend, and how AMD has been overlooked until recently, we lean toward a variation of the red or green counts. This implies that the 2022 low was a major low, and any continued weakness will likely make a higher low. However, the nature of this larger, higher low must be a large 3-wave pattern. We are not seeing a 3 wave pattern from the $148 region, which needs to be monitored. As stated, above $130 and we do not see the need to de-risk.

Nvidia (NVDA) 

My long-term target for NVDA’s bullish path has been $575-$600 for many months. I’m still holding to this, and my red count has us in the final 5th wave push higher into this target.

The other alternative, which fits better with the current structure, is that we are actually in a 2nd wave retrace, with final targets around $640. This is my green count, and though it fits better with the move off the November low, the $640 target does not fit with the proportions of the larger 5 wave pattern that started in 2022.

How we will know which one is in play will require two things: 1) any remaining weakness must hold $420. Below $420 and both green and red are a risk of not playing out. Below $420 and the odds start favoring my alternative blue count, which has last August as a major top. 2) Then, we will need to see a breakout above $575 – $600 to confirm the green count is in play.

CrowdStrike (CRWD)

CRWD has likely put in a major low in January of this year. This is evident by the developing 5 wave push off of this low. Note the vertical push higher in the back-half of 2023. It is clearly a 3rd wave, and still needs a 4th and 5th to complete.  The question is – are we still in the 3rd wave, which is my green count, or are we starting the larger 4th wave, which is my blue count?

If we break below $225, then we are in the blue count. However, look at the composite index below. It is making a lower low, while price is clearly making a higher low. This supports the green count, for now.  I’ll be looking for a low this week, and push into late January to complete 3. Then we should get one final large swing higher after the 4th wave correction completes.

Bitcoin (BTCUSD)

Until Bitcoin truly goes vertical, there are many ways in which this new bull cycle can be counted. We are likely in one of the final dips worth buying, which is targeting $38,000 – $35,000. However, if we are in the start of a sudden 3rd wave, keep in mind that the nature of 3rd waves is marked with shallow corrections that leave investors behind. So, we will likely start adding in the $40,000 region, and layer in as we go lower, or if we bottom and breakout higher. Also, in order for this scenario to manifest, we have to hold $30,000 – $28,000.

Netflix (NFLX)

Sellers have clearly stepped in at the $480 – $495 region. This marked a double, and now triple top pattern, which does warrant caution. As long as this drop can hold $425, the green count is alive. This suggests that we are in a correction within a larger uptrend pattern. If we can hold $425 and turn back up in a 5 wave pattern, then the overhead target is $537-$577. If we go below $425, then the odds start favoring the red count, which has us starting the larger drop back into the $200s.

Microsoft (MSFT)

*Please refer to my section about MSFT in the Supporting Markets section of this report.

Aehr Test Systems (AEHR)

AEHR's technical pattern has always been a mess. If its earnings report is accepted by the markets, we should hold $20.45 and turn higher. If this happens, then the drop we just went through from its high was only a 3 wave pattern, and supports us pushing to new highs in a final swing higher. This is the green count in the chart, and once we break above $39, the odds will favor this scenario.

However, if we drop below $20.45, then we have a clean 5 waves down from the high, which will be concerning. If what follows is a 3 wave bounce, then we will be setting up for a bigger drop. If this happens, we will likely look to de-risk our Aehr position.

Ethereum (ETHUSD)

We now have three series of 5 wave pattern pointing higher, each followed with 3 wave retraces that made higher lows. If we get the vertical breakout after this correction, it will be quite bullish. We are targeting sub-$2000 for this correction. I do not want to see us go below $1850. If we do, the final support is around $1700, which coincides with the below trendline. These levels have to hold if this bullish count is going to play out.

Marvell (MRVL)

There is nothing clean about MRVL’s chart from a technical angle. We have a series of overlapping moves in both directions, which can be interpreted in many ways. For one, we have a crash set up that is active, and a break below $50 will start building the odds that this is in play. This is the red count in the chart above.  However, if we can instead hold $50, and then breakout above $61.75, then we can see a push into the $80 – $90 region before putting in a larger top, which is outlined by the green count.

Super Micro Computer (SMCI)

SMCI is a confusing chart to map. Ever since topping, we have been in a chop that has frustrated both bulls and bears. From a larger perspective, this is the count that I am tracking. The vertical move higher is a 3rd wave, and the only question to answer is whether we are still in it? If so, we will see a breakout above $329. If not, we will see a breakdown below $235. Until one of these levels breaks, we can continue to chop around with no discernable direction.

Cloudflare (NET)

So far, this drop is not concerning. It looks like a 4th wave in a 5 wave push into our overhead targets. These targets are $95, $98, $104. This is the zone that we would take gains. This drop we are in can go as low as $72 and still be valid. Below $72 and the overhead targets get invalidated, which will suggest a top is already in.

Chainlink (LINKUSD)

I’m starting to think that we are in the minor b wave drop that we have been looking for. The targets here are between $12 – $9. We have to hold $7.7 if the bullish pattern is going to continue. With an alt coin tracing a bullish path like above, it’s wise to take it one step at a time. The next major test will be holding the listed support zones.

Micron (MU)

MU did well after their earnings report with favorable forward growth meteics. Because of this, we began a starter position at 2%. The long-term technicals fit best with being in a large B wave that will likely target $97 – a triple top. How MU reacts here will be very telling. If we turn down in a 5-wave pattern, we may look to de-risk and target lower prices. If we instead breakout over $97, we will add to our position, as it will be suggesting something more bullish is developing.

What’s Next

Please join the I/O Fund as we hold two webinars in early to mid-January. The first will be a 2023 Year in Review and the second will be a Q1 Earnings Kickoff.

Recommended Reading:

• Positions Report – November 2023
• 2023 Chainlink Update: Interoperability for Blockchains, Bullish SWIFT Partnership
• Cloud Earnings Review: Signs of Stabilization
• Micron: AI Offers a Multifaceted Secular Growth Tailwind

The I/O Fund has done some bold things, such as offer an audited portfolio to retail investors, call Nvidia an AI stock five years ago, and, at times, have hedged 100% of the portfolio in 2022 with the help of The Wealth Umbrella.

However, probably more bold than any of those was the decision to hold an altcoin permanently in our portfolio. This was done within a month after launching our site, when Bitcoin was on a downward trajectory, and we were up against an extremely high failure rate in altcoins. Chainlink had launched on Ethereum mainnet about three months prior to covering the token.

Some of my readers are averse to crypto, and for good reason as it can be extraordinarily volatile, so that is everyone’s personal choice to make. However, the number of stocks we’ve held without interruption since the day we launched our site four years ago is very few, not even Microsoft makes that list. But, Chainlink does.

With that introduction, I’d like to update my analysis as Chainlink has expanded from working with off-chain data to now also include cross-chain token transfers and messages. The broader vision is that Chainlink will become the blockchain backbone for the financial system, accomplished by partnering with SWIFT, the system that currently allows 10,000 banks and financial institutions to communicate with one another.

The Internet of Contracts

Before discussing how Chainlink is becoming a single access point for tokenized assets, and why this is needed by the banking system, it’s important to review smart contracts. Chainlink rephrased this to “the internet of contracts” and I think this describes smart contracts succinctly as Web3 proposes to replace the internet, but to do so in a secure, decentralized manner.

Decentralized systems require contracts if a system is to be created where all data, all messages, all token transfers, and all users are validated. Machines need contracts to offer ultimate security and decentralization as contracts ultimately allow for a revocation if a request if found to be fraudulent. In this case, the machine can shut the request down or otherwise deny the user/token transfer/data/message to move forward. The bilateral nature of contracts allows for a validation process to where nodes can determine if the action is trustworthy.

To put it simply, without contracts, trusted systems cannot truly exist as otherwise there is no penalty. This is why Web2, which is not based on smart contracts, is rife with bad actors. One centralized system can create thousands of bots, or a centralized tech company can push its agenda to the top of a newsfeed. There is no contract, and therefore, there is no revocation for unethical behavior.

The bot or the centralized Big Tech company simply does it again and again. In the vision of Web3, even the special interests of a powerful Big Tech company would not be able to dominate a newsfeed, rather all users would be equal and have to prove they are acting in an ethical manner in terms of how messages rank in the newsfeed.

Right now, you can assume what you’re seeing in newsfeeds and on search engines is ranked according to what Big Tech wants you to see and think – you will see more AI news because Big Tech wants you to support AI. You will see favorable news about their own companies because this ultimately helps their stock. We are coming into an election year, the candidates that most support Big Tech’s ambitions to further monopolize and offshore taxes will be seen favorably and/or rank at the top of a newsfeed. If you feel like there isn’t a problem with censorship, then perhaps consider that Big Tech has used its thousands of engineers and done its job quite well, which is to make it look as though it’s not even happening. 

That’s the inspirational explanation of smart contracts. We’ve also covered the broader picture in a 1-Hour Intensive Webinar on Chainlink here. For those who want to take a trip down memory lane, here is the original PDF we published back when we published PDFs.

The more technical explanation is that rather than having backend code on a centralized server, backend code runs on a decentralized network, such as the Ethereum platform. Developers use a blockchain like Ethereum for data storage and smart contracts for the app logic. Chainlink was primarily built for off chain data for non-currency smart contracts. The principal is the same where there is a set of rules which self-execute – the more common analogy is that it operates like a vending machine to where there is no middleman.

Decentralized applications (Dapps) rely on smart contracts. Dapps deployed on the Ethereum network are controlled by logic written into the smart contract and cannot be altered by the developer. Smart contracts function like APIs (this was also discussed in the Chainlink webinar). This allows applications to build on one another similar to the way applications use APIs today; except blockchain applications will build on smart contracts.

The front-end application can be written in any language with calls made to the backend. The main qualities are that the applications are decentralized, can perform any action given the required resources (whereas Bitcoin is not Turing complete) and are executed in a virtual environment such as the Ethereum Virtual Machine. The virtual machine acts as a buffer to where if the application is faulty, it does not affect the blockchain network.

There are a few key benefits to dapps: 

• Dapps are more secure and inherently protected from denial-of-service attacks. 
• Censorship will be nearly impossible as a single entity will not be able to block users from utilizing the blockchain.  
• Fraud and other malice will be prevented as the data has complete integrity from the decentralized and cryptographic qualities of the blockchain.  
• Because smart contracts are self-executing, they remove the need for a centralized institution. Real world identities can also be anonymous with dapps.

There are also some drawbacks to dapps: 

• Most developers do not want to relinquish control over their creation
• If there is a bug that need to be fixed, that developer is unable to take back control of the Dapp once it’s launched onto the Blockchain
• Dapps will need to prove they can scale on Layer 1s with Ethereum’s Proof of Stake largely untested in the real world in terms of scaling to tens of millions or even hundreds of millions of users. Layer 1s such as Solana are competing with Ethereum specifically on its scalability. 
• Some developers may utilize centralized servers for the frontend or to store business logic which could eliminate many of the decentralized security/anonymity benefits of the blockchain.

Oracles:

The issue with smart contracts and the proposed use cases for the blockchain is … where will we get the off-chain data, which is key contractual data? When you go to trade a stock, where will the blockchain get the stock price in a way that is trusted, since this is off-chain data. Right now, in other applications, these are done through APIs which act as building blocks so the developer does not have to build the input/output.

