I/O Fund’s preview of 7 Ad-Tech stocks for Q4 Earnings

Posted on February 4, 2022August 28, 2026 by io-fund

Google parent Alphabet’s results have further renewed optimism in the stock market as the company beat analysts’ revenue estimates by 4.9% and EPS by 13%. It was led by the growth in advertising and cloud revenues. Advertising revenue grew by 33% to $61.24 billion. The company also announced the 20-for-1 stock split.

On the other hand, Facebook’s results disappointed as it missed analysts' EPS estimates by 4% and only managed to beat revenue estimates by 0.7%. The revenue outlook for the next quarter also disappointed the Street since it only expects revenue to grow in the range of 3-11% YoY. Revenue in Q4 grew by 20% to $33.67 billion. We have stayed away from the stock due to the various privacy issues and failed efforts to enter new markets like stable coins and dating. Not to mention the Cambridge Analytical data scandal.

Snap Inc. reported on February 3rd and results came in relatively stronger than Meta’s. Snap guided for sales to grow 36% YoY next quarter, well above Meta’s guide for 7% YoY growth at the mid-point. The large disparity between Snap and Meta’s forward guide highlights that Apple’s changes to iOS will have varying degrees of impacts on companies in the ad-tech space. The stock is up 59% after hours following the positive report while Facebook is down 28% following its report.

In this earnings preview, we cover Digital Turbine, Twitter, HubSpot, Trade Desk, Roku, Magnite, and PubMatic. To understand valuations across the Ad-Tech companies and how the sector is positioned moving into earnings, please reference our analysis, “I/O Fund’s Ad-Tech Q4 2021 Earnings Overview.”

Digital Turbine – Earnings on February 08th

Source: YCharts, Earnings Reports, and I/O Fund

The company’s revenue grew 338% YoY to $310.2 million. However, the company’s results include AdColony and Fyber results which were acquired earlier this year. For better comparison, the management provides pro forma revenue growth i.e. 63% YoY. The analyst’s consensus estimates suggest revenue to grow 299% to $353.21 million in the next quarter.

The management believes that the company’s current Total Addressable Market has significantly increased from about $96 billion to about $369 billion due to the various acquisitions.

Source: Analyst Day Presentation

The company expects organic revenue to grow 25-30% in the long term.

Source: Analyst Day Presentation

Macquarie analyst Tim Nollen has an outperform rating and a price target of $80. He is bullish on the company due to “Industry and macro tailwinds (secular growth in mobile gaming and digital ads, alongside lower app store fees); an expansion into brand advertising (a $400 billion-plus total addressable market); upside to current estimates; and the attractive valuation.”

Roth Capital Partners analyst Darren Aftahi has a price target of $90. He is positive on the +25% revenue growth, the SingleTap feature, and also on the company’s various partnerships. “Therefore, not only can [Digital Turbine] expand its wallet share on existing devices, it can capture additional upside and long-tail revenues on new devices as well, especially with market expansion outside the U.S. given various partnerships with Samsung, Telefonica and others.”

Please note that the I/O Fund may or may not agree with the above financial analysts, yet we objectively report what the Street is saying. You may view our previous analysis of the company below:

Q3 Stock Earnings Preview – What to Expect for 7 Ad Tech Stocks

Ad Tech Stock Earnings – What to Expect for Q3 2021 Earnings

Twitter Inc – Earnings on February 10th

mDAU: Monetizable Daily Active Usage

Source: YCharts, Earnings Reports, and I/O Fund

The company’s revenue grew 37% in Q3 and the consensus forecast suggests revenue to grow 22% to $1.57 billion in the next quarter. It will be the first earnings call for the new CEO, Parag Agrawal. In the Barclays Tech Conference, he mentioned his priorities include smooth transition to all the stakeholders and improving the execution to deliver great products and results.

Truist analyst Youssef Squali has a buy rating and a $50 price target. He believes, “The company's Q4 revenue growth should decelerate sequentially to 22% from 37% in Q3, reflecting tough Y/Y comps, and normalization from peak engagement on the platform due to COVID.” However, he still expects over 20% growth, led by healthy ad budgets, new monetization tools, and mDAU growth.

Mizuho analyst James Lee lowered the company’s price target to $56 from $70. He has a neutral rating on the stock. In his view, “While the management changes are necessary to enable Twitter to accelerate the development, introduction, and update of its products, it could take time for the new strategy to take shape for users and revenues to reach the company's long term targets.”

Read our previous article on the company below:

I/O Fund’s Interview with CoinDesk: Why Square’s Name Change to Block is Defensive

Social Media Projected to Lead Global Ad Spend in 2021

HubSpot Inc – Earnings on February 10th

Source: YCharts, Earnings Reports, and I/O Fund

HubSpot’s Q3 revenue grew 49% to $339.2 million. The company’s total number of customers increased 34% to 128,144. The consensus analysts’ estimates suggest revenue to grow 42% in the next quarter. The company’s revenue growth has been good since it grew at a compound annual growth rate of 41% from its IPO in October 2014 till Q3 2021.

Source: Investor Presentation

Mizuho analyst Siti Panigrahi has lowered the company’s price target to $500 from $790 and has a buy rating on the stock. In his view, “Software-as-a-service momentum has stalled thus far in 2022 amid concerns over rising interest rates.” However, the analyst does not see any deterioration of fundamentals despite the market sell-off. On the other hand, Barclays has also lowered the price target to $550 from $800.

Goldman Sachs analyst Gabriel Borges has a buy rating and a $953 price target. The analyst notes that the company responded positively during the early days of the Covid-19 pandemic. He points out that the company lowered the starter package price and introduced a freemium product, which led to the increase of the customers. Over a period of time, he sees a potential for its customers to move to a higher-priced plan.

The Trade Desk Inc – Tentative Earnings Date is February 18th

Source: YCharts, Earnings Reports, and I/O Fund

The company's Q3 revenue grew 39% YoY to $301.1 million, excluding the political spend related to the previous year's U.S. elections; the growth was about 47%. The consensus analysts' estimates suggest revenue to grow 22% to $389.82 million. The management expects Q4 revenue to be about $388 million. It did not give specific guidance and mentioned about the uncertainty to the advertising industry due to rising Covid-19 cases. In the earnings call, founder and CEO Jeff Green mentioned that the IOS changes did not have any material impact on the company's business.

Jefferies has upgraded the stock to a buy rating and has a price target of $105. In his view, "Broadening adoption of connected TV viewership is driving more dollars toward programmatic advertising, from linear TV; the Solimar product launch is the biggest since Next Wave, which drove an acceleration in rev growth following its mid-2018 launch; and TTD is in a relatively better position to weather the privacy changes from Apple's iOS 14, compared to Walled Garden names like FB and SNAP."

On the other hand, Stifel analyst Mark Kelley has resumed coverage on the stock with a hold rating and a price target of $68. He says that the feedback he heard about the stock is positive. He also believes that Connected TV advertising still has room to improve. However, he sees the company's shares are "stretched at current levels."

Roku Inc – Tentative Earnings Date is February 18th

Source: YCharts, Earnings Reports, and I/O Fund

The company’s Q3 revenue grew 51% to $680 million and the analysts' consensus estimate suggests revenue to grow 38% to $897.65 million in the next quarter. The management expects revenue in the range of $885 million to $900 million and adjusted EBITDA of $65 million to $75 million. The company’s active accounts at the end of Q3 were 56.4 million, a net addition of 1.3 million in Q3.

According to the NPD's Weekly Retail Tracking Service, the company has been the top-selling smart TV operating system for the second consecutive year in the U.S. Also, according to the study conducted by Hypothesis Group, Roku is Canada's number 1 streaming platform. On other recent news, Fox News International announced that it is expanding distribution on Roku, which should supplement Roku’s international growth.

Deutsche Bank analyst Jeffrey Rand has lowered the company’s price target to $300 from $400 and has kept the buy rating on the stock. He believes that the company is well-positioned in the rapidly growing connected TV market and the recent sell-off is overdone. Q4 earnings could be a positive catalyst for the stock. His checks indicate that the advertising market remained strong in Q4 despite some initial concerns about brands reducing ad spending due to supply chain issues.

Read our previous article on the company below:

Podcast: This Week in Startups and I/O Fund on Tech Investing

The Crucial Difference Between Roku and Netflix

Magnite Inc – Earnings on February 23rd

Source: YCharts, Earnings Reports, and I/O Fund

The company completed the acquisitions of SpotX and SpringServe this year. Revenue excluding traffic acquisition cost (TAC) was $114.1 million, up 89% and up 26% on a pro forma basis (SpotX and SpringServe included in Q3 20 for comparisons). The consensus analysts’ estimates suggest revenue ex-TAC to grow 71% to $139.85 million. Management expects revenue ex-TAC in the range of $138 million to $142 million.

Truist analyst Matthew Thornton has a price target of $23 and a Buy rating. The analyst believes that the setup could be interesting into the second half of the year on easing supply chain issues and the stock trading 13-times and 11-times expected FY22 and FY23 adjusted EBITDA. He further notes that the Q4 consensus expectations are reasonable but a bit cautious on Q1.

Needham analyst Laura Martin has a buy rating on the stock but has lowered the price target from $70 to $25. The analyst highlights broader short-term concerns like tougher comps, supply chain concerns, and omicron variant slowing digital ad growth for companies under her Streaming and AdTech coverage that drove multiple compression last year and in 2022-to-date.

Read our previous article on the company below:

Will Dividend Stocks Become the Inflation Trade?

Podcast with Motley Fool: I’m Bullish on These Trends for 2021

PubMatic Inc – Earnings on February 28th

Source: YCharts, Earnings Reports, and I/O Fund

PubMatic’s revenue grew by 54% in Q3 and is expected to grow 34% in the next quarter to $75.55 million. The company’s revenue grew at over 50% in the previous four quarters. It also has an excellent net-dollar retention rate (NRR) of 157% for the trailing twelve months ended September 2021.