Oracles are trusted third-parties that retrieve off-chain information and push that information to the blockchain at predetermined times. Oracles introduce a potential point of failure, however, and this is why Chainlink is critical middleware for Layer 1s.

Without Chainlink, Ethereum’s smart contract utility is confined to currency tokens on its Layer 1 only as data cannot be directly fetched from off the blockchain. The only secure input that can power smart contracts is data that exists on the Ethereum blockchain, which is token inflows/outflows. This becomes problematic for cross-chain token transfers as price also needs to be verified outside the Ethereum blockchain.

Chainlink uses decentralized oracles to solve the smart contract connectivity problem, which is that a smart contract needs to interact with external data feeds that are secure and trusted. There are many inputs and outputs in the form of data feeds and APIs, rather what Chainlink solves is a tamper-proof way of triggering smart contracts with events and data that is tamper-proof.

Decentralized Oracle Networks (DONs) are multiple, independent oracle nodes that incorporate three layers of decentralization: at the data source, at the individual node operator, and at the oracle network levels.

Cross-Chain Interoperability Protocol (CCIP)

Blockchains are fragmented, and naturally prefer to have users locked into their ecosystem. This is problematic as each blockchain and DeFi application has unique strengths, and thus, users often seek to use more than one blockchain and dozens of applications depending on their needs.

This is best illustrated with token transfers. The process to liquidate Bitcoin and buy another altcoin on a DeFi platform is time consuming and overly complicated. This friction is a primary pain point causing a low user adoption rate for crypto.

Clearly, cryptocurrency has its loyal enthusiasts, but what innovation needs is outsized demand. In tech, there is plenty of innovation and supply, whereas demand is the part of the equation that is much, much harder to solve. The friction that exists with transfers for currency and information, plus the overall user experience, must be solved for Web3 to become a replacement for Web2.

This means that Web3 must function seamlessly like Web2 to where the infrastructure (AWS, Azure, GCP), the protocols (TCP/IP, SMTP) the operating systems (Windows, Linux, MacOS, Android, iOS), the applications and the software are seamlessly working together without friction. In the majority of these cases, the user is unaware of the systems that support the user experience.

Chainlink’s CCIP sets out to solve this by providing a bridge between blockchains and DeFi applications. The protocol was launched in July of 2023 to solve the pain point of seamlessly transferring data and currencies across various blockchain networks. At launch, it was integrated with Ethereum, Avalanche, Polygon and Optimism. This allows users to use any decentralized application (dApp) on these blockchains for liquidity purposes and connectivity.

This is not a new concept, rather how it’s approached is what has evolved. Sidechains for popular applications, such as the popular game Axie Infinity, were developed to transfer assets between the game and Ethereum. This allowed Ether to be used for purchases and to also pay gamers with rewards. The sidechain called Ronin Bridge was secured by only 9 nodes, and hackers were able to compromise 4 of these nodes and exploit $25 million worth of Ether.

Clearly, any bridge needs to be handled carefully as this is one of a few hacks which occurred when developers attempted to develop a solution. However, in the past, dApps had to build in-house implementations for cross-chain interactions, which puts immense pressure on application developers to also provide secure interoperability.

At the time, it was presumed that decentralized was inherently “secure enough,” yet this has been debunked as bad actors only need to control the majority of the nodes. With enough incentive, such as $25 million worth of Ether, Ronin Bridge proved this can be accomplished.

This represents the issue for a popular gaming application, but a similar issue exists for banks and institutional investors. The fragmented layer 1 blockchain networks that compete with one another are not interoperable and each has their own functionality and liquidity profile. This creates friction and potentially security issues if layer 2s or sidechains are needed for token transfers or swaps.

Chainlink is uniquely positioned to solve the problem of bridging blockchains and popular applications because it has built a secure oracle network. CCIP extends the idea of an oracle network, which was originally designed to on-load off-chain data, to also offer decentralized oracle computation for performance histories and to monitor for malicious activity. Off-Chain Reporting (OCR) is used to aggregate a report from many validators, which reduces congestion.

In conversational terms, what this means is that Chainlink was once thought of as the Google of Web3, which it can still very well be. However, Chainlink is also evolving to become a critical security layer, which in turn, is what’s needed for blockchains to become attractive for banks.

The financial system has different goals for blockchains than Web3, which is to reduce fees and reduce fraud. What will likely unfold is that there is more urgency with the financial system than there is with Web2 users to advance crypto forward. Web2 users are fairly comfortable with the internet and native mobile apps they use today. Meanwhile, the financial system has serious pain points that blockchains can solve.

Instead of Chainlink only working with off-chain data, CCIP extends its use to include token transfers and messages. The broader vision is that this will be accomplished by partnering with SWIFT, the system that currently allows banks and financial institutions to communicate with one another.

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications (SWIFT) and is the system used by banks and institutions for money and security transfers. Currently, 11,000 banks use SWIFT across 200 countries, and it’s the largest and most streamlined payment system for international transfers. SWIFT facilities secure and efficient communication between institutions with 45 million messages sent in 2022.

Recently, SWIFT successfully completed a test using Chainlink’s CCIP to facilitate transactions with tokenized assets on public and private blockchains using back-end systems. This allows financial institutions to integrate blockchain technology into the existing infrastructure. You can read more about this on Swift’s website here.

The test was done with 10 banks initially to test the settlement process. Findings included a need for nonce management, which refers to transactions being mined in sequence. This acts as a counter for the number of transactions sent by an address, which ultimately helps choose the order that transactions are processed and prevents replay attacks. 

Pictured above: By including a timestamp or a nonce, only one transaction is authorized.

Crypto nonces prevent replay attacks where a hacker on the network attempts to replay someone’s credentials or retransmit the login request to the bank server.

Another component to security that Chainlink provides is an abstraction layer. Payment abstraction layers are important because it provides the value of the token that is being paid. As a decentralized oracle network, Chainlink is the industry leader in providing price oracles. Chainlink’s data oracles provide the data that assigns value to cross-chain token transfers, and this is a primary reason SWIFT is partnering with Chainlink. Ultimately, a payment abstraction layer will allow users to pay with a credit card, a bank account, a native blockchain token, a stable coin, or a protocol token – safely and securely. 

Chainlink’s Early Success

Chainlink launched on the Ethereum mainnet on May 30th, 2019. We covered the altcoin for the first time in August of 2019.

Prior to launch, Chainlink signed 30 partnerships. By 2020, when we covered Chainlink a second time, total value secured (TVS) had grown from $254 million to $6.3 billion, or 23,000% growth in TVS. At crypto’s peak in Nov of 2021, Chainlink had $75 billion in total value secured across up to 1500 protocols and hundreds of DeFi applications. This has declined to $17 billion today, yet the TVS from 2021 is important as it shows Chainlink is capable of securing $75 billion without a hack. As the CEO stated recently at SmartCon: “Right now, the Chainlink Network has provided the most cryptographic truth in history.”

To date, there has been 10.3 billion data points delivered on-chain. When taking the sum of the USD value of each transaction that has utilized an oracle, the transaction value enabled (TVE) by Chainlink is $8.68 trillion. As stated, there’s been no hacks or otherwise any tokens lost through Chainlink’s secure network.

There have been many oracle solutions launched to compete with Chainlink yet the company has retained 50% or greater market share. The predominant use of Chainlink is for market data for DeFi apps. DeFi apps have grown in total value locked (TVL) from $700 million in December of 2019 to mor than $200 billion today. With the launch of CCIP, Chainlink can use its strong track record in securing DeFi blockchain smart contracts to expand to cross-chain smart contracts.

Tokenomics

One area where critics find fault with Chainlink is the tokenomics. The monthly growth in Chainlink’s circulating supply is at 1.4% per month on average. Over the course of a year, this can dilute token holders 10 to 15%, on average.

Chainlink’s fully diluted market cap tracks 2.1X higher than its current market cap. There is a circulating supply of 568M tokens yet a max supply of 1 billion tokens.

Of the 1 billion tokens, at the initial coin offering, a little more than one-third was to go to node operators, a little more than one-third was sold in the public sale, and a little less than one-third went to the company to be held in reserves. The 350 million held at the company can be released anytime, which dilutes token holders.

When more of Chainlink’s supply is in circulation, there is likely to be stronger price action. About 56% is in circulation now, and so look for Chainlink’s price to be less volatile in 2-3 years if we assume the 1.4% per month rate in circulating supply continues.

Technicals, Technicals, Technicals:

I was recently on a Real Vision interview where they asked me what my investment framework for crypto is and I said: “Technicals, technicals, technicals.” If you want to buy Apple or Microsoft without using technicals, and hold over a long period, that will probably work out just fine. But to participate in these extraordinary companies at an early stage, it’s of ample importance to carefully consider technicals.

We lead with technicals on crypto given it’s early-stage tech. This is different than stocks, where fundamentals lead. The good news is that crypto is sentiment driven, and so it respects price and technicals work quite well when managing these positions.

Our history with Chainlink is quite good – we bought at $1.50 and trimmed in the $25 to $50 range, and then began buying again much lower in the $7 to $11 range.

Below, is Knox Ridley’s update on Chainlink. I asked him to provide an update on Ethereum and Bitcoin, as well, for one comprehensive view of our crypto buying plan. Real-time trade alerts are sent to Advanced Members.

Technical Analysis

By Knox Ridley

 

Chainlink (LINKUSD)

From a long-term perspective, Chianlink appears to be tracing a diagonal pattern. This is an overlapping uptrend that consists of 5 large wave. These are quite tricky, and exhausting to maneuver due to the relatively large swings in both directions. That being said, the recent bear market, within this context, was only correction within the larger uptrend pattern.

If we zoom in to the recent uptrend, it is moving in a more vertical manner than prior swings and taking the form of a 5 wave pattern that is incomplete. That means that we should see one more drop, then a continuation higher to complete the patter. The current correction appears to have one more drop in it that would be targeting the $12.8 – $10.75 region.

I do not want to see this drop go below $10.5, or else the next swing higher could be in jeopardy. If this happens, I still believe the larger uptrend is still intact, just taking an alternative route to our overhead targets.

On the other hand, there is a chance that the 4th wave is incomplete. If this is playing out and we do not get that final swing lower, then a break above $16.50 will be the signal that we are going directly to the $20 – $22 region next. 

Bitcoin (BTCUSD)

From a long-term perspective, the 2022 bear market appears to be a correction within a much larger uptrend that started in late 2018. This uptrend is taking the shape of a 5 wave pattern that should hit the $100,000 – $130,000 target before putting in a bigger top. As of now, this pattern remains valid as long as we hold the $28,000 support level. 

If we zoom into the pattern off the 2023 low, what is important to notice is the series of vertical moves higher, which are followed by overlapping corrections. In short, we see higher highs and higher lows, repeating over and over again.  This is the hallmark of a classic uptrend.

It is our belief that the current pullback will be one of the last great buying opportunities before investors are forced to chase Bitcoin higher. Bitcoin is now setting up for another correction within this uptrend. Our targets are $38,000 – $35,000 for the most likely spot to find a bottom. However, we can see this drop go as low as $28,000 and still not threaten the larger uptrend we are tracking.

If these levels hold, the next move in Bitcoin should be vertical, which would be targeting the $50,000 – $58,000 region overhead. This will be the last big test for Bitcoin before confirming that we are heading to the $100,000 target.

I’m calling this region the “danger zones” because this is where my alternative count in red would likely top, if it is in play. This count suggests that 2023 was actually a corrective bounce in a much larger downtrend. If this is true, what will follow is a continuation of the bear market to new lows. So, how Bitcoin reacts in this region will be crucial for proper risk management of this position.

In summary, in order to reach the target we outlined over a year ago, there are many steps that Bitcoin has to take in order to get there. So far, it has pushed higher with many vertical moves, and held critical support on the pullbacks. In order for this target to remain valid, we need to hold $28,000 on any deeper pullback than expected, and then break above $58,000 on the next vertical move higher. If Bitcoin fails to make these two steps, then we will be forced to pivot, log our gains in Bitcoin, and regroup.

Ethereum (ETHUSD)

The larger pattern in Ethereum is similar to Bitcoin. The 2022 bear market was likely a downtrend in a much larger uptrend that is still playing out.

If we zoom into the bull market off the low, the posture appears to be in a notably bullish posture. Note the series of vertical moves higher, followed by overlapping corrections that make a higher low. There are three series of 5 wave moves higher that have held the below trend line. My targets for the next pullback are between $2,000 – $1,850. If we get a deeper pullback than expected, we must hold that below trendline, which comes into play around $1,700.

Like Bitcoin, the big test will be the overhead “danger zone” in red. If Etehreum can break above this region at $4,450, there will be little resistance as we move towards our targets around $8,000.

Conclusion:

The broader vision is that Chainlink’s Network and CCIP infrastructure will allow developers to build smart contracts with code across multiple chains similar to how web applications consist of code across multiple clouds. The lack of interoperability is holding Web3 back, and Chainlink is the middleware offering the way forward. The first customers to move forward are likely to be banks, and Chainlink is a clear choice as long as the SWIFT partnership continues to expand. 

Chainlink’s story today is much stronger than when we added this altcoin permanently to our portfolio a month after we launched the site. The market has been intense since then, from the Covid pandemic in 2020, to the exuberant 2021 high, to the 2022 bloodbath – yet, Chainlink remained a staple in the I/O Fund portfolio through all of this.

We expect Chainlink to remain a staple for the long-term, which is saying volumes since it’s an altcoin, not to mention that Chainlink has held the conviction ranking of other major winners. In the meantime, while we patiently wait for the fundamentals and product to align, we will provide you all of the technical analysis you need to manage this position as well as humanly possible. As always, we have our eye on the ball.

That’s a wrap for 2023! Thank you for the wonderful year. Our team has never performed better and we are in gratitude for the opportunity to learn and grow together as we move into 2024. Look for a 2024 Annual Webinar plus Q1 Earnings Kickoff Webinar in early to mid-January.

Recommended Reading:

• My Firm called the Bitcoin’s Bottom; Here is Where the Price Goes Next
• Cloud Earnings Review: Signs of Stabilization
• Micron: AI Offers a Multifaceted Secular Growth Tailwind
• Memory and PC Stocks Review
• Marvell Q3 Earnings: The Market Wants More on AI

Note: We are taking a break from Netflix in the Essentials plan for now, and instead initiated Bitcoin as the setup looks stronger at the moment. You can read this analysis here.analysis here.

Microsoft

Microsoft is a very mature pattern. Our long-term target is $378, which it is struggling to push through. This target completes the large uptrend that started in 2009, so a sizable pullback is expected when the current rally ends – sometime between now and late March/early April, is our best guess.

Regarding MSFT, if still needs to complete that final 5th wave swing higher. This could target between $400 – $415. Please understand the risk involved with this great company and where we are in the trend. We plan to look lower into 2024 for better entries, and plan to hedge the remainder of our position.

Nvidia

Though it looks likely that the October 2022 low was a major low, we should see a sizable pullback into 2024/2025. However, before that, Nvidia looks like it needs to push towards the $545 – $600 level to complete the large 5 wave pattern off the 2022 low. The risk here is that the red alternative top in the chart below does satisfy the minimum requirements for a 5th wave. Below $480 and risk becomes quite elevated that this is playing out.

Advanced Signals Members receive real-time trade alerts for our entries and in-depth technical analysis from the Portfolio Manager, Knox Ridley.  Learn more here.here.

Recommended Reading:

• Essentials Key Articles: Three Stock Picks
• Bitcoin: Setting Up for a Strong 2024
• Cloud Earnings Review: Signs of Stabilization
• Broad Market Analysis
• Nvidia Fiscal Q3 Earnings: The China Impact
• Big Tech companies continue to invest in AI

Welcome to the recent new Essential Members. We have revamped the Essentials Portfolio by including Bitcoin. Stay tuned for trade alerts sent directly to your inbox, keeping you up-to-date with any adjustments to three key holdings. We are adding Bitcoin because we believe it will be advantageous for our Essentials members to receive real-time trade alerts for one of our top convictions in the upcoming year. What we emphasize is that it’s not a stock tip that generates wealth, rather how you manage the position. One of our most valuable value-adds has been our Bitcoin trades, which you can read about here. By initiating Bitcoin for Essentials Members, we will be updating you in real-time on our Bitcoin trades via email alerts.

The harsh truth is that many stocks look to be topping in their charts given the strong rally in tech this year, yet Bitcoin looks as if the chart has room – perhaps substantial room, which we will monitor and update you with real-time trade alerts as we hit key price levels.

Certainly, the asset is facing one of the best moments for institutional adoption, which is the approval of spot Bitcoin ETFs and a clearance for central banks to own up to 2% of assets in crypto. Couple this ramp in demand with the Bitcoin halving that is set to take place in 2024, which will further restrict supply, and we think this is the perfect recipe for Bitcoin to lead in 2024.

Bitcoin Backdrop:

It’s important to understand that some of the brightest minds in technology (and by far, the best investors in technology) believe bitcoin is a viable form of currency, as well as one of the recent marvels within tech innovations. Venture capital firms such as Khosla Ventures, Union Square Ventures, Lightspeed, and A16Z have been funding bitcoin projects for some time (circa 2013 and 2014).

On the other hand, one of Bitcoin’s hurdles is multigenerational adoption. To date, bitcoin is predominantly a retail dominated asset. Late Charlie Munger and Warren Buffett both criticized bitcoin as worthless. In fact, Buffett went so far as to claim Bitcoin is “probably rat poison squared.” In this article, we would like to highlight the unique benefits of Bitcoin.

Economic Uncertainty in Lower GDP Countries

The populations that rapidly adopt Bitcoin are located in lower GDP countries. Imagine not having enough confidence in your government and federal-backed insurance to put your money in the bank. Yet, this is the reality for billions of people globally who do not trust their governments – primarily in Latin America, Africa, Asia and the Middle East. There are ongoing conflicts in these countries, civil dis-rest, cartels often run the government behind the scenes, and the domestic economies can become crippled overnight.

Regardless of how you feel about your own country’s government and banking system, it’s important to acknowledge that the best technology solves issues for global populations. You do not need to personally use Facebook to acknowledge the social network is popular globally with 3 billion users. You do not need to personally use Salesforce to see it solved a real need for sales and marketing teams. Similarly, you may feel quite confident in your country’s government and banking system – but it’s important to acknowledge that the majority of the world does not have this confidence and these populations do not use a bank. We call this the “unbanked” and this is a key demographic driving Bitcoin adoption from the bottom up.

For example, Venezuela saw record Bitcoin adoption during a period of hyperinflation when the price of a cup of coffee rose to 2,800 bolivars up from 0.75 bolivars within one year, representing an increase of 373,233%, according to Bloomberg data. Essential goods such as toilet paper and medicine were also very costly, and many Venezuelans fled the country. Despite market volatility, bitcoin helped Venezuelans make money at a time when inflation threatened their livelihood and also their family’s survival. Cryptocurrency offered the lower GDP country accessible protection and the ability to escape an autocratic government.

Notably, the government in El Salvador has adopted Bitcoin as their national currency. During the transition, the government provided $30 in free Bitcoin for citizens who signed up for a digital wallet. Within weeks, the number of digital wallets in El Salvador surpassed the number of bank accounts in the country. This is clearly demonstrating the distrust many global populations have with their banking system. Although many consider countries with the most dominant GDPs as the countries who set the world’s stage for economic conditions, the emerging markets play an important role as the unrest in these regions can lead to disruption.

Apple, Google, Microsoft, and Amazon crossed market caps of $1 trillion because their products scale to global populations and are required on a daily basis. Bitcoin not only scales to the global population, but it also protects and diversifies their livelihood – a necessity rather than a convenience. In fact, we see populations who are not necessarily tech-savvy most enthusiastic about bitcoin, and this was part of the I/O Fund’s thesis in 2019 as to why Bitcoin would cross a $1 trillion market cap. 

Notably, Bitcoin is also the world’s most secure financial network. The transfers eliminate processing fees and hedges against inflation. Due to these unique features, the I/O Fund believes Bitcoin should be worth as much as a search engine, enterprise software, social media network, warehouse fulfilment/data center (AMZN), or iPhone hardware company. Bitcoin is more secure than 10,000 banks combined due to its decentralization. This level of security solves a genuine need for the financial system as the financial system cannot be automated without a decentralized blockchain solution.

The United States Has Its Fair Share of Financial Issues Too

Economists have discussed the effects of going off the gold standard during Nixon’s presidency, yet this has been a futile conversation in the past as there has been no alternate method of transacting other than centralized cash. Gold and precious metals are hard to transport and cannot be used to transact daily in the modern age, despite having a store of value.

During the Nixon Presidency, the United States fiat system decoupled from gold, and this is why the cost of living has gone up exponentially while wages have stagnated. This has forced many households to work two jobs with little to show for their efforts.

Currently, the United States is at debt levels of about 119 percent of gross domestic product (GDP) whereas the average since 1940 has been in the 70 percent range with the exception of World War 2 when debt-to-GDP was at 106 percent. There has been a steady rise in the level of national debt to GDP due to decreased tax revenue and increased spending, especially on health care. The debt load is being passed onto Millennials, which is a demographic rapidly adopting cryptocurrency.

Source: YCharts

The United States is unlikely to see hyperinflation to the extent of Venezuela (at least, let’s hope not). However, trust in fiat currencies is eroding as debt continues to climb.

Japan is an excellent case study for an economy that is struggling due to quantitative easing. The Japanese debt-to-GDP ratio topped 260% last year due to its quantitative easing. Government debt to GDP in Japan averaged 137.4% from 1980 to 2017. Easy money policies from Japan’s central bank harmed domestic asset returns by suppressing local interest rates. Ranking as the world’s third largest economy, Japan resorted to negative interest rates in 2016. In April 2016, it was reported that a “Japanese bank buying 5-Year U.S. Treasuries with perfectly hedged currency and duration risk would (lose) 0.9% a year.”

Consequently, Japan is a thriving bitcoin market and has seen a continuation of crypto activity despite regulations. For example, 39% of investors aged between 18 and 30 years have invested more than ¥10,000 in cryptos. Also, 49% of young crypto investors between 18 and 30 years trade cryptos multiple times weekly.