In the words of the company’s CEO, “We use a land and expand approach, coupled with a usage-based revenue model. When we deliver incremental value to our customers, we participate in their upside which further accelerates our profitable business model and enables us to invest for future growth. This flywheel positions us well for sustained and profitable growth and market share gains.”

The management expects revenue in the range of $74 million to $76 million, representing a growth of about 34%. It had raised the full-year 2021 guidance from the range of $205 million-$209 million to the range of $225 million-$227 million, representing a growth of about 52%. It also expects the full-year 2022 revenue to be at least $281 million.

Jefferies has been positive about the company as they believe that the recent iOS changes will not have much impact on the company. They also point out that the company has been trading below its historical averages.

The I/O Fund is a team of analysts who share their research publicly as they build a portfolio of 20 stocks. Our team has record results for a retail Fund and we also have four-digit gains on some of our free newsletter coverage. You can learn more about our premium service by clicking here or sign up for our free newsletter here.by clicking here or sign up for our free newsletter here.

Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.

Another Cyclical Slowdown within a Secular Bull Market

Posted on February 3, 2022June 30, 2026 by io-fund

Even though the larger cyclical growth trend is slowing, we are seeing unexpected signs of a temporary and unexpected bounce in growth. With inflation likely peaking, the FED beginning to walk back the most hawkish path of rate hikes this year, we could set up a much needed rally in high beta stocks from historically oversold conditions. This also lines up with our technical analysis work, all of which we discuss below.

We do plan to use any move in high beta stocks from here to further de-risk and raise another round of cash. We raised cash in December/early January, and have used that cash to layer into the companies that we want to own for longer than 1-2 years. On a short to intermediate-term time frame, we believe the upside risk from current oversold levels is higher than the downside risk. On an intermediate to long-term time frame, the risk will likely be more to the downside until the 4th cyclical slowdown within the larger secular bull market runs its course. Regardless, we believe the odds that the end of this great secular bull market is quite low.

The type of bear markets that go deep and last for years happen in conjunction with recessions. With the Yield Curve NOT inverted, nor giving any sign of an inversion in the near future, the current consensus odds of a recession are close to zero. Instead, what we are likely experiencing is the 4th deflationary shock in an ongoing secular bull market. We experienced these shocks in 2011, 2015, 2019/2020, and now 2022. these shocks are emotional and sharp but tend to recover quickly with a renewed reflationary impulse. Nobody can give you an exact guarantee, however, this is the outlook we are using for our current portfolio positioning. If something changes, we will let you know.

Inflation vs. Equities

Historically, rate hikes cause a knee-jerk reaction by markets rotating assets over the short term; however, we tend to see sharp snapbacks to new highs once that rotation subsides. Rising rates imply a strong economy. As growth and inflation rise together with the Fed Funds Rate, we tend to see strong moves in the stock market.

For example, in December of 2015, the Fed raised rates for the first time since 2006. This created a short-term top as the S&P 500 fell 11%. Within 8 months the market was back at ATHs. From there the FED raised rates aggressively, as inflation, growth and the markets began to advance together on one of the best years within the secular bull market that started in 2009.

Today, we seem to be getting a similar reaction, yet at a more aggressive velocity. So, what happened? The short answer is that the FED has never waited this long to raise rates. Their “transitory” inflation stunt last year, coupled with inflation targets in the second half of 2021 that were also wildly detached from reality, placed them between a rock and a hard place.

On one hand, now that inflation is elevated, we are seeing the results of this reality filter through the economy. For example, real hourly wage growth is at an annualized pace of 12%, which is very inflationary. Yet, this growth in wages is still not enough to keep up with the annualized CPI print, causing real wage growth to be negative. Another example is that Real GDP grew at a 6.9% annual rate in Q4. Even with this excellent Q4 beat, real GDP for 2021 was only 1.6% (growth minus inflation), which was slower growth than the pre-COVID trend.

On the other hand, we have the U.S. Equity Market, which is dependent on an ongoing infusion of liquidity to maintain support. Though there is some room to deflate current prices in equities, letting the market crash for a sustained period is also not a viable option. Unlike in prior decades, the pivot towards manipulating a “Wealth Effect” in 2009 through FED policy, coupled with the near-universal adoption of 401Ks, over a decade of mostly 0% savings rates forcing money out of savings, and Wall Street’s infiltration of public and private retirement funds, has fundamentally tied the stock market to the economy.

The FED is now faced with allowing inflation to further erode growth, which is affecting middle to low-income households or attempting to deflate the stock market by focusing on curbing inflation. Going into Jan of 2022, we got the answer to that very difficult question, which was further backed by the recent FOMC Q&A. The market was expecting 1-2 rate hikes going into 2022 with a targeted roll off of QE to be in June-July. They then announced that 4 rate hikes were needed and an end to QE in March. This sudden increase of actions caused a panic out of risk assets and into energy, financials and various defensive assets, which is still playing out.

On top of a rushed tapering announcement, we have further evidence building that the cyclical growth in the global economy is peaking. So, unlike 2017 where inflation growth and rates rose together, we have the FED rushing to raise rates with growth and likely inflation peaking. Once again, this is unchartered territory, as the FED has never waited this long to act, which is creating uncertainty that is showing up in market volatility.

Like many, we did not expect such a sharp selloff so early into 2022. I do believe the market has moved too far too fast, which is common with market sentiment. This has set up the pricing in the worst-case scenario, and created oversold conditions that noticeably outpaced March of 2020. With sentiment at extremes, we only need the slightest upward surprise to trigger a reverse rally, which I believe the bond market is signaling.

How Bonds Relates to Tech and Why This Matters

Tech growth is considered a long-duration asset. When a stock has no current cashflow or earnings, yet is showing strong top-line growth with a large runway to expand, you are in essence buying a stake in the future cashflow of that business. These cashflows are far out in the future but are assumed to be very large. They are then discounted back to the present-value. Thus, a small change in the discount rate on the long duration cashflows has a material impact on current valuations.

As inflation rises, the costs associated with these company’s day-to-day businesses becomes more expensive. Furthermore, if they require on-going debts to fuel growth until profitable, the cost of borrowing goes up with an increase in yields. This forces the stockholder’s future stake on the company’s profitability to get repriced.

Equity investors are focused primarily on a company’s fundamentals and price action. Bond traders, on the other hand, are focused predominantly on economic growth and inflation. This is what drives the bond market, except for one key factor – FED policy. Because the Federal Reserve controls the Fed Funds Rate, which is the target yield set by the FOMC for commercial banks’ lending excess reserves overnight, this action filters out across the yield curve, having a greater effect on yields the closer you are to the Fed Funds Rate.

In other words, the closer a bond’s duration is to the front end of the curve, the less it is affected by growth and inflation expectations, and the more it is controlled by FED policy. As we move farther out on the yield curve, FED policy has less of an effect on bond buying. Instead, growth and inflation expectations drive these yields. This is important to understand when discussing what’s going on in the greater macro environment.

If growth and inflation expectations are driving long-duration yields, what does this mean for the recent upward moves in the 10-year yields across the world (Ex-China)?

With the CPI at 7% and the 10-year yielding 1.75%, the real yields on the 10-year are currently -6.25%. Inflation is obviously affecting the 10 year yield. However, with evidence that inflation is peaking, which will likely rollover in a decelerating economy, as well as evidence of one-time events not moving into 2022, the 10-year is likely also picking up on an unexpected and temporary growth surge.

Inflation

In 2022, the only major assets and sectors that are up are Energy, Oil, Commodities and the Dollar. In fact, the energy sector is the only sector that is up YTD, showing 17% gains in one month. Inflation fears are high and the expectation is that the 10-year yield is destined to reach 2.5%, and likely never see sub-2% again. All of this could happen, but I do not believe this is what’s causing the 10-year yield to make a higher high. Here are some points that show inflation may be peaking soon.

Our model measures the Rate of Change in both Inflation and Economic Growth. This matters because even though we are seeing a high reading of 7% in the CPI, the rate of change is slowing.

Note how Nov-21 marked a lower high in inflation’s rate of change than May-21. As we entered December, inflation is slowing and trending towards deceleration.

The recent CPI number showed a slowing down of both food and energy, which is a trend that will likely continue to further fuel the deceleration in inflation into 2022. With energy showing a noticeable topping pattern, a drawdown will bring inflation numbers down further.

The advance is oil prices is showing a strong divergence within the RSI, suggesting the upward advance in oil is due for a pullback. This would relieve the inflation pressures on the economy, pushing yields down and potentially being a temporary catalyst for long-duration assets.

Last Friday, we also saw the FED’s preferred method for gauging inflation, PCE, was up 5.8% on a YoY basis, while the core PCE was up 4.9% on a YoY basis. These are high numbers, which have been fully priced into stocks, yet they were well below the worst case scenarios. Moving into February and March inflation metrics will have higher comps to clear on a YoY basis, which should provide a cushion. As long as we continue to see CPI and PCE either come in-line or surprise to the downside in 2023, we should see buyers step back into the risk market.
From recent earning calls the one theme that is universal is the ongoing supply chain disruption, which is certainly contributing to the inflation we are seeing throughout the global economy. Interestingly, the continued trend in recent PMI reports as well as the Empire State MoM delivery Times Index are showing that purchasers are reporting quicker delivery times, which suggests that we have reached peak supply chain issues, and should see a further resolution in 2022.

The supply chain disruptions have forced businesses to build up their inventory, which has also contributed. The excellent Real GDP Print in Q4 was largely due to this inventory buildup, as businesses have reacted to the supply chain issues in 2021. This increase in inventory will not be repeated going into 2022 due to signals of a recovering supply chain and a cyclical slowdown in global growth.

All of the above data points suggest inflation should start to ease. This was further backed up by recent statements from Mathias Cormann, the secretary general of the OECD. Corman claimed that inflation should start to ease as global central banks update their policies to pre-pandemic levels.