During the Ukraine-Russian war, the use of crypto once again took prominence as the Ukrainian government accepted crypto donations during this crisis. According to Alex Bornyakov, Deputy Minister of Ukraine’s Ministry of Digital Transformation, “In times like these, response time is crucial. Crypto is playing a role to give us flexibility to respond really quickly to deliver the army’s required supplies.”

The lack of financial access might also increase the use of crypto in both countries. The Ukraine central bank had suspended electronic transfers and reduced cash withdrawals with Ukrainians turning to cryptocurrency.

In the words of Alex Gladstein, Chief Strategy Officer at the Human Rights Foundation, “The fact that it can’t be frozen, the fact that it can’t be censored, and the fact that it can be used without ID is very, very important,” He further added, “And they are why bitcoin is such an important humanitarian tool.”

Institutional Adoption

Most people can imagine a world that runs on digital financial transactions as money today is exchanged digitally and cashless. The United States has digital financial apps, such as Apple Wallet, and Venmo is a popular method to exchange money between friends without fees.

One of the biggest hurdles for institutions, however, is not the idea of a world run on digital currencies, but rather the decentralization concept and the need for reliable and safe cryptocurrency custodians. Institutional investors need to know the assets are secure, insured, and under the care of a trusted third party, per SEC rules, which requires advisers to keep client funds with a qualified custodian. ETFs solve these major hurdles. 

Custody solutions safeguard cryptocurrency, and go beyond private keys or wallets, which are subject to hacks or the misplacement of hard disk storage. The word “custody” refers to a third-party provider of storage and security services for cryptocurrencies. These services are aimed at institutions and hedge funds, and incorporate a combination of storage online for liquidity and storage that is disconnected from the internet.

According to Fidelity’s Institutional Investor Digital Assets 2022 Study, 58% of the surveyed Institutional Investors had an investment in digital assets, up 6 percentage points from 2021. 74% of the total surveyed investors had plans to buy digital assets in the future compared to 71% in 2021. 81% of the surveyed investors believe digital assets should be part of the portfolio. Asian Investors had about 69% invested in digital assets, though a 2-point decrease from 2021. While European Institutional Investors showed an 11% YoY jump to 67% of the investors surveyed, US Investors showed a 9-percentage point increase from 2021 to 42%.

How I/O Fund traded Bitcoin in the past – What You Can Expect

Here is an example of how the I/O Fund has traded Bitcoin in the past. The goal is to be directionally correct.

Similar to this, you will receive notifications via email when we buy and sell Bitcoin moving forward. We often cover a stock in our free newsletter, but this is a small percentage of the work involved with smart investing. Our real-time trade alerts are invaluable for knowing how much of a position we own, and when we are buying or selling.

Bitcoin Buy Plan

We use a blended approach of technical analysis to determine our portfolio entries and also to pre-determine our risk management. Risk management is a key part of owning tech stocks. In the below video our Portfolio Manager Knox Ridley outlines his bullish outlook on Bitcoin, citing on-chain and technical data to support his prediction of an upward trend.

Currently, we have an 8% allocation in Bitcoin. He anticipates the next buying opportunity to arise within the $38,000 to $40,000 range and advocates for making proactive moves in the cryptocurrency market. Additionally, he maintains that there are no plans to sell Bitcoin prematurely. The only levels to closely monitor are the breakdown below $28,000 or the range depicted in the video above $50,500, if a five-wave drop is followed by a three-wave retrace. Short of those two things happening, the I/O Fund will not be selling Bitcoin right now – rather we are looking to be heavy buyers.

You can read more here, and please whitelist us to ensure you are receiving the trade alerts when they occur, which will be sent via email.

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

Recommended Reading:

• Cloud Earnings Review: Signs of Stabilization
• Broad Market Analysis
• Nvidia Fiscal Q3 Earnings: The China Impact
• Big Tech companies continue to invest in AI
• November Positions Report
• Q4 2023 Webinar Highlights

The rise of generative AI has necessitated hyperscalers to develop their own large language models (LLMs), build platforms that enable their customers to create AI applications, and also offer AI in their product offerings. AI has been a boon for hyperscalers that were otherwise affected by tightening budgets due to challenging macro conditions.

We have been following the cloud sector closely with a regular review of hyperscalers and the best-of-breed cloud companies. This analysis shows that the hyperscalers are showing signs of stabilization. In a positive development, the best-of-breed cloud company’s expected sequential deceleration is slowing from a decline of 11 points in Q1 to Q2 of this year to a decline of 4 points in Q3 to Q4 of this year. This means we may near a bottom. We also discuss various financial metrics that can help determine which cloud companies will lead once the declining growth does find a bottom.

Notably, cloud has lagged broader tech’s rally this year, and on a 3-year basis, returns are still negative. Cloud ETFs like SKYY are down (-8.9%), CLOU down (-18.8%), and WCLD down (-35.1%) compared to a 27.4% gain for the QQQ. Timing has been crucial for cloud given the 1-year returns (from Jan 1st 2023) look nearly identical to the 4-year returns (from Jan 1st 2020), meaning there were losses in-between that took time to recoup.

Big Tech is the Best Proxy for Cloud

The Big 3 cloud providers are considered the best proxy for gauging overall cloud market trends because their reports reflect the most resilient cloud infrastructure layer with the highest market concentration. Cloud IaaS services are less prone to churn due to high switching costs, and the Big 3's dominance in this market (66%) provides a more concentrated view of the overall cloud landscape. By analyzing the Big 3's performance, we can comprehensively understand the infrastructure that supports the cloud ecosystem.

Microsoft Azure’s Q3 growth rate was the outlier among the Big 3 as its growth rate accelerated by 3%, while AWS remained steady albeit at a slower growth rate, and Google Cloud decelerated by 6%. The steep deceleration in Google Cloud was a negative surprise as analysts were expecting it to grow 26% compared to the actual 22%.

Microsoft

• Azure grew by 29% and 28% YoY in constant currency, including about 3% incremental gain from AI services.  OpenAI and Microsoft are estimated to hold a combined 69% share of the generative AI model and platform market, followed by AWS at 8% and Google at 7%.
• Growth accelerated from 26% in the previous quarter yet was down year-over-year from 35%.
• The company’s guide for next quarter is 26% to 27% in constant currency. Azure's consumption business is driving growth, and the company expects this trend to continue in the next quarter.

The company’s CFO Amy Hood said in the recent earnings call, “While the trends from prior quarter continued, growth was ahead of expectations, primarily driven by increased GPU capacity and better-than-expected GPU utilization of our AI services, as well as slightly higher-than-expected growth in our per-user business.”

The company’s CEO, Satya Nadella, highlighted its efforts to offer AI in its product offering. He said, “With Copilots, we are making the age of AI real for people and businesses everywhere. We are rapidly infusing AI across every layer of the tech stack, and for every role and business process to drive productivity gains for our customers.”

AWS

• AWS revenue grew by 12% YoY to $23.1 billion.
• The growth has stabilized as AWS grew 12% in the previous quarter. However, it decreased significantly from 27% in the same period last year.

Our previous analysis highlighted optimizing due to the tough macro environment. Now the company is seeing a reduction of cost optimization by its customers as companies deploy new workloads, which is positive. A similar trend was observed in the previous quarter.

The company’s CFO Brian Olsavsky said in the recent earnings call, “On a quarter-over-quarter basis, we added more than $900 million of revenue in AWS as customers are continuing to shift their focus towards driving innovation and bringing new workloads to the cloud. Similar to what we shared last quarter, while optimization still remain a headwind, we've seen the rate of new cost optimization slowdown in AWS and we are encouraged by the strength of our customer pipeline.”we've seen the rate of new cost optimization slowdown in AWS and we are encouraged by the strength of our customer pipeline.”

Google Cloud

• Google Cloud revenue grew by 22% YoY to $8.4 billion.
• The growth is lower than the 28% in the previous quarter and 38% in the same period last year.

Optimization continues to weigh on the slowdown of growth. The company’s CEO, Sundar Pichai replied to an analyst’s question on deceleration in Cloud and optimization. “On Cloud, maybe what I would say is, overall, we had definitely started seeing customers looking to optimize spend. We leaned into it to help customers given some of the challenges they were facing. And so that was a factor. But we are definitely seeing a lot of interest in AI. There are many, many projects underway now, just on Vertex alone, the number of projects grew over 7x. And so we see signs of stabilization, and I'm optimistic about what's ahead.”But we are definitely seeing a lot of interest in AI. There are many, many projects underway now, just on Vertex alone, the number of projects grew over 7x. And so we see signs of stabilization, and I'm optimistic about what's ahead.”

The bottom line is that cloud growth is lumpy across key players with a positive surprise from Microsoft, yet a steep, negative surprise from Google Cloud. We see similar trends in Best-of-Breed.

Best of Breed

We took a sample of the top-ranking cloud stocks on revenue growth, free cash flow, adjusted operating margin, and valuations.

The best comparison is the sequential growth from Q3 to Q4 in 2022 compared to sequential growth in Q3 to Q4 2023 estimates as this will take into account any seasonality from the Q4 period.

Per our last write-up in June: “We now see an improvement in the recent quarter, as the best-of-breed cloud stocks are guiding for a 72% slowdown in QoQ/YoY growth for Q2 guides – from an average 15% QoQ last year to 4% this year.”

We saw a further improvement in the current quarter, as the best-of-breed cloud stocks are expected for a QoQ/YoY decline of 47% from Q3 to Q4 estimates – from an average 9% QoQ last year to 5% this year.

All the best-of-breed cloud companies showed a deceleration. Bill Holdings has minimal deceleration as the company’s QoQ growth was 13% last year and is expected to be 12% this year. ServiceNow ranks next as it grew 6% last year and is expected to grow 5% this year. MongoDB was accelerating by 1 point in our June analysis yet is now decelerating 8 points in the upcoming period.

Source: YCharts

Earnings Beats

MongoDB is the leading stock with a revenue beat of 7.2%. The strong performance of the Enterprise Advanced Business largely drove the solid beat. The company’s revenue grew by 30% YoY to $432.9 million. However, the deceleration is expected to persist in the upcoming quarter, as the company’s revenue guidance of $429 million to $433 million represents a YoY growth of 19% at the mid-point.

GitLab’s revenue exceeded analyst expectations by 6.1%. The company’s revenue grew by 32% YoY to $149.7 million. The guide for the next quarter is $157 million to $158 million, representing a YoY growth of 28% at the mid-point. The deceleration of four points is reasonable compared to peers.

SentinelOne ranked third with a revenue beat of 5%. The revenue grew by 42% YoY to $164.2 million. The guide for the next quarter is $169 million, representing YoY growth of 34%.

Source: YCharts

GitLab’s adjusted EPS came in at $0.09 compared to a (-$0.10) for the same period last year, with an adjusted EPS beat of 1710%. HashiCorp reported $0.03 compared to (-$0.13) for the same period last year, with a beat of 169%. It was the company’s first quarter with positive adjusted EPS. MongoDB reported $0.96 compared to $0.23 for the same period last year, with a beat of 93.5%.

Source: YCharts

Bottom Line and Free Cash Flow

GAAP profitability is another crucial metric to monitor closely, especially with macroeconomic uncertainty. Most of the names listed in the chart below are unprofitable on a GAAP basis as they are paying high stock-based compensation. ServiceNow has the best operating margin among the cloud companies with 10%, followed by CrowdStrike at break even, and Datadog at (-1%).

Many cloud companies have been improving their margins, which is positive. In our premium analysis of CrowdStrike, we said, “A key item in the report was that Q3 marked CrowdStrike’s first quarter with positive operating income. CrowdStrike now has to prove that it can continue to expand operating margin further into positive territory.”

Bill Holdings has improved its operating margin to (-19%) from (-38%) in the same period last year. Similarly, Gitlab’s has improved to (-27%) from (-50%), HashiCorp to (-38%) from (-62%), SentinelOne to (-50%) from (-90%), and Zscaler to (-9%) from (-19%).

Source: YCharts

Zscaler has the highest free cash flow margin of 45%. It has improved from 27% in the same period last year. CrowdStrike ranks second with a free cash flow margin of 30% and Datadog ranks third with 25%.

Source: YCharts

Stock-Based Compensation

Stock-based compensation is a non-cash expense that is added back to adjusted earnings. However, in practice, this is an expense as per GAAP rules. Among the best-of-breed cloud stocks, Snowflake has the highest stock-based compensation as a percentage of revenue at 40.6%, followed by SentinelOne at 33.4%, and HashiCorp at 30%. The high level of stock-based compensation reflects what the competitive cloud industry must do to retain talent. However, it is a double-edged sword since it dilutes ownership of existing shareholders.

Source: YCharts

Valuations

Snowflake has the highest fwd P/S ratio of 22.5 among the best-of-breed cloud stocks. It is followed by Cloudflare at 20.2 and CrowdStrike at 19.1.

Source: YCharts

Ranking based on revenue estimates change for next quarter

Gitlab’s revenue estimates have been revised by 5.9% after the company’s recent strong results. MongoDB’s estimates have been changed by 4.8% followed by SentinelOne by 1.6%.

Source: Seeking Alpha

Ranking based on adjusted EPS estimates change for the next quarter

MongoDB’s adjusted EPS estimates have been revised up by 29.9%, followed by Bill Holdings by 0.5% and CrowdStrike by 0.4%.

Source: Seeking Alpha

Highlights and Lowlights in Q3

GitLab reports first positive non-GAAP operating profit

GitLab reported a revenue beat of 6.1% and an adjusted EPS beat of 1710%. The company reported its first adjusted operating income in the recent quarter and guides a positive adjusted operating income for the next quarter. GAAP operating margin improved from (-50%) to (-27%).

The company’s CFO, Brian Robins, mentioned in the earnings call that sales cycles have lengthened and buying behavior in the enterprise segment has stabilized. Mid-market and SMB customers continue to be cautious.

He said, “Looking back at the quarter, I want to share some of the areas we have been closely monitoring. These include sales cycles, win rates, contraction, and Ultimate. In comparing Q3 with Q2 of FY ‘24, we have seen overall sales cycles lengthen. During Q3 buying behavior in our enterprise segment stabilized. However in the mid-market and SMB, we see customers continue to be cautious in the uncertain macro environment. […] Contraction during Q3 also improved for the third consecutive quarter and is in-line with levels from Q3 last year.”

Solid Results from SentinelOne

SentinelOne stood out as one of the only companies with QoQ acceleration in billings at 33% YoY and 2% QoQ. We covered here a few stocks that struggled with billings, in particular. Revenue grew by 42% YoY to $164.2 million, with a revenue beat of 5% and an adjusted EPS beat of 63.7%.

 ARR grew by 43% YoY to $663.9 million and net new ARR grew by 11% YoY. The adjusted operating margin improved by 32 percentage points to (-11%). Free cash flow margin improved by 40 percentage points to (-16%). Management expects the company to achieve positive free cash flow in the second half of next year.

Dave Bernhardt, the company’s CFO, said in the recent earnings call, “Our margin improvement is indicative of healthy pricing and the value and innovation we deliver to customers. It also demonstrates the success of our land and expand strategy. Our unified security and data architecture in a single platform is delivering meaningful value for SentinelOne as well as our customers.”

HashiCorp reports first positive non-GAAP net income

HashiCorp reported a 2% revenue beat. However, the revenue YoY growth was 17%, ranking at the bottom of the best-of-breed cloud stocks. Operating margin improved from (-62%) to (-38%) and adjusted operating margin improved 17 percentage points to (-7%). Free cash flow improved 18 percentage points to 4% and was the company’s second positive free cash flow. The management expects positive free cash flow going forward other than in Q2, which is low due to booking seasonality. The adjusted EPS beat was solid 169% and the company reported the first positive adjusted net income.

Zscaler reports strong billings growth. However, full-year guidance unchanged

Zscaler reported a 4.9% revenue beat and a 36.9% adjusted EPS beat. The company’s operating margin improved by 10 percentage points to (-9%) and the adjusted operating margin improved by 6 percentage points to 18%. The free cash flow margin improved by 18 percentage points to 45%, ranking the top among the best-of-breed cloud stocks.

Billings growth remained strong, at 34% YoY to $456.6 million. However, management did not raise its full-year billings outlook as it tends to do. Its outlook remained unchanged at 24% to 26% YoY growth or $2.52 billion to $2.56 billion. That outlook suggests that billings growth will decelerate through the remainder of the fiscal year. We have discussed the company further in our Cybersecurity analysis here.

MongoDB solid beat, however, cautious management tone

MongoDB reported a solid 7.2% revenue beat and a 93.5% adjusted EPS beat. As observed in the above paragraphs, the analysts have also increased their estimates after the company’s strong results.

Dev Ittycheria, CEO of the company, said in the earnings call, “We had a healthy quarter of new business acquisitions, led by continued strength in new workload acquisition within our existing customers. In addition, our Enterprise Advanced business again exceeded our expectations, demonstrating strong demand for our platform and the appeal of our run-anywhere strategy.”

However, the results failed to impress investors due to management’s comments on macro conditions. We have discussed the consumption business model here in depth. In this model, the revenue can be lumpy.

Michael Gordon, CFO of the company, said in the earnings call, “As a reminder, we recognize Atlas revenue primarily based on customer consumption of our platform and that consumption is closely related to-end user activity of the application, which can be impacted by macroeconomic factors.”

Conclusion

The cloud sector has demonstrated resilience amid the recent macro uncertainty and exhibits signs of stabilization. We added two cloud companies in September and October to our portfolio partly informed by scans such as these, which revealed bottom line strength coupled with strong growth. We will continue to look for outliers in the cloud category as we move into next quarter’s earnings season.

Advanced Signals Members receive real-time trade alerts for our entries and in-depth technical analysis from the Portfolio Manager, Knox Ridley.  Learn more here.here.

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

Recommended Reading:

• Broad Market Analysis
• Nvidia Fiscal Q3 Earnings: The China Impact
• Big Tech companies continue to invest in AI
• November Positions Report
• Q4 2023 Webinar Highlights

The rise of generative AI has necessitated hyperscalers to develop their own large language models (LLMs), build platforms that enable their customers to create AI applications, and also offer AI in their product offerings. AI has been a boon for hyperscalers that were otherwise affected by tightening budgets due to challenging macro conditions.

We have been following the cloud sector closely with a regular review of hyperscalers and the best-of-breed cloud companies. This analysis shows that the hyperscalers are showing signs of stabilization. In a positive development, the best-of-breed cloud company’s expected sequential deceleration is slowing from a decline of 11 points in Q1 to Q2 of this year to a decline of 4 points in Q3 to Q4 of this year. This means we may near a bottom. We also discuss various financial metrics that can help determine which cloud companies will lead once the declining growth does find a bottom.

Notably, cloud has lagged broader tech’s rally this year, and on a 3-year basis, returns are still negative. Cloud ETFs like SKYY are down (-8.9%), CLOU down (-18.8%), and WCLD down (-35.1%) compared to a 27.4% gain for the QQQ. Timing has been crucial for cloud given the 1-year returns (from Jan 1st 2023) look nearly identical to the 4-year returns (from Jan 1st 2020), meaning there were losses in-between that took time to recoup.

Big Tech is the Best Proxy for Cloud

The Big 3 cloud providers are considered the best proxy for gauging overall cloud market trends because their reports reflect the most resilient cloud infrastructure layer with the highest market concentration. Cloud IaaS services are less prone to churn due to high switching costs, and the Big 3's dominance in this market (66%) provides a more concentrated view of the overall cloud landscape. By analyzing the Big 3's performance, we can comprehensively understand the infrastructure that supports the cloud ecosystem.

Microsoft Azure’s Q3 growth rate was the outlier among the Big 3 as its growth rate accelerated by 3%, while AWS remained steady albeit at a slower growth rate, and Google Cloud decelerated by 6%. The steep deceleration in Google Cloud was a negative surprise as analysts were expecting it to grow 26% compared to the actual 22%.

Microsoft

• Azure grew by 29% and 28% YoY in constant currency, including about 3% incremental gain from AI services.  OpenAI and Microsoft are estimated to hold a combined 69% share of the generative AI model and platform market, followed by AWS at 8% and Google at 7%.
• Growth accelerated from 26% in the previous quarter yet was down year-over-year from 35%.
• The company’s guide for next quarter is 26% to 27% in constant currency. Azure's consumption business is driving growth, and the company expects this trend to continue in the next quarter.

The company’s CFO Amy Hood said in the recent earnings call, “While the trends from prior quarter continued, growth was ahead of expectations, primarily driven by increased GPU capacity and better-than-expected GPU utilization of our AI services, as well as slightly higher-than-expected growth in our per-user business.”

The company’s CEO, Satya Nadella, highlighted its efforts to offer AI in its product offering. He said, “With Copilots, we are making the age of AI real for people and businesses everywhere. We are rapidly infusing AI across every layer of the tech stack, and for every role and business process to drive productivity gains for our customers.”

AWS

• AWS revenue grew by 12% YoY to $23.1 billion.
• The growth has stabilized as AWS grew 12% in the previous quarter. However, it decreased significantly from 27% in the same period last year.

Our previous analysis highlighted optimizing due to the tough macro environment. Now the company is seeing a reduction of cost optimization by its customers as companies deploy new workloads, which is positive. A similar trend was observed in the previous quarter.

The company’s CFO Brian Olsavsky said in the recent earnings call, “On a quarter-over-quarter basis, we added more than $900 million of revenue in AWS as customers are continuing to shift their focus towards driving innovation and bringing new workloads to the cloud. Similar to what we shared last quarter, while optimization still remain a headwind, we've seen the rate of new cost optimization slowdown in AWS and we are encouraged by the strength of our customer pipeline.”we've seen the rate of new cost optimization slowdown in AWS and we are encouraged by the strength of our customer pipeline.”

Google Cloud

• Google Cloud revenue grew by 22% YoY to $8.4 billion.
• The growth is lower than the 28% in the previous quarter and 38% in the same period last year.