Furthermore, the bond market is also suggesting an inflation slowdown, which is running counter to the popular narrative that inflation is only going to get worse. If inflation was going to remain elevated and continue upwards as a secular trend, we would likely see more of a reaction the further out on the yield curve we move, as well as a continued upward move to the 10-year yield.

Instead, with the 10 year making new highs and holding below the 2% line, the 30-year, which is looking more at longer cyclical trend in growth and inflation is still in a noticeable downtrend.

In other words, the bond market is not buying that the inflation (as well as growth) will continue its upward trend on a longer-term time frame. Instead, the 10-year could be signaling a temporary reprieve, which is not fully being priced into the equity market, and the 30-year is signaling that if this manifests, it will not be sustainable before the bigger cyclical slowdown resumes.

Growth

The below model measures various growth metrics within the U.S. economy that tend to be leading indicators for the market. This is important because cyclical growth affects the far end of the yield curve. Visually, you can see how the economy was slowing down going into the COVID crash, and how it appears to have peaked in Q4 of 2021.

This is confirmed with recent data worth pointing out:

Industrial production came in at -0.1% on a MoM basis, which compares to the historical average of 0.74%. This was well below the expectation of a 0.3% increase.
Retail sales also came in at well below expectations of -0.1% with a -1.9% MoM reading.
New Orders missed expectations.
The same can be said with manufacturing and business activity. The Manufacturing PMI came in an 11 month low, also surprising to the downside as it dipped below its 1-year moving average. The last time this happened was in September of 2018.

PMI in Services came in relatively strong; however, we needed more growth in this area of the U.S. economy to offset the decline in manufacturing.
This was further backed up with the recent ADP employment survey showing the economy lost 301,000 jobs in January, which was well below the expectation of an increase of 200,000. This was the first decline for ADP employment since December of 2020, and it was led by services.

Economic Conditions and Consumer Sentiment

Economic conditions, as measured by the US Current Economic Conditions Index, are at a similar measurement as March 2020, while consumer sentiment actually was lower in December than at the March low in 2020.

The reason for this is that though average hourly wage growth is up between 5.1% and 4.7% on a YoY basis over the last 2 months, real wage growth, when factored in for inflation, is down between -1.75% and -2.4%. As you can see in the above table, real wage growth has been negative since April of 2021, which has certainly been one of the main drivers for the deceleration in consumer sentiment that is filtering into economic growth.

Why is consumer sentiment so important? There are a few simple factors that when present, have preceded deflationary shocks to the stock market and economy. Consumer sentiment is one of them.

Going back to 1987 there is a clear correlation between consumer sentiment and stock market events. As consumer sentiment diverges from the stock market’s uptrend, what tends to follow is large correction or bear market. Today, we are seeing consumer sentiment hit levels that we last saw in 2011, which is something investors should be aware of.

The reason for this correlation is quite simple. If consumers feel good about their financials, they tend to spend more money on discretionary items. What tends to affect this sentiment, aside from a rare black swan event, is that inflation rises faster than wages. As consumers feel their real wages decline, they tend to spend less on discretionary items, and in periods of heightened inflation, consumers tend to take out debt to cover living expenses, which is what we have been seeing in the last half of 2021.

It’s important to know where we are in the business cycle for both short and long term investors. The larger cyclical trend is certainly suggesting that we have reached peak growth or close to it. However, recent data is providing some green shoots that the consumer is starting to feel better about the economy.

The Conference Board released their monthly Consumer Confidence index and report in January. Even though it fell to 113.8 from 115.2 in December, it was above the expected decline to 111. They acknowledge that the surprise was that even though inflation is high, and real hourly wages are down, the average consumer is still planning to buy homes and large ticket items including cars over the next 6 months.
This positive upside surprise was even further backed by Visa and American Express’s recent earnings call. AMEX said that card members’ spending was at an all-time high. They also confirmed that consumer travel and leisure spending is finally above pre-pandemic highs. They further claimed that they believe travel and leisure spending will continue to boost their revenues through 2022.
UPS recently reported a strong beat on both the top and bottom line. Their top-line growth showed a 11.5% YoY increase, which they claim was the result of strong e-commerce demand. They further raised their guidance for 2022. UPS further noted that they have raised their prices do to supply chain disruption, and the consumer has shown a willingness to pay these higher prices.
Two Federal Reserve chairs came out this week easing the probability of the most hawkish FED response in 2022, which has been priced into the equity market. The Federal Reserve Bank of Philadelphia President Patrick Harker expressed that the supply chains have a lot do with inflation pressures. He believes that 50 bp hike in March is not necessary. This approach was also expressed by the Atlanta President as well as the San Francisco President, supporting a more tempered approach to rate hikes in 2022.

With sentiment at rock bottom levels, this potential temporary return to growth, and likely peaking of inflation, which the bond market could be signaling, would be the catalyst that leads to a short to intermediate-term reprieve from the larger cyclical slowdown taking place. If this scenario manifests, and/or we see the FED continue to let up on the most aggressive plot program for 2022, we expect to see a bid in risk assets.

Is Tech Growth Over?

What will happen to long-duration assets and high beta when the larger global growth slowdown resumes, and if/when inflation continues its deceleration into 2022? Right now, many tech innovators are showing strong forward growth and even raising guidance into 2022, yet their stock is down anywhere between 30-70%. With growth assets left for dead, this would be the ideal environment to see a multi-week to multi-month relief rally that could last throughout the remainder of Q1 2022.

This is also lining up with our broad market Technical Analysis in the S&P 500

The above scenario lines up with the macro thesis outlined. It would suggest a multi-week/multi-month rally to ATHs within the broader market. This is supported by extreme sentiment readings. For example, the S&P 500 recently hit 22 on the daily RSI, a level only seen 5 times in the last 20 years, and each time showing positive returns 6 months from that reading.

On a micro view, it appears that the current bounce is still within the range of being a 4th wave within a 5 wave decline. Considering that the current c wave down is only showing a distinct 3 waves down, I wouldn't be surprised to see the market trend down into a lower 5th wave to complete the correction that started 9 weeks ago. If we do get another low into the Feb 3-11 time factor, I would consider this strong evidence that the above thesis is in play.

On the other hand, if the market moves above 4585-4600, that will complicate the above scenario on a technical basis. I would not like to see us trend up into the February time factor after only giving us 3 waves down. My current count, for reference, has us in the final leg lower now, but we would need to see one more leg to retest the lows, at minimum. If we do not see this, It would mean that we have likely only experienced the first leg down, the current bounce is a b wave, with a c wave to follow to new lows. We will simply need to see what the coming week gives us.

If we do rally to new highs, once this rally finishes, we will likely see a larger deflationary correction in both price and time. So, any rally that we get would be an opportunity to de-risk as we head further into 2022. Note the larger degree (4) wave in our future (shown above). this lines up with the slow move into the deflation/stagflation macro quadrant.

Keep in mind, as inflation and economic growth start their decline, it is only a matter of time before stocks get the message in a meaningful way. Because this Deflation/Stagflation cycle is looming over any short-term economic boost, it is likely only some indexes and some sectors will make new highs while others make lower highs. This is common with risk assets. They tend to lead us into slowdowns and lead us out, which appears to be the case, so far.

For example, one of our favorite microtrends in play, which is only in its middle innings, is Cloud. The best proxy for this trend is CLOU, which is an ETF of cloud pure-plays (shown below).

One thing that is undeniable is that the excess sentiment from 2020 in high tech began to correct in February of 2021. As the broad market moved forward, cloud, which is arguably the strongest microtrend in tech right now, is providing us with a very distinct corrective pattern outlined in blue. This would suggest that this flush-out in January could setup the next large degree uptrend.

Even with this potential on the table, I’m leaning more towards the red path. This suggests that the high beta tech world is experiencing its first leg down in a larger degree 2nd wave drawdown. Like we see with high beta, they tend to lead us into and out of larger declines. So, as SPX and the DOW would potentially make a new high, continuing their uptrend, high beta would be in a b wave. Thus, we would see high beta bottom first, and begin its new uptrend as the broader market likely makes one more lower low.

Conclusion

Regardless of what plays out, we believe that valuations in key names are oversold and setting up for a decent comeback. As long-term investors in tech trends, managing sentiment is crucial. Though cloud is growing and well within the middle innings of adoption economically, the sentiment regarding the stocks that are setup to benefit from this growth experience wide and emotional swings. Just like we saw an exuberance stretching sentiment in one direction in 2020/Q1 of 2021, we are now seeing the reverse effect, which we believe is setting up great buying opportunities amongst specific names for long-term investors willing to ride out any further volatility, which is likely.

We do believe the market shifted into a risk-off investing environment in Nov/Dec of 2021 due to the realization of peak growth and the projections of peak inflation soon after. However, the consumer is starting to perk up, appearing to accept the new norm of heightened inflation. This, coupled with the real possibility of a post-pandemic economy and heightened inflation, is causing long-duration assets to get sold, which is affecting tech growth. When coupled with the oversold conditions in tech growth, the macro environment could be setting up for a recovery rally that could last well into 2022. However, we see any renewed uptrend as an opportunity to de-risk, and raise some cash until the global growth story bottoms and begins a new cycle.

Microsoft, Tesla and Apple’s Strong Results Are Great for Tech Stocks

Posted on January 31, 2022August 28, 2026 by io-fund

Microsoft, Tesla and Apple reported last week (week of 01/24/22) and results came in strong across the group. Investors needs to stay aware of what these companies are doing as they can impact numerous industries, such as semiconductors, cloud and even financial/insurance markets.

Microsoft, Tesla and Apple strong results will likely be a tailwind for the broader technology complex. For example, Tesla, Microsoft and Apple are ramping capex, which will benefit key industries such as semiconductors.

As shown below, Microsoft has ramped capital expenditures, which has been driven by its expansion of cloud computing. This is a strong tailwind for cloud companies, and highlights that cloud remains an area of hyper growth.

Watch the video below for a quick recap of Microsoft, Apple and Tesla's latest earnings release and the impact that they have on the broader market.

I/O Fund’s Cloud Q4 2021 Earnings Overview

Posted on January 28, 2022August 28, 2026 by io-fund

Cloud reports in two waves, with the first wave of Q4 earnings ramping this week. Microsoft was the first to report on January 25th, and strength in cloud sales helped the company beat expectations. Specifically, Azure and other cloud services revenue increased 46% YoY in the quarter, which drove consolidated sales growth of 20% YoY, beating topline estimates by 2%. In the analysis that follows, I give a brief overview of the cloud industry and discuss key metrics that investors should be aware of heading into Q4 earnings.

Cloud: Top 10 EV/FWD Revenue Multiples

Below we ranked cloud stocks based on their EV/NTM sales multiples. Snowflake (SNOW) has the highest multiple in the cloud sector, as the cloud platform provider most recently reported accelerating topline growth coupled with improving retention and other key metrics. Snowflake is benefitting from increasing rates of data ingestion in the cloud environment, a secular tailwind that will likely continue to be strong in the near term.

SentinelOne (S), Zscaler (ZS) and Cloudflare (NET) follow Snowflake’s valuation and have been rewarded a relative premium in the cloud category. Each of these companies provides cybersecurity solutions, which is a market that will likely continue to see strong demand as companies increasingly digitize and migrate online. As companies move online, their attack surfaces increase, driving demand for cyber security solutions.

It is noteworthy that cloud valuations have normalized in 2022 following the heightened volatility in financial markets. Nonetheless, these leading cloud companies highlighted below will likely continue to report robust growth in the near term as cloud adoption remains a strong secular tailwind for the foreseeable future.

Cloud: Top 10 Three-month Forward YoY Growth Rates

Below is a chart of forward sales growth expectations for cloud stocks expected to grow the fastest in the upcoming quarter. Bill.com (BILL) is expected to report the fastest growth rate in our cloud universe heading into Q4 earnings at nearly 140% YoY. However, Bill.com recently completed its acquisition of Invoice2go, which impacts the company’s as-presented topline growth rate.

Absent M&A, Bill.com’s sales are still strong and recently grew 78% YoY on an organic basis, up from the 73% YoY organic growth rate in the prior quarter. Also noteworthy are the differing growth rates between Monday.com and Asana, two work productivity platforms that are both rapidly growing.

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Monday.com is expected to grow sales 75% YoY to $88 million while Asana is expected to grow sales slower at 54% YoY to $105 million in quarterly sales. The next few quarters will likely shed light on which platform is the leading work productivity solution going forward. Strength in enterprise will be a key metric to monitor to gain insight into which company is the leading work productivity platform.

Top 10 Weekly Share Price Movements

Below is a table of the weekly change in share price for our universe of cloud stocks (week ended 01/21). Markets have been volatile and every cloud stock in our universe was down last week as the Nasdaq declined by 7%. However, there were some relative outperformers, such as Workday (WDAY) and Zuora (ZUO), both of which support back-office operations, and the market may be expecting these companies to perform well given the labor shortage. Furthermore, Anaplan (PLAN), Box (BOX) and Dropbox (DBX) have also outperformed well on a YTD basis, and were up 4%, 2% and 3% relative to the Nasdaq’s 7% YTD decline. Lengthening the timeframe to 1-year and Box has performed the strongest of the three and is up 38% YoY. Likely contributing to its outperformance, Box has reported three consecutive quarters of acceleration topline growth, with sales rising 14% and billings increasing 25% YoY in Q3. The outperformance in billings suggests sales may continue to accelerate, and management guided for Q4 sales to accelerate to 15% YoY.

Top 10 Changes in sales growth estimates – last 90 days

The table below ranks cloud stocks by their topline revisions over the last 90 days. An increase in topline revisions signals that the Street believes that the company will grow faster than initially believed, which can result in outperformance. Confluent (CFLT) has had a 16% topline revisions over the last three-months, which leads cloud stocks. Confluent raised its FY2022 sales guide in November by 8% at the mid-point and also announced a partnership with Alibaba in December, both of which likely contributed to the higher topline estimates. Another standout is New Relic (NEWR), which saw a 9% rise in estimates over the last 90 days, driven by a strong earnings report as the company reported an acceleration in sales and guided for a further acceleration in Q2. New Relic’s shares are up 27% over the last three-months as the company recently revamped its product offering and migrated to a consumption billing model. Time will tell if the recent changes resulted in sustainable growth or if the recent changes provided only a short-term boost to growth.

Update on EV/Fwd revenue multiples:

Overall stats:

Overall cloud forward median: 8x
Top 5 cloud forward median: 24x
Overall cloud forward average: 10x

EV/FWD SALES:

As shown below, the median and average cloud EV/NTM sales multiple was trending up throughout 2021 but has since corrected in 2022 to levels last seen in early 2020. For instance, the median cloud EV/NTM revenue multiple was 8x in the most recent week, which is below the 9x median cloud multiple in May 2020. Furthermore, the delta between the average and median multiple has narrowed recently as the top valued cloud stocks have had their valuations compress, reducing the distortion on the average calculation. If Q4 growth comes in strong for the cloud category, expectations for forward growth will likely be revised higher, leading to a recovery in valuations.

Top 5 EV/FWD SALES:

In the chart below, we can more clearly see the large dispersion in cloud valuations, as the top 5 premium valued cloud stocks have had their EV/Fwd sales multiples expand since 2020. However, the top 5 valued cloud stocks have had their valuations halved since November. The median cloud stock has also experienced a multiple compression in recent weeks.

EV TO FWD Sales Growth Buckets:

We can further dissect the change in cloud valuations by breaking up the group into high growth (>30%), mid growth (>15% and <30%) and low growth (<15%). The below chart shows the historical valuations for stocks in various growth buckets. Each growth bucket has had their valuations compress since November, with the high growth bucket experiencing the steepest decline. The market may be expecting a deacceleration in growth in the near term, which would explain the correction in high growth valuations. If growth in cloud remains robust in Q4 and estimates come in strong, then valuations may rebound in the next few months. Microsoft’s strong cloud results discussed above suggest that cloud will continue to grow strongly in the near term.

Top EV TO FWD SALES:

The below chart provides a more holistic view of the cloud landscape heading into Q4 earnings, sorted by EV to Fwd revenue multiples. As mentioned above, Snowflake (SNOW) sports a premium multiple, driven in part by its accelerating topline, followed by three cyber security firms: SentinelOne (S), Zscaler (ZS) and Cloudflare (NET). Snowflake’s premium multiple is 380% above the cloud median of 8x, which may be warranted given its triple-digit accelerating topline growth rate.

Growth adjusted EV/Fwd Revenue (EV/Fwd Rev/Fwd Growth)

The last chart is based on EV to FWD sales but also takes into account forward growth expectations. By scaling valuation relative to forward growth, we can more clearly see which companies are cheapest relative to forward growth. A low value in the below chart means that a company is cheap relative to growth. Note that some names may be skewed due to acquisitions. It is interesting to note that Snowflake drops from having a 380% premium valuation relative to the median to a 33% premium after taking into account its strong growth rate. Alteryx and Splunk move to being some of the most expensive cloud stocks once we factor in their forward growth.

Finally, the last table we will be discussing includes aggregate cloud operating metrics. The below table illustrates the median topline growth, margins and FCF generation for the cloud industry. The median growth rate was 36%, and the market expects the median cloud stock to grow sales by 28% YoY in Q4. Gross margins remain robust at over 73% and cashflows are slightly positive at 3% of three-month sales for the median cloud company. Cloud remains a category exhibiting rapid growth, with strong margins but relatively low cashflows. As the category matures, cashflows will likely materially improve, rewarding investors in the long run.

While cloud valuations have been volatile in recent weeks, the category remains one of the fastest growing areas in the market. The I/O Fund believes in the long-run success of the cloud category, and we remain invested Find out what the Street is saying about cloud stocks headed into Q4 earnings in our I/O Fund’s Preview of 7 Cloud Stocks for Q4 Earnings.

The I/O Fund is a team of analysts that share their research publicly as they build a portfolio of 30 stocks. Our team has record results for a retail Fund and we also have four-digit gains on some of our free newsletter coverage. You can learn more about our premium service by clicking here or sign up for our free newsletter here.by clicking here or sign up for our free newsletter here.

Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.

I/O Fund’s Preview of 7 Cloud Stocks for Q4 Earnings

Posted on January 28, 2022August 28, 2026 by io-fund

IBM released upbeat results recently as the company beat consensus analysts’ revenue estimates by $740 million and adjusted EPS by $0.06. Even though IBM is not a pure-play cloud company, it has increased its focus in the cloud segment to stay in the race. IBM’s cloud revenues increased 16% YoY in Q4 and the results brought some relief to the investors after the recent volatility in the stock market.

On the other hand, Microsoft beat analysts’ revenue estimates by 1.9% and adjusted EPS by 6.9%. Microsoft Cloud revenue grew 32% to $22.1 billion. This is a positive sign for the broader cloud market. The company’s capex has also been strong, suggesting that management believes demand is structural.

Our Cloud companies’ earnings preview includes Dynatrace, Unity Software, JFrog, DigitalOcean, UiPath, Palantir, and BigCommerce. To understand valuations across the cloud companies and how the sector is positioned moving into earnings, please reference our analysis, “I/O Fund’s Cloud Q4 2021 Earnings Overview.”

Dynatrace Inc – Earnings on February 02nd

ARR: Annualized Recurring Revenue

Source: YCharts, Earnings Reports, and I/O FundYCharts, Earnings Reports, and I/O Fund

The company’s revenue in Q2 FY22 grew 34% YoY to $226.35 million. According to the analysts’ consensus estimates, revenue is expected to grow 28% YoY to $234.6 million in the next quarter. The management has been positive on the long-term growth prospects due to the digital transformation across industries. In the last earnings call, they mentioned that the near-term market expansion opportunities include the U.S. government's investments in cloud platforms.