Optimization continues to weigh on the slowdown of growth. The company’s CEO, Sundar Pichai replied to an analyst’s question on deceleration in Cloud and optimization. “On Cloud, maybe what I would say is, overall, we had definitely started seeing customers looking to optimize spend. We leaned into it to help customers given some of the challenges they were facing. And so that was a factor. But we are definitely seeing a lot of interest in AI. There are many, many projects underway now, just on Vertex alone, the number of projects grew over 7x. And so we see signs of stabilization, and I'm optimistic about what's ahead.”But we are definitely seeing a lot of interest in AI. There are many, many projects underway now, just on Vertex alone, the number of projects grew over 7x. And so we see signs of stabilization, and I'm optimistic about what's ahead.”

The bottom line is that cloud growth is lumpy across key players with a positive surprise from Microsoft, yet a steep, negative surprise from Google Cloud. We see similar trends in Best-of-Breed.

Best of Breed

We took a sample of the top-ranking cloud stocks on revenue growth, free cash flow, adjusted operating margin, and valuations.

The best comparison is the sequential growth from Q3 to Q4 in 2022 compared to sequential growth in Q3 to Q4 2023 estimates as this will take into account any seasonality from the Q4 period.

Per our last write-up in June: “We now see an improvement in the recent quarter, as the best-of-breed cloud stocks are guiding for a 72% slowdown in QoQ/YoY growth for Q2 guides – from an average 15% QoQ last year to 4% this year.”

We saw a further improvement in the current quarter, as the best-of-breed cloud stocks are expected for a QoQ/YoY decline of 47% from Q3 to Q4 estimates – from an average 9% QoQ last year to 5% this year.

All the best-of-breed cloud companies showed a deceleration. Bill Holdings has minimal deceleration as the company’s QoQ growth was 13% last year and is expected to be 12% this year. ServiceNow ranks next as it grew 6% last year and is expected to grow 5% this year. MongoDB was accelerating by 1 point in our June analysis yet is now decelerating 8 points in the upcoming period.

Source: YCharts

Earnings Beats

MongoDB is the leading stock with a revenue beat of 7.2%. The strong performance of the Enterprise Advanced Business largely drove the solid beat. The company’s revenue grew by 30% YoY to $432.9 million. However, the deceleration is expected to persist in the upcoming quarter, as the company’s revenue guidance of $429 million to $433 million represents a YoY growth of 19% at the mid-point.

GitLab’s revenue exceeded analyst expectations by 6.1%. The company’s revenue grew by 32% YoY to $149.7 million. The guide for the next quarter is $157 million to $158 million, representing a YoY growth of 28% at the mid-point. The deceleration of four points is reasonable compared to peers.

SentinelOne ranked third with a revenue beat of 5%. The revenue grew by 42% YoY to $164.2 million. The guide for the next quarter is $169 million, representing YoY growth of 34%.

Source: YCharts

GitLab’s adjusted EPS came in at $0.09 compared to a (-$0.10) for the same period last year, with an adjusted EPS beat of 1710%. HashiCorp reported $0.03 compared to (-$0.13) for the same period last year, with a beat of 169%. It was the company’s first quarter with positive adjusted EPS. MongoDB reported $0.96 compared to $0.23 for the same period last year, with a beat of 93.5%.

Source: YCharts

Bottom Line and Free Cash Flow

GAAP profitability is another crucial metric to monitor closely, especially with macroeconomic uncertainty. Most of the names listed in the chart below are unprofitable on a GAAP basis as they are paying high stock-based compensation. ServiceNow has the best operating margin among the cloud companies with 10%, followed by CrowdStrike at break even, and Datadog at (-1%).

Many cloud companies have been improving their margins, which is positive. In our analysis of CrowdStrike, we said, “A key item in the report was that Q3 marked CrowdStrike’s first quarter with positive operating income. CrowdStrike now has to prove that it can continue to expand operating margin further into positive territory.”

Bill Holdings has improved its operating margin to (-19%) from (-38%) in the same period last year. Similarly, Gitlab’s has improved to (-27%) from (-50%), HashiCorp to (-38%) from (-62%), SentinelOne to (-50%) from (-90%), and Zscaler to (-9%) from (-19%).

Source: YCharts

Zscaler has the highest free cash flow margin of 45%. It has improved from 27% in the same period last year. CrowdStrike ranks second with a free cash flow margin of 30% and Datadog ranks third with 25%.

Source: YCharts

Stock-Based Compensation

Stock-based compensation is a non-cash expense that is added back to adjusted earnings. However, in practice, this is an expense as per GAAP rules. Among the best-of-breed cloud stocks, Snowflake has the highest stock-based compensation as a percentage of revenue at 40.6%, followed by SentinelOne at 33.4%, and HashiCorp at 30%. The high level of stock-based compensation reflects what the competitive cloud industry must do to retain talent. However, it is a double-edged sword since it dilutes ownership of existing shareholders.  

Source: YCharts

Valuations

Snowflake has the highest fwd P/S ratio of 22.5 among the best-of-breed cloud stocks. It is followed by Cloudflare at 20.2 and CrowdStrike at 19.1.

Source: YCharts

Ranking based on revenue estimates change for next quarter

Gitlab’s revenue estimates have been revised by 5.9% after the company’s recent strong results. MongoDB’s estimates have been changed by 4.8% followed by SentinelOne by 1.6%.

Source: Seeking Alpha

Ranking based on adjusted EPS estimates change for the next quarter

MongoDB’s adjusted EPS estimates have been revised up by 29.9%, followed by Bill Holdings by 0.5% and CrowdStrike by 0.4%.

Source: Seeking Alpha

Highlights and Lowlights in Q3

GitLab reports first positive non-GAAP operating profit

GitLab reported a revenue beat of 6.1% and an adjusted EPS beat of 1710%. The company reported its first adjusted operating income in the recent quarter and guides a positive adjusted operating income for the next quarter. GAAP operating margin improved from (-50%) to (-27%).

The company’s CFO, Brian Robins, mentioned in the earnings call that sales cycles have lengthened and buying behavior in the enterprise segment has stabilized. Mid-market and SMB customers continue to be cautious.

He said, “Looking back at the quarter, I want to share some of the areas we have been closely monitoring. These include sales cycles, win rates, contraction, and Ultimate. In comparing Q3 with Q2 of FY ‘24, we have seen overall sales cycles lengthen. During Q3 buying behavior in our enterprise segment stabilized. However in the mid-market and SMB, we see customers continue to be cautious in the uncertain macro environment. […] Contraction during Q3 also improved for the third consecutive quarter and is in-line with levels from Q3 last year.”

Solid Results from SentinelOne

SentinelOne stood out as one of the only companies with QoQ acceleration in billings at 33% YoY and 2% QoQ. We covered here a few stocks that struggled with billings, in particular. Revenue grew by 42% YoY to $164.2 million, with a revenue beat of 5% and an adjusted EPS beat of 63.7%.

 ARR grew by 43% YoY to $663.9 million and net new ARR grew by 11% YoY. The adjusted operating margin improved by 32 percentage points to (-11%). Free cash flow margin improved by 40 percentage points to (-16%). Management expects the company to achieve positive free cash flow in the second half of next year.

Dave Bernhardt, the company’s CFO, said in the recent earnings call, “Our margin improvement is indicative of healthy pricing and the value and innovation we deliver to customers. It also demonstrates the success of our land and expand strategy. Our unified security and data architecture in a single platform is delivering meaningful value for SentinelOne as well as our customers.”

HashiCorp reports first positive non-GAAP net income

HashiCorp reported a 2% revenue beat. However, the revenue YoY growth was 17%, ranking at the bottom of the best-of-breed cloud stocks. Operating margin improved from (-62%) to (-38%) and adjusted operating margin improved 17 percentage points to (-7%). Free cash flow improved 18 percentage points to 4% and was the company’s second positive free cash flow. The management expects positive free cash flow going forward other than in Q2, which is low due to booking seasonality. The adjusted EPS beat was solid 169% and the company reported the first positive adjusted net income.

Zscaler reports strong billings growth. However, full-year guidance unchanged

Zscaler reported a 4.9% revenue beat and a 36.9% adjusted EPS beat. The company’s operating margin improved by 10 percentage points to (-9%) and the adjusted operating margin improved by 6 percentage points to 18%. The free cash flow margin improved by 18 percentage points to 45%, ranking the top among the best-of-breed cloud stocks.

Billings growth remained strong, at 34% YoY to $456.6 million. However, management did not raise its full-year billings outlook as it tends to do. Its outlook remained unchanged at 24% to 26% YoY growth or $2.52 billion to $2.56 billion. That outlook suggests that billings growth will decelerate through the remainder of the fiscal year. We have discussed the company further in our Cybersecurity analysis here.

MongoDB solid beat, however, cautious management tone

MongoDB reported a solid 7.2% revenue beat and a 93.5% adjusted EPS beat. As observed in the above paragraphs, the analysts have also increased their estimates after the company’s strong results.

Dev Ittycheria, CEO of the company, said in the earnings call, “We had a healthy quarter of new business acquisitions, led by continued strength in new workload acquisition within our existing customers. In addition, our Enterprise Advanced business again exceeded our expectations, demonstrating strong demand for our platform and the appeal of our run-anywhere strategy.”

However, the results failed to impress investors due to management’s comments on macro conditions. We have discussed the consumption business model here in depth. In this model, the revenue can be lumpy.

Michael Gordon, CFO of the company, said in the earnings call, “As a reminder, we recognize Atlas revenue primarily based on customer consumption of our platform and that consumption is closely related to-end user activity of the application, which can be impacted by macroeconomic factors.”

Conclusion

The cloud sector has demonstrated resilience amid the recent macro uncertainty and exhibits signs of stabilization. We added CrowdStrike and Cloudflare to our portfolio partly informed by scans such as these, which revealed bottom line strength coupled with strong growth. We will continue to look for outliers in the cloud category as we move into next quarter’s earnings season.

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

Recommended Reading:

• Micron: AI Offers a Multifaceted Secular Growth Tailwind
• Memory and PC Stocks Review
• Marvell Q3 Earnings: The Market Wants More on AI
• Marvell Q3: AI-Driven Rebound on the Books, Bottom Line in Focus
• CrowdStrike Q3 Earnings: Net New ARR Accelerates, Billings Decelerate
• Big Tech companies continue to invest in AI
• Cloudflare 3Q23 Earnings Summary

Memory plays a critical role in the world of AI, as faster and more powerful AI chips and servers will require increasing amounts of memory. The recent surge in generative AI and AI GPUs, spurred by the success of OpenAI’s ChatGPT and development of hundreds of other large language models, are forecast to bring about a new DRAM market, underpinned by high-bandwidth memory (HBM) and DDR5. Micron is uniquely positioned to benefit from this secular AI growth tailwind, leading the industry with the fastest, highest-capacity HBM, alongside other industry-leading products for AI applications.

This analysis will touch on how the memory market is recovering off one of the worst cyclical downturns it has faced recently, how NAND and DRAM are evolving, the massive shift ahead for HBM3, and how this translates to a multifaceted growth opportunity for Micron to tap into to push towards record revenues.

Please note, our plan is to patiently wait for the right entry. This is detailed below at the Conclusion.

Memory Market Recovery Begins in 2024, Accelerates in 2025

The memory market is coming off its worst cyclical downturn in 15 years, with late 2022 seeing memory revenues fall off a cliff, with challenges persisting through much of 2023. Heading into Q4, the market is showing multiple signs of bottoming – South Korean NAND flash exports returned to growth in September, NAND and DRAM pricing is expected to return to growth this quarter, and supply bit shipments are forecast to return to double-digit growth in 2024.