Barclays analyst Raimo Lenschow has lowered the price target to $65 from $85. He has an Overweight rating. According to the analyst, the main question for software investors in 2022 is not around end demand, as there are "no issues there," but the correct valuation level for the space. "Are we going back to the long-term average, or should software bounce back to the more recent highs given the exciting structural growth profile? We are in the former camp,” says the analyst as he gets a bit cautious on the sector.

Jefferies analyst Brent Thill also lowered the price target to $60 from $75 and has kept the hold rating. He adjusted his targets across the app, infrastructure and security software spaces. “Software underperformed the S&P 500 by 15% in 2021 as overall valuations contracted 10%,” according to Thill, who thinks multiples in the space will continue to compress in 2022 as 80% of software names are expected to decelerate with "digital digestion" happening coming out of the pandemic.

Please note that the I/O Fund may or may not agree with the above financial analysts, yet we objectively report what the Street is saying. You may view our previous analysis of the company below:

3 Different Ways Companies Can Game Their Topline Growth Rates

Podcast with Motley Fool: I’m Bullish on These Trends for 2021

Unity Software Inc – Earnings on February 03rd

Source: YCharts, Earnings Reports, and I/O FundYCharts, Earnings Reports, and I/O Fund

Unity’s revenue grew by 43% YoY in Q3 and is expected to grow 34% to $295.29M in the next quarter. The company recently completed the acquisition of Weta Digital. Weta is a digital visual effects company known for its work in Lord of the Rings, Avatar, and Wonder Woman. The management believes that the company’s addressable market will increase by about $10 billion from the acquisition.

Piper Sandler analyst Brent Bracelin made an interesting point that the company is an indirect beneficiary of Activision and the Microsoft deal due to its unique position as the leading 3D creator platform for gaming, movies, AR/VR, and metaverse applications. The analyst also believes that Unity can expand its footprint as a 3D creator platform in the coming year.

Stifel analyst J. Parker Lane has initiated coverage of the company with a buy rating and a price target of $190. According to the analyst, “Unity's broad set of solutions has made the company a market leader in the gaming industry and positioned its platform to address emerging use cases in other industry verticals.” Lane further adds, “Additionally, the company's continued investment in research and development, tuck-in acquisitions, and presence in gaming has helped it withstand the headwinds of IDFA and gain market share in a competitive advertising market.”

Read our previous article on the company below:

IPO Round Up

JFrog Ltd – Earnings on February 10th

Source: YCharts, Earnings Reports, and I/O FundYCharts, Earnings Reports, and I/O Fund

The company’s revenue grew by 38% YoY in Q3 and the consensus analysts’ estimates suggest revenue to grow 36% to $58.1 million in the next quarter. The management expects revenue in the range of $57.5 million to $58.5 million and adjusted earnings per share of break-even to $0.01. For the full year, management expects revenue in the range of $205 million to $206 million, representing a growth of 36% YoY at the mid-point.

Stifel analyst Brad Reback has a buy rating and a $45 price target. He sees the company is well positioned to sustain 30%-plus revenue growth as it leverages its "unique position within the DevSecOps workflow.” He further believes that JFrog has a growing suite of solutions to help customers build, manage, distribute, and secure their respective applications more effectively and efficiently.

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Needham analyst Jack Andrews has a buy rating and a $71 price target. The analyst is positive on its leverage to strong macro demand trends for DevOps tools and practices, expects its key financial metrics to inflect higher. He further believes that the company is trading at a discount to the broader software companies creating a favorable risk/reward. At the time of the writing, the company was trading at 6.0x EV/Fwd revenue multiple.

Read our previous article on the company below:

Tech Growth Earnings Review for Q3 2020 – Part 2

DigitalOcean Inc – Tentative Earnings date is February 15th

Source: YCharts, Earnings Reports, and I/O FundYCharts, Earnings Reports, and I/O Fund

The company’s shares got listed in March 2021. The stock rose about 30% since its IPO. The consensus analysts’ estimates suggest revenue to grow 36% YoY to $119.02 million. The company’s net dollar retention rate (NDR) has shown improvement from 105% in Q4 20 to 116% in the last quarter. On the other hand, the growth rate has also shown acceleration for three consecutive quarters.

Source: Investor PresentationInvestor Presentation

William Blair analyst James Breen has initiated coverage of the company with an Outperform rating. He notes, “DigitalOcean is a comprehensive cloud platform designed to simplify cloud infrastructure for developers, start-ups, and small to midsize businesses.” He is also positive on the large and growing addressable market, which is expected to reach $116 billion by 2024.

UiPath Inc – Tentative Earnings date is February 15th

Source: YCharts, Earnings Reports, and I/O FundYCharts, Earnings Reports, and I/O Fund

UiPath had a successful listing in April 2021. The company’s revenue grew 50% YoY in Q3 and the consensus analysts’ estimates suggest revenue to grow 36% to $283.25M. The company is betting on the robotic process automation market (RPA). According to Precedence Research, the Robotic Process Automation market is expected to reach $23.9 billion by 2030, growing at a compound annual growth rate of 28% from 2021 to 2030.

Oppenheimer analyst Brian Schwartz has upgraded the company to Outperform with a $56 price target. In his opinion, “UiPath as the RPA market leader should benefit from a strong top-line driver with good business efficiency tools demand this year. At the same time, valuation risk has lessened considerably.”

Wells Fargo analyst Michael Turrin upgraded the company to Overweight with a price target of $60. The analyst sees a "potential tailwind emerging" for the company from a tightening labor market, which he thinks could benefit automation-centric vendors.

Palantir Inc – Tentative Earnings date is February 15th

Source: YCharts, Earnings Reports, and I/O FundYCharts, Earnings Reports, and I/O Fund

Palantir's revenue grew 36% YoY in Q3 and the consensus analysts estimate revenue to grow 30% to $418.07 million. The company's initial focus was on the government sector. The company's first platform Gotham was mainly built for government operatives in the defense and intelligence sector. The company continues to win deals from the public sector. On the other hand, the commercial revenue segment has also shown strong growth in the past few quarters.

Source: Investor PresentationInvestor Presentation

Jefferies analyst Brent Thill lowered the company’s price target to $24 from $31. He kept a Buy rating on the shares and adjusted his targets across the app, infrastructure, and security software spaces.

Deutsche Bank analyst Brad Zelnick lowered the firm's price target to $18 from $25 and kept a Hold rating on the shares. The analyst is bullish on software industry fundamentals but recommends a balanced approach with greater valuation sensitivity than in recent years.

Read our previous article on the company below:

Q1 Earnings Analysis for Etsy, Square, and Palantir

BigCommerce Inc – Tentative Earnings date is February 18th

ARR: Annual revenue run-rate

Source: YCharts, Earnings Reports, and I/O FundYCharts, Earnings Reports, and I/O Fund

The company’s revenue grew 49% YoY to $59.3 million in Q3. It included $5.9 million from the recently acquired Feedonomics, a data feed optimization platform. The consensus analysts estimate revenue to grow 43% to $61.82 million in the next quarter. Management expects revenue in the range of $61.3 million to $61.7 million, representing a growth of 42% to 43%. The guidance includes expected Feedonomics revenue of $7.1 million to $7.3 million. For the full year, the management expects revenue in the range of $216.2 million to $216.6 million, representing a growth of about 42%.

Needham analyst Scott Berg has been positive on the recent acquisition and also has a bullish stance on the company. In his words, "We came away incrementally more confident in BIGC’s positioning in the market entering 2022 and its growth opportunity upmarket as large organizations look to re-platform from legacy on-prem solutions to a flexible, multi-tenant SaaS platform." He has a buy rating and a price target of $85.

On the other hand, a few other Wall Street analysts have lowered the price target on the company due to overall weak market sentiment. KeyBanc analyst Josh Beck lowered the price target to $40 from $75. Barclays analyst Raimo Lenschow lowered the price target to $36 from $67.

The I/O Fund is a team of analysts that share their research publicly as they build a portfolio of 20 stocks. Our team has record results for a retail Fund and we also have four-digit gains on some of our free newsletter coverage. You can learn more about our premium service by clicking here or sign up for our free newsletter here.by clicking here or sign up for our free newsletter here.

Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.

Confluent Product Overview and Q3 Earnings

Posted on January 26, 2022June 30, 2026 by io-fund

The founding team of Apache Kafka worked at LInkedIn before leaving to start Confluent. Apache Kafka is used by thousands of companies for message streaming, such as LinkedIn, where a publish/subscribe model allows applications to share and create data in a serverless and microservices architecture. What Kafka solved for is the ingestion of events data in real-time with low latency.

At the time that Kafka was developed, LinkedIn was ingesting 1 billion events a day. The company is now ingesting 1 trillion per day. Kafka does this through a log that writes messages to a topic and is able to retain messages for a long time. Kafka is also used in stream processing by parallelizing the pipelines. Kafka Streams were built to increase simplicity while retaining the same amount of performance as a Spark streaming job.

As with Spark and other open-source projects, there is a marketplace for making the frameworks easier to use. Confluent Kafka opens up the amount of data that can be integrated, for example, to combine transactional data (orders, inventory) with sentiment-driven data (likes, page clicks). This helps with predictive analytics and also machine learning because the “data flow” allows for algorithms to work as they are intended to. This is what is meant by the title slide of the S-1 filing “Set Data in Motion.” In order for data to be in motion, Confluent’s platform connects data from many different sources.

Note: We first covered Confluent here and there is more additional information in that write-up on Spark, etc.covered Confluent here and there is more additional information in that write-up on Spark, etc.

Confluent created a Community License to help stave off companies like Amazon from commercializing its contributions. The Confluent license is a re-architected cloud-scale Kafka framework that is compatible with and improves on existing Kafka systems. Kafka sits in the middle of data analytics/warehousing and databases, which is technically above the operation layer and below the application layer. Rather than focus on data in rest, Confluent is reimagining what data in motion and in real-time looks like by introducing tools, connectors and a stream processing layer for Kafka workloads.