The downcycle starting in Q2/Q3 of 2022 exceeded the previous cycle in late 2018 in terms of its scale and duration – memory revenues declined approximately (-26%) from ~$44 billion in Q2 to nearly $33 billion in Q3. NAND revenues declined (-24.3%) to $13.7 billion, while DRAM fared slightly worse, with revenues declining (-28.9%) to $18.2 billion.

Q4 of last year saw another ~ (-27%) sequential decline to just over $24 billion in revenues. NAND revenues slipped around (-19.7%) sequentially to ~$11 billion, while DRAM revenues fell (-34.2%) sequentially to $12.3 billion. Essentially, DRAM revenues saw nearly a (-50%) decline in just two quarters, while the broader memory market declined just over (-45%).

Driving this rapid slowdown was a rapid deterioration in NAND and DRAM pricing – this was exacerbated by excess inventory at major manufacturers Samsung and SK Hynix leading to a fire sale at extremely low prices. NAND and DRAM both saw pricing decline more than (-20%) QoQ in Q3, and nearly (-30%) QoQ in Q4 2022. The previous year, from Q3 2021 through Q1 2023, NAND prices fell (-55%), and DRAM declined (-57%).

Source: Yole Intelligence

Pricing is expected to bottom out in Q3, with Q4 projected to see the first QoQ increase in both NAND and DRAM pricing since Q3 2021. That trend is set to continue through 2024, with Yole Intelligence forecasting NAND and DRAM prices to continue rising.

Source: Bloomberg

South Korean export data further supports the recovery story for NAND and DRAM.

NAND flash exports for September rose for the first time in a year, while DRAM exports registered the smallest decline. NAND flash exports increased +5.6% for the month, compared to an (-8.9%) decline in August, while DRAM exports fell (-24.6%). In October, chip exports from the country declined just (-3.1%) YoY to $8.9 billion in October, the smallest decline since August 2022, and another data point in support of memory’s recovery from the deep trough of late 2022 and early 2023.

A Broader Look at Memory’s Rebound

Pricing and export data both are signaling a return to growth for the memory market starting in Q4 and persisting through 2024 and 2025. Production cuts beginning in early 2023 are expected to lead to an undersupply of chips over the next four to eight quarters, and combined with steadily increasing NAND and DRAM prices, the memory market is projected to jump to record levels by 2025. cuts beginning in early 2023 are expected to lead to an undersupply of chips over the next four to eight quarters, and combined with steadily increasing NAND and DRAM prices, the memory market is projected to jump to record levels by 2025.

Overall, the memory market is projected to register a (-41%) YoY decline to approximately $84 billion in revenues in 2023, down from ~$144 billion in 2022. DRAM revenues are projected to fall (-47%) YoY from $79.7 billion in 2022 to ~$42 billion in 2023; NAND revenues are expected to fall (-37%) YoY from $58.7 billion to $37 billion this year.

2024 is forecast to see a sharp rebound in the market, with revenues rising approximately +55% YoY to more than $130 billion, according to Yole Intelligence. The increase in prices are driving the revenue jump with DRAM growing by “as much as 87 percent” in 2024 while NAND flash memory is projected to “bounce back to grow by about 60 percent,” according to Gartner.

2025 is projected to see the market reach record revenues of above $200 billion, or over +55% YoY for a second year straight, boosted by increased prices, undersupply – especially in DDR5 and other DRAM sub-segments — and AI mega-trends.

According to Lam Research, AI servers use 8X DRAM and 3X NAND compared to an enterprise class server.  For DRAM, that AI server and data center demand is expected to push the markets to new highs, from that ~$42B size in 2023 to ~$96B in 2028, according to Yole Intelligence.

Overview: HBM and DDR5’s Role in AI

High-bandwidth memory (HBM) – more specifically the next-gen HBM3/HBM3e – and DDR5 play a mission-critical role in AI, and such a role will lead the market to stunning growth: market leader SK Hynix projects the HBM market will grow at an 82% CAGR through 2027.

High bandwidth memory (HBM) offers higher bandwidth, capacity, performance, and lower power by vertically stacking up to twelve DRAM memory chips to shorten how far data has to travel, while also allowing for smaller form factors. Stacked memory chips are connected through something called “through silicon vias” or TSVs. HBM is increasingly being used to power machine learning, high performance data centers, and more recently, generative AI models. For a different perspective into HBM from an equipment leader, read our analysis on Lam Research here.here.

DDR5 DRAM, or double data rate 5, aimed to double bandwidth and data transfer speeds at a lower latency and power consumption than its predecessor, DDR4. DDR5 memory chips can be mounted on circuit boards to create memory modules, for use in servers or PCs. DDR5’s increased bandwidth allows for faster processing for memory-intensive applications, such as generative AI and training LLMs.

Demand for high-capacity memory is being driven by the sudden rise in generative AI and LLMs, which both require significant amounts of computing power and substantial amounts of DRAM to meet elevated performance requirements. SK Hynix’s head of DRAM marketing Park Myung-soo explained that “an AI server requires 500-gigabyte (GB) or larger High Bandwidth Memory (HBM) chips and at least 2-terabyte (TB) DDR5 chips.” As such, HBM3 and DDR5 are projected to see a rapid shift to become the dominant architectures over the next few years.

In 2022, HBM2e was the dominant HBM architecture, accounting for ~70% share of HBM shipments, with the emerging HBM3 taking just 8%. However, HBM3 will see a surge in demand in 2023 and 2024, rising to 39% share this year and approaching 60% share in 2024 to become the dominant architecture. This will be driven by the massive demand for Nvidia’s H100 GPU and AMD’s upcoming MI300, which are underpinned by HBM3.

As a result, HBM3 revenues are forecast to rise as much as +127% YoY to $8.9 billion, according to TrendForce, while SK Hynix estimated that this AI chip boom will lead to the HBM3 market expanding at an +82% CAGR through 2027.

Similar to HBM3, DDR5 is expected to quickly become the mainstream DDR architecture, driven by demand for faster compute for AI. DDR5 was expected to take more than 25% share of bit shipments in 2022, before rising to take more than 55% share in 2023. By 2026, DDR5 is projected to hold almost 95% share of bit shipments as the memory market completes its transition over to DDR5 from DDR4.

Source: Tom’s Hardware

Micron is well positioned to benefit from this massive shift to HBM3 and DDR5, as it is first-to-market with its 128GB capacity DDR5 RDIMMs (registered memory modules) and its eight-high 24GB HBM3e cube.

Background on Micron’s Positioning in HBM3 and DDR5

Throughout 2024, Micron is seeing “accelerating AI-driven opportunities for memory and storage across multiple market segments from the data center to the edge,” and it is rolling out industry-leading HBM and DDR5 products. Micron’s 8-high 24GB HBM3e cube began sampling in late July 2023, and it plans to sample its 12-high 36GB HBM3e cube in the first quarter of 2024 – among the first in the industry to reach the market.

Micron is investing heavily to capitalize on this HBM3/3e shift, with management noting last quarter that “assembly and test capex is projected to double year over year in fiscal 2024, predominantly driven by investments to support HBM3e production.”

Micron currently has deployed the industry’s fastest and highest capacity HBM3e on the market, supporting the most advanced AI training and inference. Micron’s HBM3e can deliver faster training times and more responsive queries for LLMs — it “increases performance per watt resulting in lower time to train LLMs such as GPT-4 and beyond.”

Micron’s HBM3e provides higher memory bandwidth that exceeds 1.2TB/s and 50% more memory capacity per 8-high 24GB cube, improving the accuracy and precision while training LLMs. Micron explains that this allows for up to 50% or more queries per day while reducing training times by 30%, thus lowering total cost of ownership (TCO).

TCO is an important factor for hyperscalers when evaluating equipment, especially GPUs, as it factors in not only the acquisition cost but also the costs associated with owning and operating the equipment over the hardware life cycle. Micron’s 24GB cube touts 2.5 times performance per watt improvement over previous generations; this increased power efficiency generates “tangible cost savings” for AI data centers. Micron explains that for “an installation of 10 million GPUs, every five watts of power savings per HBM cube is estimated to save operational expenses of up to $550 million over five years.”

In terms of DDR5, Micron says it currently sits as the market leader, with the most market share in the early innings of this DDR5 shift, underpinned by the memory industry’s most developed DDR5 ecosystem. Micron has launched its high-capacity 96GB DIMMs, and at the beginning of November, Micron launched the first-to-market 128GB DIMM based on its 1β technology, which it says “delivers the fastest speed and lowest latency” of any DDR5 DIMM available.

Micron explains that the 128GB DIMM offers more than 24% improved energy efficiency, as well as 16% improved latency, which is crucial for “memory-bound workloads such as generative AI, in-memory

databases, and real-time data analytics, where high-capacity is needed, and prompt response times are critical for real-time inference.” Micron adds that the 128GB DIMM “delivers up to 28% faster performance for AI training” on models such as Meta’s Llama 2-70B.

Customers are seeming optimistic about the benefits that the 128GB DIMM offers – AMD SVP Dan McNamara said that “as AMD advances compute with our next-gen EPYC processors, Micron’s 128GB RDIMMs will likely become one of the main memory options to deliver high-capacity and bandwidth per core capabilities to address the demands of memory-intensive applications.” Intel VP Dr. Dimitrios Ziakas echoed that sentiment, saying, “Intel is evaluating this 32Gb memory offering for key DDR5 server platforms based on the resulting total cost of ownership benefits to cloud, AI and enterprise customers.”

Competition Remains Stiff for Micron

While Micron claims it is first-to-market with HBM3e and holds the most market share in DDR5, competition remains stiff, as Micron is competing against two heavyweights who control more than 85% of the market – Samsung and SK Hynix. The two South Korean firms are rapidly advancing HBM3 development, with SK Hynix already firmly established in the market as it was the preferred HBM3 supplier for Nvidia’s highly popular H100 GPU.

SK Hynix unveiled its 1TB bandwidth HBM3e memory in late Q2 this year, with mass production set to start in early 2024. SK Hynix is also reportedly eyeing development of its next-gen HBM4 cube with a plan to introduce that product to market in 2026.

Samsung is currently mass producing its 12-high 24GB HBM3 cube, ‘Icebolt’, and is sampling its HBM3e cube ‘Shinebolt’ to prospective customers. While coming to market later than Micron and SK Hynix, Shinebolt is rumored to compete with Micron on performance, with both offering 1.2 TB/s bandwidth. Samsung is also expected to unveil its fifth-gen HBM3e cube, named ‘Snowbolt’, by the end of the year, followed by a sixth-gen HBM cube next year.

Nvidia, AMD Battling on Memory

HBM3 and HBM3e are becoming the next battleground for memory chip manufacturers as well as AI chip developers, especially Nvidia and AMD, who are pushing the boundaries with the amount of memory bandwidth in each GPU.

AMD’s competing GPUs, the MI300 series, substantially boosted memory and bandwidth relative to the H100, utilizing Samsung’s HBM3. The MI300A is shipping with 128GB HBM3 memory while the MI300x ships with 192GB memory and 5.2 TB/s of bandwidth – that’s 1.6x more bandwidth and 2.4x more HBM3 density than Nvidia’s H100.