This is a good quote from the S-1 filing: “It is not just that companies are using more software–in a very real sense, they are actually becoming software.” By becoming more software driven, more businesses will rely on real-time data. Confluent believes that data in rest is not able to meet the current and future demands of software-driven businesses. Daily batch processing and static real-time queries or “point-in-time” queries with stored data lead to an unnecessarily large and tangled architecture that is not capable of data flow between applications.

Here's a quote from the most recent earnings call:

“I would say there's really no reason you want things to be processed in batch. Like it doesn't — there's nothing in the world that happens batch. Things in the world happen all the time, continuously and in real time” … “I touched on this a little bit in the call, is it's kind of just the digitization of business, like as the actual operation of the business moves into software, not just the analysis, not just the report you get in the morning, but the actual carrying out of the business as it plugs into e-commerce things, as it drives operations out in the world, as IoT bridges into other parts of the world, as machine learning kind of closes the loop on some of the decision-making and processes, that's really where you have to do it.”there's really no reason you want things to be processed in batch. Like it doesn't — there's nothing in the world that happens batch. Things in the world happen all the time, continuously and in real time” … “I touched on this a little bit in the call, is it's kind of just the digitization of business, like as the actual operation of the business moves into software, not just the analysis, not just the report you get in the morning, but the actual carrying out of the business as it plugs into e-commerce things, as it drives operations out in the world, as IoT bridges into other parts of the world, as machine learning kind of closes the loop on some of the decision-making and processes, that's really where you have to do it.”

Big data is more relevant for companies like LinkedIn where Kafka was developed. Big data is not the thesis rather the thesis is the increase in the number of companies that will need real-time data processing and real-time data analytics due to the increase in software driven architectures. The idea is that “data in motion” will replace data at rest, or batch data processing from traditional databases. This is also important for the real-time data streams that machine learning requires.

Confluent/Kafka is Built for the Constant Flow of Data (i.e., Event Streaming)

In our write-up on Big Data, Analytics (and ML) we discussed event streaming and the importance of Apache Kafka. Data streams are created from real-time events, such as messages, transactions or traffic conditions. Confluent opens up the amount of data that can be integrated, to combine transactional data (orders, inventory) with sentiment-driven data (likes, page clicks). This allows large amounts of data to be moved quickly especially for machine learning algorithms that are very data hungry for training models. Specifically, building an analytic model that is trained and makes predictions requires current information, will make predictions on new events in real time, and requires monitoring the infrastructure for accuracy and errors. With Confluent, this can be done by building streaming analytics on top of Kafka using compatible languages, such as Java, .NET or Python, or data scientists can use the SQL engine.

The goal is to reduce operational complexity, deliver optimal user experience and increase accuracy. Kafka Streams through Confluent do not require a cluster to be spun up, offers a single framework for streams of events, and reduces the number of pieces in a stream architecture. Kafka is already a popular framework that can handle trillions of events in one day, has over 5 million downloads from developers, and is used by Big Tech, stock exchanges and car manufacturers.

Source: Benchmarks from Confluent

Kafka is used by 70% of enterprises and this is helpful for Confluent, as the company offers a managed Kafka system. The company believes Kafka is the correct framework to lead a new data flow due to its high throughput of 600 megabytes per second and 5 milliseconds of latency. The maturity of the Kafka ecosystem is also large in terms of number of developers and partners. This important as it prevents Pulsar from taking market share from Kafka.

The three main improvements that the Confluent team made are:

1. to re-engineer Kafka to be cloud-native; especially easy management of elastic quotas (i.e., reads and writes on usage) and offering security with multitenancy.

2. offer a more complete Kafka ecosystem with over 120 connectors and a control plane that automates limit handling; also a SQL layer to bridge current database skills with streaming.

3. is more geographically inclined through cluster linking and other improvements for geographically distributed data; cluster linking allows Kafka clusters in different geographies to be connected for more real-time data flow.

Amazon MSK is a competing managed streaming service that is a good option for developers provisioning a Kafka cluster and a new streaming platform may not be needed in this case. Rather than re-architect Kafka to be cloud-native, Amazon MSK cloud-enabled it as provisioned infrastructure. This means Confluent is stronger than MSK with scaling elastically by offering elastic quotas, which eliminates the need to size clusters for spikes. It’s also stronger on multi-tenancy security. Amazon MSK also does not offer Kafka Connect or Kafka Streams. For more enterprise uses where Kafka Connect or Kafka Streams is required, then Confluent is more likely to be used to save development time and learning curve in writing Kafka Connects sinks and source.

The majority of the information above focuses on Confluent creating a new kind of data pipeline for streaming, yet Confluent will have another catalyst down the line when more streaming applications come to the market. The company wants to disrupt data at rest, and on the other hand, Confluent wants to reimagine the kind of applications that are available once data is in motion. The obvious example is machine learning applications yet the Metaverse will also need data to be in motion.

Confluent is partnered with nearly every database and data warehouse on the market, including Snowflake, Databricks, Google’s database and warehouse products like BigQuery and BigTable, Amazon DynamoDB and RedShift, Microsoft Azure Synapse, Cosmos Data Lake Storage and SQL Server, MongoDB Atlas, Redis, Oracle, My SQL, etcetera. For observability, Confluent is partnered with Datadog. Most recently, the company announced a partnership with Alibaba Cloud – which a bit surprising considering China’s hard stance against United States-based tech.

Q3 Earnings Overview

By Bradley Cipriano, CFA, CPA

In Q3, revenue grew 67% year-over-year to $102.6 million which is an acceleration from 64% growth last quarter. Confluent Cloud drove this acceleration with cloud revenue growing from 200% in the previous quarter compared to 245% in the current quarter. Remaining performance obligations also showed a slight acceleration from the previous quarter at 75% in Q3 compared to 72% in Q2.

The above $1 million ARR customer segment grew 90% year-over-year. Customers above $100,000 slightly decelerated from 51% growth to 48% growth. Due to the size of companies that need a managed solution for Kafka, this is an important key metric to determining Confluent’s growth in the future. Confluent does have a pay-as-you-go option yet managed services for Kafka will likely attract a higher paying customer.

Covid may have affected Confluent’s net retention rate, which declined from 134% in 2019 to 125% in 2020. This number has accelerated to being greater than 130% in Q3. The company is providing near-term targets of 120% and long-term targets of 130% because of Confluent Cloud’s consumption model. Here’s a quote regarding a higher target for NRR in the future: “We're actually at our longer-term target of above 130% and the profile of like in the dynamics of NRR as it relates to our two main products, Confluent Platform and Confluent Cloud, our thesis is that Confluent Cloud will have a higher NRR profile over time because it's elastic, it's consumption-based and there's very little friction in terms of expansion, whereas with Confluent Platform, we're renegotiating deals, etc.”

Adjusted operating losses increased to ($42.6) million from ($19.7) million in adjusted operating losses in the year-ago quarter. The fiscal year estimate for operating losses is ($169) million or adjusted EPS of ($0.91). Free cash flow decreased from ($10.3) million to ($20.6) million.

Confluent Cloud can impact gross margin, at 69.4% down from 71.6%, and subscription margin at 76.8% down from 78.9% a year ago. As the company reaches scale, this is expected to remain around 70%. The company had $1.3 billion in cash as of Q3, which was relatively flat QoQ, and no long-term debt outside of $34 million in lease liabilities. Confluent also receives a significant portion of its revenue upfront in cash, which helps pay for working capital and reduces the need for immediate outside financing. By netting AR from DR (net DR), we can see that upfront cash payments (proxied by net DR) slightly increased QoQ from 83% to 84% of quarterly sales.

Furthermore, there was a degree of conservatism in Confluent’s deferred revenue balance. Revenue recognized from deferred revenue was $118 million YTD, or 74% of beginning deferred revenue. This was down from 77% in the prior quarter, signaling that the recent acceleration in sales was organic and was not driven by pulling forward deferred revenue recognition. This trend also provides more support for future sales, as there is relatively more deferred revenue on the balance sheet, providing a ‘floor’ for future growth.

Confluent also states that RPO is an important metric to monitor in order to measure the health of the sales pipeline. In Confluent’s first conference call as a public company (Q2), CFO Steffan Tomlinson explained that:

“Given the various revenue components and billing terms in our model, remaining performance obligations or RPO and current RPO rather than billings, are important metrics to measure the health of the business. RPO provides insight into the organic momentum of our business as it represents contractually committed revenue to be recognized in the future regardless of billing terms and variability in cloud consumption pattern. RPO provides insight into the organic momentum of our business as it represents contractually committed revenue to be recognized in the future regardless of billing terms and variability in cloud consumption pattern”

As mentioned above, RPO was up 75% YoY to $385 million and RPO to be recognized in the NTM was up 65% YoY to $258 million, both of which represented an acceleration from the 72% and 63% YoY growth rate in the prior quarter, respectively. The acceleration in RPO provides support for future sales. Coupled with the relatively higher rates of upfront cash receipts, Confluent appears well positioned to continue to grow strongly in the near term.

Looking forward, management guided that Q4 revenue will rise 55% YoY $109 million, which would mark a deacceleration from the most recent growth rate of 67% YoY growth. However, this estimate is likely conservative, as management guided that Q3 sales would grow 46% YoY to $90 million and actual Q3 sales grew 67% YoY to $103 million. If we assume that Confluent beats it guide by a similar amount in Q4 as it did in Q3 ($13 million), then Q4 sales growth will accelerate to 73% YoY (this is merely an observation – no guarantees). To be complete, management also guided for Q4 EPS to be a loss of-$0.22.

For fiscal year 2021, the company is guiding for revenues to grow 60% at the midpoint to $377 million, up $27 million from its prior guide of $350 million. For fiscal year 2022, the company is guiding for sales to grow 36% YoY to $511 million, and for Q1 ’22 sales to be flat on a sequential basis, while Q4 ’22 is expected to be the strongest quarter.

Management’s back-end weighted guidance is due to two key trends: 1) the timing of large enterprise deals which are clustered near year-end and are recognized in the quarter of signing, skewing revenue and 2) the recent ramp in sales hiring, which management noted that it takes “roughly four quarters for folks to get fully productive”.

We suspect that management’s forward guide is likely conservative. For instance, cash support for sales increased and RPO also accelerated. Looking forward, Confluent has 64% of its NTM sales guide already secured via RPO commitments, which is high relative to peers. For example, MongoDB’s NTM RPO is 20% of its NTM sales estimate. Furthermore, 70% of Confluent’s NTM RPO is locked-in with upfront cash payments (deferred revenue), further increasing the quality of its forward guide.

Confluent is being conservative with their forward guide likely to ensure that they beat expectations as a new company. While there is limited financial history, there are signs of conservatism as upfront cash receipts increased and RPO accelerated. Confluent remains well positioned to benefit from the secular tailwinds driving “data in motion” in the cloud environment and should continue to grow strongly in 2022.

Work-from-Home Trend: Monday.com and Asana

Posted on January 21, 2022June 30, 2026 by io-fund

My Zoom thesis is the same as my Monday.com and Asana thesis and it’s a very simple thesis – work-from-home is here to stay. Perhaps centrally located workers will go back into the office, yet teams are used to working remote and as long as a percentage of the office is hybrid or remote, then productivity software will need to be implemented company wide.

We’ve covered this from different angles but our most recent trend update is found here where we said in November:

“One of the main reasons we want to continue holding Zoom is that hybrid work-from-home is an important trend for our portfolio. Asana’s growth is participating in this trend and Monday.com is also participating in the productivity tools category with work-from-home tailwinds. When we were down 40% in Asana, the portfolio manager Knox asked about my conviction and I said “we need to have more than Zoom for work-from-home – productivity tools will be winners this year.” The chances this trend wouldn’t carry Asana was low. Now, I’m reiterating “we don’t want to give up on the leader in work-from-home because the trend is not done yet.” On a side note, we will likely revisit Asana OR we will look at Monday.com if these companies get into a buy zone.

According to Gartner, 51% of knowledge workers will be working remotely by the end of 2021 up from 27% of knowledge workers in 2019. Looking forward, Gartner expects that 31% of all workers in the global workforce will be a mix of remote and hybrid with the United States at 53% of its workforce – in other words, not only knowledge workers. The senior research director who worked on the report stated, “Through 2024, organizations will be forced to bring forward digital business transformation plans by at least five years. Those plans will have to adapt to a post-COVID-19 world that involves permanently higher adoption of remote work and digital touchpoints.”

This part regarding the expansion of work-from-home was updated with new percentages in August:

“Regarding productivity tools, Gartner reports 80% of workers are using collaboration tools for work, up from roughly half in 2019.

Here’s the main statistic we think adds to our bull case: “Specifically, the use of meeting solutions surged during the pandemic. While workers globally reported that they spent, on average, 63% of their meeting time in-person in 2019, that number dropped to 33% by 2021 as more meetings took place over audio and video-enabled meeting solutions. The shift away from in-person meetings is expected to continue. Gartner predicts that by 2024, in-person meetings will drop from 60% of enterprise meetings to 25%, driven by remote work and changing workforce demographics.”

In all instances, we are seeing higher penetration over the next few years. Productivity tools or Work Management tools (synonymous) are a safer bet than most during times of inflation because these companies drive down costs while increasing productivity. We see Monday.com and Asana counting enterprise accounts in the >$50,000 range. That means one employee located outside the Bay Area or Manhattan (or other tech hubs) can absorb the entire cost of a productivity suite for most companies if we figure a Bay Area employee goes for $150,000 in tech where they normally go for $100,000 in tech. This is a very common spread to see between salaries and locations due to cost of living. Some companies have their entire work force remote, such as Shopify or Gitlab, while others are global teams with a need to bridge productivity.

Bradley covered remote outsourcing company Grid Dynamics here which you could see become a moonshot ($2.5 billion market cap) when the technicals are ready (timing). This report highlights a particular company that offers outsourcing for technical labor including big data and analytics, AI/machine learning and cloud computing. The company’s clients are United States based yet 90% of the talent is global. The competitive salaries outside of tech hubs helps to cover the costs from companies like Asana and Monday.com. Even if you’re not interested in a small cap company, it’s worth a read as it broadens the discussion around work-from-home increasing in penetration from a different yet complimentary angle.

Here's a quote from Asana on ROI: “The Asana Work Graph is uniquely architected to give organizations cross functional capabilities that deliver measurable business value and according to IDC, an estimated 225% ROI in the first year.”

MNDY vs ASAN: Top Line Vs Enterprise

I’ve seen a few comparisons between these companies floating around but I want to get to the core of the matter as to why our position is split rather than fully concentrated in one company.

Retail has decided Monday.com is the winner and institutions are certainly favoring Asana with ownership 9:1 (Asana). Some of the low institutional ownership in MNDY could be the lock-up recently expired and institutions will enter over 1-2 earnings reports assuming insiders have had the opportunity to sell.

I liked Asana last year because the management was low risk and the product is quite good, whereas Monday’s location in Israel introduces a small element of risk. We cover Israeli Shekel FX below.

Monday blew the doors off with the >$50,000 account growth. This key metric may be the stand-out key metricthe stand-out key metric from the earnings season from any/all companies. We certainly know where Monday.com is spending its cash, which is sales and marketing, to make sure they leave no stone unturned in claiming ground.

You’ll see Bradley discuss below why the >$50,000 account growth does not tell the full story, primarily that Asana attracts higher value customers. For example, Asana has one customer nearing 1% of revenue in spend, so roughly $3 million. This account counts as one of these >$50,000 customers despite equaling 60 of these accounts (if we figure $50K in spend) or 30 of the accounts if you figure $100K in spend.

Therefore, the stand-out key metric was certainly impressive on MNDY but we are not ready to name a winner. Right now, Asana is the enterprise leader and institutions prefer this more than top line growth because generally speaking it’s more sustainable long-term due to upgrades. We also note below that the earnings call from Asana was stronger in terms of larger enterprise accounts, which I highlight below.

Monday.com and Asana: Key Metrics Overview

Monday.com grew enterprise customers to 185 in the third quarter, up 231%, an acceleration from 226% last quarter. Monday.com has increased enterprise customers from the 140-185 range a year ago to 630. This puts the company on Asana’s heels with 739 enterprise customers and 132% growth. Monday.com’s full year revenue is at $300 million compared to Asana’s estimates of $372 million.

Workdocs is a newer product that Monday.com introduced. If you’re a power user of Google Docs or something similar than it’s easy to visualize the pain point that Monday is solving for, which is that cloud docs should be integrated directly into the productivity software. These docs can be updated in real-time when data sources change.

Marketplace is certainly not new yet evolves frequently as new apps are added, including apps like Typeform for customer data, embedded social media for marketing teams, whiteboards and integrations with Zoom and Airtable. The goal is to build a diverse marketplace so teams don’t need to leave the platform for an individual app. Where Monday.com excels is the branding and advertisements. The company’s Work OS is very catchy and clearly communicates the vision. The company’s advertising strategy is critical to its growth and this was mentioned on the call:

“As a follow-up, I was chuckling because I saw another monday.com ad on my browser when I logged in this morning, to listen to the call. And I click every time I see one of your ads. I — a couple times a week. I think these advertising campaigns are brilliant. And they're fantastic if you had one that did have the gorilla or Bigfoot or something like that, they're super creative.”

The question was in regards to IDFA which Monday said they should do just fine as they have more of a contextual ad strategy. But this bears pointing out that Monday spends 81.2% of its revenue on S&M compared to Asana 75%. With that said, Monday spends less on R&D at 24% of revenue compared to Asana at 54%. During a major expansion phase, the market can be forgiving of expenses because the point is growth-at-all-cost so upgrades can offset losses. The point is getting customers in the door and then proving your upmarket strategy is strong.

Here's what management said:

“As a reminder, one more thing that because we generate such a huge capital efficiency of [indiscernible], if you think about every dollar that we burn since inception, is — we're getting like $3 in terms of pay [indiscernible] definitely for us, it would be stupid not to continue to invest.”

A paramount discussion on Monday.com is the Israeli shekel exchange rate. Due to Monday.com being headquartered in Israel, they have to take into account potentially hedging any fluctuations. Bradley goes more into this below including cash balances and debt in his section after I review Asana.

*Should* we see Asana inch past Monday.com on gains despite lower growth, I think uncertainty on FX could be one reason. With that said, management was upbeat about the question:

“Obviously, this year we took the dollar rate 3.2 and now the shekel at 3.1. But we are trying to proactively edge against it. We don't see seeing a big issue due to the cost breakdown. However, this is something that we are very much focused on with regards to today's value shekel though are. On the revenue side, most of our revenue is collected in the U.S dollar and a small portion is in Euro and British pound. So we are also looking at edging strategies to make sure that we're also protecting our top line where possible.”

Regarding the Israeli shekel, what to watch for here is whether institutional ownership grows and/or if this question keeps coming up on the call. Bradley discusses this more below.

Asana

A few things stand out about Asana. The first is the transparency on number of users rather than segments of users. The company has 2 million paying users now and paid customers of 114,000. What we got from MNDY is that 40,000 accounts are using Workdocs so a bit unclear on overall number. Most importantly, Asana’s 5K+ customer base is 68% of revenue and growing 96%.

The enterprise segment of >$50,000 represented the highest growth segment in the quarter at 132%, with the second tier at >$5,000 up 58% year-over-year, and overall customer growth up 28% year-over-year. The company also broke out net retention rate for each segment with 145% NRR in the enterprise segment, 130% in the second tier and 120% overall customers.

Here was the more direct question on the call regarding Asana’s financials:

“Tim, just curious kind of underneath the surface, there’s a lot of surface level metrics decelerating revenue, RPO and billings down, realizing you have tough comps, but I think many are asking.”