Nvidia is rapidly moving forward with its GPU roadmap, as it aims to launch its next-gen H200 and B100 GPUs next year followed by the X100 GPU in 2025 – each GPU will accelerate AI inference times along an exponential curve, thus creating a need for more memory and more bandwidth.

Source: Nvidia

Nvidia’s A100 shipped in two different versions with either  40GB or 80GB HBM2e memory, with the 40GB offering 1.55TB/s of bandwidth and the 80GB offering 2TB/s bandwidth, the industry’s fastest at the time in 2021.

Nvidia then upgraded from HBM2e to HBM3 DRAM, tapping SK Hynix as the supplier for its H100 GPU for 1.6X the bandwidth. Nvidia’s upcoming H200 GPU, set to launch in early 2024 as the industry’s first HBM3e-powered GPU, is expected to ship with another 1.5x bandwidth boost relative to the H100 with nearly 1.8x the memory.

It is rumored by some sources that the H200 is shipping with Micron’s HBM3e, instead of SK Hynix. rumored by some sources that the H200 is shipping with Micron’s HBM3e, instead of SK Hynix. Micron reportedly sampled its 24GB HBM3e memory with Nvidia at the end of July, with SK Hynix following in mid-August and Samsung in early October. According to sources in South Korea, Nvidia remains engaged with SK Hynix for the H200.

This raises an important point about competition in this AI chip and memory race: if Nvidia is switching this quickly from one supplier to the next based on time to market, this raises the risk that Samsung or SK Hynix could be first to market with a superior HBM4 product and take share away from Micron, especially if they undercut Micron on price.

AI Will Increase Secular Growth Opportunity for Micron

The recent surge in AI and data center growth fueled by Nvidia is expected to translate into an interesting shift in revenue mix for Micron: it foresees exposure to the more cyclical and seasonal PC and mobile end market declining from 55% share of revenue in FY21 to 38% share in FY25.

Data center and graphics are forecast to rise from 30% share of revenue in FY21 to 42% share by FY25, with AI and machine learning driving such growth; the projected surge in the HBM3/HBM3e market supports this shift. In data center, Micron is expecting NAND GB shipped per server to increase 3x and DRAM 2x by 2025, as AI servers require significantly more memory than traditional servers.

Automotive and industrial are projected to rise from 15% share to 20% share, as both end markets exhibit much faster growth rates than PC and mobile due to the rise of electric vehicles, industrial robotics, and other emerging trends which require a higher semiconductor content per unit.

This revenue mix shift is underpinned by long-term agreements, at ~75% of revenue in CY22. This offers multiple benefits: more visibility into forward revenues, less exposure to cyclical pricing trends in NAND/DRAM with pricing locked in for the contract duration, reduced impacts from supply and demand imbalances, and ultimately more stable margins.

Financials Sharply Improving

The swift decline in the broader memory market over the past eight quarters has had a significant effect on Micron’s financials. Revenues plummeted, falling (-49.5%) YoY in FY23 from $30.76 billion to $15.54 billion. Operating margin also shifted deep into the red, with Micron posting a (-37.0%) operating margin, compared to a 31.5% operating margin in FY22. Micron reported a net loss of (-$5.83 billion), or ($5.53) per share, compared to net income of $8.69 billion, or $7.75 per share, in FY22. This was the sharpest decline for revenues, operating income, and net income in Micron’s history.

Fiscal Q4 (ending Aug 31) showed initial signs of a recovery:

• NAND revenues increased 19% sequentially to $1.2 billion, bit shipments rose >40%
• DRAM revenues increased 3% sequentially to $2.8 billion
• Total revenue increased 7% sequentially to $4.01 billion
• GAAP net loss improved 25% sequentially to ($1.43 billion)
• Operating cash flow improved 938% sequentially to $249 million, but is much lower compared to $3.78 billion in the year ago quarter

Fiscal Q1’s guide was boosted at the end of November:

• Revenue is projected to be $4.7 billion, compared to a prior view for $4.4 billion +/- $200 million. This would represent YoY growth of 14.9%.
• Gross margin is expected to be (0.5%) to 0%, compared to the prior view of (4.0%) +/- 2.0%

The surge in the HBM3 market, positive outlooks for a NAND and DRAM pricing recovery through 2024 and into 2025, and a surge in AI and data center demand are expected to fuel a rapid recovery for Micron’s top and bottom line.

Moving forward through FY24 (Sept. 2023-24, this reacceleration in NAND and DRAM, buoyed by increasing pricing, is expected to send Micron’s revenue on an eight-quarter streak with more than +20% growth – even as high as +65% as it laps easy comps. On a dollar basis, revenues are forecast to rise from $4.01 billion in Q4 of fiscal 2023 to $8.71 billion in Q1 FY26.

Essentially, Micron is on track to potentially reach record revenues just over eight quarters after that massive slump. However, EPS is forecast to be below levels seen in FY18 and FY22 – estimates peak at $2.05 in Q4 FY25, compared to $3.53 in Q4 FY18 and $2.59 in Q3 FY22. What this means is that revenues are being propelled higher by this shift to HBM3/3e (as it exhibits much higher ASPs relative to typical DRAM memory), but margins are having a tougher time recovering as rapidly due to the deep trough that NAND and DRAM prices must rebound from.

Operating cash flow is also expected to rebound quickly after plunging alongside revenues and EPS in FY23. OCF margin is estimated to rebound from 10% to more than 40% by FY25, with Micron projected to generate upwards of $13.2 billion in operating cash flow, compared to $1.56 billion in FY23.

Micron has applied for CHIPS Act funding for its New York and Idaho fabs, saying that federal funding and tax incentives were needed to develop both facilities. Micron is investing up to $115 billion over the next 20 years to build out its US production base, in an effort to boost the US’ share of production from 2% to 15% and diversify away from East Asia – Micron’s current high-end chip production is more concentrated in Japan and Taiwan. Given that construction isn’t set to begin until late next year with production commencing as early as 2026, any margin benefits from the CHIPS Act are unlikely to be recognized over the short and medium term.

Risks

China presents a real risk to Micron as it does to much of the semiconductor industry. Micron is generating nearly one-quarter of its revenues from China, and CEO Sanjay Mehrotra recently told CNBC that “about half that revenue is at risk.” Micron was the first American chip company targeted by China with a partial ban earlier this year, and the company is working to improve relations with the nation, though there is no guarantee that such a ban will be lifted.

However, there are risks to this recovery, in that it may not unfold as smoothly as projections picture. Quarterly revenues have been variable over the past few fiscal years, with multiple sequential declines present along the growth trend, so there is a risk that current projections calling for sequential growth through Q1 FY26 do not account for some of that lumpiness.

In addition, there is also a tail-end risk in that NAND and DRAM pricing does not exhibit consecutive sequential growth through 2024. This could be exaggerated if NAND pricing slips back to sequential declines in Q2, as it is forecast to see just +3-4% sequential growth in that quarter. Pricing has shown to be volatile in the past, and there is no guarantee that pricing will rebound smoothly and steadily. Should some sequential declines appear in NAND and DRAM pricing in 2024, this would likely weigh on both margins and EPS.

Valuation

Micron’s fundamental backdrop is projected to see rapid top-line growth and a sharp bottom-line improvement on the backs of surging HBM3/3e demand; however, semis have rallied this year due to Nvidia leading the historic Nasdaq rally in the first six months of 2023. This has resulted in a rising of all boats, as many semis are trading far above historical multiples. The product of strong gains in the broader semiconductor industry has pulled Micron’s shares higher: the iShares Semiconductor ETF has gained +48.7% YTD, significantly outperforming the S&P 500’s +18.7% return.

Micron currently trades at a 5.43x PS ratio, its highest level in more than 20 years, in part due to FY23’s (49.5%) YoY decline in revenues while shares have gained +54.5% YTD. Even with +34.5% estimated revenue growth in FY24 to $20.9 billion, Micron still trades at a 4.05x 1-year forward PS ratio, far above its 5-year median PS ratio of 2.75x.

Micron’s forward EV/EBITDA multiple of ~13.0x also is elevated, at nearly double its 5-year median multiple. This accounts for the expected top and bottom line recovery for next year, but it will take more than a few quarters for this top-line growth to translate to a strong recovery in EBITDA and regression to the mean.

Conclusion

As Beth stated in Nvidia’s Q3 earnings preview, HBM3e is rapidly making its presence known, with Nvidia’s upcoming H200 GPU to be the first with HBM3e memory, rumored to come from Micron (still needs confirmation, but is an exciting possibility should it come to fruition).

Nvidia’s rapid GPU upgrade roadmap in response to AMD’s MI300X is a testament to the fast-moving nature of not just the AI GPU market, but also memory – HBM3e is coming to market in 2024, but may quickly be replaced by HBM4 in 2025 and future iterations of HBM memory beyond 2025 to 2026. 

It is a highly concentrated market, dominated by Samsung and SK Hynix, though Micron remains an important player as it moves ahead with industry-leading first-to-market HBM3e and DDR5 solutions. Micron looks well positioned to capitalize on this AI mega-trend, with revenues from both solutions contributing in 2024. On a broader scale, AI and data center are set to transform Micron’s revenue mix to stronger and more secular end markets from its historically cyclical and seasonal concentration in PCs and smartphones — Micron estimates data center and AI to rise from 30% of revenue in FY21 to 42% in FY25, while smartphone and PC’s 55% share is estimated to decrease to just 38%.

However, Micron is valued at elevated multiples, when memory stocks typically would be on a deep discount given the steep downcycle, yet SOXX returns are > QQQ returns. This has lifted the tide of all boats, and memory stocks such as Micron are not trading where they’d normally trade, which makes a near-term buy less likely for the I/O Fund until we see a pullback. This is where the I/O Fund is unique, not only do we strive to be early in our research, such as to the importance of memory for the next generation of AI accelerators, but we are also careful with our timing.

Technical Analysis

The long-term pattern best fits as a large degree diagonal pattern. This is a 5 wave uptrend that is characterized with large corrective swings. If accurate, we are in the middle of the 4th wave correction, which would target the $48 – $35 region before completing.

If we zoom into the 2021 top to now, we can get a better look at the risk parameters that would either confirm or invalidate this setup. For one, the price action from the 2021 high best fits this pattern. Note how we only have a clear 3 wave drop into the October, 2022, low. This is followed by a messy and overlapping uptrend into the recent high. More times than not, when the following bounce after a 3 wave drop is a messy and overlapping move, it signals a bounce in a larger corrective pattern.

If we see a break down below the $62-$58 support region, then this pattern will be confirmed, as we establish lower targets to buy this stock. On the other hand, in order to invalidate the risk present in the current price structure, we need to see price break above the $84-$91 resistance zone. The higher we go into this region, the more likely that we will see a continuation of the larger uptrend.

I/O Fund Equity Analyst, Damien Robbins, contributed to this analysis. I/O Fund Portfolio Manager, Knox Ridley, contributed to this analysis.

Recommended Reading:

• Memory and PC Stocks Review
• Marvell Q3 Earnings: The Market Wants More on AI
• Marvell Q3: AI-Driven Rebound on the Books, Bottom Line in Focus
• Nvidia Fiscal Q3 Earnings: The China Impact
• 2024 Trend: Memory and PC Rebound