Management’s response was this:

“And then over time, the marginal cost or the marginal cost to have them increase or grow becomes less, because based on our net expansion rate, for both our 5K and our 50K, you see that they’ve improved to pre-pandemic levels now, 130% on the 5K and above, and then over 145K on the 50k and above.

But your question is really about the billings and RPO, and I think, we’ve said, because a third of our base is still on monthly that billings isn’t the best indicator for how we grow our business over time.

And I’ll just add, I think that, part of your question is, is that a harbinger of doom or something like that, and so I’ll just reiterate, we’re really excited about the enterprise momentum and we raised guidance for next quarter by $12 million.”

Comparing recent financials

By Bradley Cipriano

Monday.com and Asana have very similar financial metrics, but there are slight differences. Monday has more cash and relatively higher rates of deferred revenue, which positions it better for a near term acceleration in sales growth. However, Asana is investing in its future with higher rates in research and development (R&D) expense and has larger enterprise deals, suggesting that Asana may be prioritizing long-term growth over short term revenue acceleration. I discuss these trends in more detail below.

Starting with the income statement, Monday is growing faster than Asana and has higher earnings. For instance, Monday’s Q3 sales increased 95% YoY to $83 million, which was an acceleration, while Asana’s Q3 sales grew 70% YoY to $100 million, which was a deacceleration. Furthermore, Monday has exhibited greater leverage as its quarterly gross profit increased $11 million QoQ while its operating expenses (opex) grew $13 million sequentially. This compares favorably to Asana, which also saw its gross profit increase $11 million QoQ but its opex grew by $19 million on a sequential basis.

The discrepancy in opex growth was mainly driven by R&D expense, as Asana’s R&D margin was 54%, or more than double Monday’s 24% R&D margin. Furthermore, Monday is spending more on sales and marketing (S&M) expense, as its S&M margin was 81% vs 73% at Asana. In short, Monday’s topline is growing faster but it is spending more on marketing, while Asana’s losses are larger but it is investing more in research and development. Investments in R&D position Asana well for long-term growth while investments in S&M position Monday well for near term growth.

On top of exhibiting faster growth and higher earnings, Monday also reported positive free cashflow (FCF) during Q3, as quarterly FCF increased to $1 million. This compares favorably to Asana, as its three-month FCF was an outflow of -$29 million. On its Q3 call, Monday’s Co-CEO Eliran Glazer explained that the positive cashflows were driven by efficient collections, but that the company does not target to be cash flow positive in the near future or to generate cash.

It is important to note that quarterly cashflows can be lumpy and on a TTM basis, Monday and Asana reported that FCF was an outflow of -$108 million and -$107 million, respectively, after accounting for stock-based compensation (companies can increase FCF by increasing SBC, so excluding SBC improves the presentation of true FCF). In short, both companies cashflow performances were relatively the same over the last twelve months.

Another key metric for both companies is deferred revenues, since around 70% of customer pay upfront for their subscriptions for both companies. Monday’s deferred revenue was 141% of three-month sales while Asana’s was 154% of three-month sales. Higher rates of deferred revenue suggests that customers are paying more cash upfront, a sign of strength. Furthermore, as the name implies, deferred revenue turns into sales in the future, which provides more support for future sales growth. However, we also must consider customers that pay arrears by subtracting accounts receivables from deferred revenue (net DR). Monday’s net DR balance was 133% of three-month sales while Asana’s was 108%, signaling that Monday has received relatively more cash for its sales than Asana has. This trend positions Monday relatively better for a near term acceleration in revenue since the company has relatively higher rates of upfront customer cash payments, which effectively locks in future revenue.

Monday also has more cash on balance with $876 million in cash following its recent IPO and no debt. This compares favorably to Asana, which has $343 million of cash and over $240 million in long-term debt (mostly lease liabilities). It is favorable that Monday has relatively more upfront cash payments in deferred revenue and a larger net cash position, which gives it ample liquidity to scale going forward.

However, as Beth mentioned above, Asana does appear to be outperforming Monday with enterprise customers. While Monday’s >$50,000 growth was more robust than Asana’s, Asana has larger customers. Specifically, on its Q3 call, Asana’s COO Anne Raimondi stated that the company was closing seven and eight figure deals. She explained that: “In fact, it’s worth mentioning with a tremendous momentum in the enterprise over the last few quarters, we’ve been closing seven and eight figure deals and we’re still early”. Monday is not closing similar sized deals, as its Co-CEO Roy Mann stated on the Q3 call that “We are approaching seven figures transactions”, implying that the company has not yet booked a seven figure contract.

Lastly, another minor difference, that could prove to be a significant one in the long run, is the different headquarters of each company. Monday is based in Israel and around half of its expenses are in the Israeli shekel. The shekel has appreciated strongly relative to the dollar in recent months. This is unfavorable, since the majority of Monday’s revenues are in dollars but half of its expenses are in the shekel. As the shekel appreciates to the dollar, it makes it relatively more expensive to pay salaries in the shekel, which lowers shareholder returns. This compares unfavorably to Asana, which is based in the US and is not exposed to significant FX headwinds. If the shekel continues to appreciate, Monday’s earnings will weaken and will be lower quality relative to Asana’s. However, the reverse is also true, if the shekel depreciates relative to the dollar, then Monday’s expenses will be lower which will improve shareholder returns.

In summary, both companies have very similar metrics but there are slight differences between the two. Monday has reported strong topline growth, which may be due to its higher investments in marketing, while Asana has lower earnings which were driven by its larger investments in research and development. This trend positions Monday well for a near term acceleration in growth but Asana may be positioned better for long-term growth. Monday also has more liquidity and higher rates of net deferred revenue, which positions the company well to scale in the near term.

In the near term, Monday may be best positioned to accelerate growth due to its higher deferred revenue and cash balances, but Asana has been stronger with larger enterprise customers and is investing more in long-term growth. We will likely hold both companies until there is more evidence of who the clear leader is going forward. The upcoming release of Q4 results coupled with the 10K (20F) from both companies should shed more light on who is outperforming.

I/O Fund’s Semiconductor Q4 2021 Earnings Preview

Posted on January 21, 2022August 28, 2026 by io-fund

TSMC broke off Q4 semiconductor earnings after it reported on 01/13/22. Sales at the massive foundry pure play grew 21% YoY in Q4, and net income increased 16%, setting the stage for a strong earnings season for the semiconductor industry. In the analysis that follows, I give a brief overview of the semiconductor industry and discuss key metrics that investors should be aware of heading in Q4 earnings.

Semiconductors: Top 10 EV/FWD Revenue Multiples

Below is a table of semiconductor stocks ranked by their EV/1-year forward sales multiples, along with their most recent YoY growth rate, gross and free cashflow (FCF) margins. Semiconductors experienced strong demand in 2021 and the market has rewarded the outperformers with premium multiples. Nvidia (NVDA) sports the highest multiple of the group at 21x, likely due to Nvidia’s dominate position with GPUs and its strong topline growth rate.

There are a cluster of other top performing semiconductor firms valued around 11x to 14x EV/Fwd revenues, such as ASML, a leading semiconductor equipment provider that has seen strong demand as capacity in the sector ramps up to address supply issues. Another standout is WOLF, which has seen strong demand for silicon carbide solutions, a relatively new technology that is being adopted by the automotive market. WOLF claims that it is the sole vertically integrated supplier of silicon carbide for high power and RF application, which likely contributes to its premium multiple.

Semiconductors: Top 10 Three-month Forward YoY Growth Rates

Below is a chart of forward sales growth expectations for the semiconductor industry. Looking forward, AEHR is forecasted to grow the strongest from our universe of semiconductor stocks (n=74). The company is benefiting from tailwinds in EV and datacenter exposures, which are expected to ramp in the near term. INDI is also expected to grow strongly in the upcoming quarter as the company guided for more than 50% sequential growth heading into Q4, driven by demand for its solutions in the automotive sector and a recent acquisition. RMBS is also expected to grow nearly 100% next quarter, as demand for its memory interface chips remains strong in the current environment. Our research suggests that demand for automotive and memory solutions in the semiconductor industry are strong tailwinds heading into Q4 earnings.

Top 10 Weekly Share Price Movements

Below is a table of the weekly change in share price for our universe of semiconductor stocks (week ended 01/14). TSM has already reported Q4 results, and the foundry pure play’s results came in strong as the company guided Q1 2022 sales to increase 8% sequentially, up from its most recent 6% QoQ growth rate. The strong guide likely led to the strong price action in TSM’s shares. Many other top performing semiconductor stocks are equipment providers, such as VECO, UCTT, ICHR, AMAT and LRCX. The market is likely pricing in increased demand for semiconductor equipment, as fab expansions lead to more equipment purchases going forward.

Top 10 Changes in sales growth estimates – last 90 days

The table below ranks the semiconductor companies by their topline revisions over the last 90 days. An increase in topline revisions signals that the Street believes that the company will grow faster than initially believed. INDI has had the largest topline revision in the semiconductor industry, as the company guided for 50% sequential growth, which includes benefits from its recent acquisition of TeraXion. SYNA has also had its topline estimates revised up by 13% over the last 90 days, driven in part by its recent acquisition of DSP Group, which the company explained would help it expand its ability to cross-sell AI solutions at the edge of the network. The market likely agrees with management and its share are up 40% over the last 90 days.

Update on EV/Fwd revenue multiples:

Overall stats:

Overall Semiconductor forward median: 5x
Top 5 Semiconductor forward median: 14x
Overall Semiconductor forward average: 6x

EV/FWD SALES:

As shown below, the median and average semiconductor EV/1-year forward sales multiple has trended up since April 2020. Semiconductor valuations have increased as demand for semis has remained robust, driven by a global chip shortage. The world may be entering a new normal where semiconductors are used in everything, such as datacenters, automotive, and IoT devices. This trend reduces their cyclical nature and has likely led the market to reward the industry with a premium multiple. This will likely be a multi-year trend and if the semiconductors cycles continue to shorten, then multiples may continue to rise.

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Top 5 EV/FWD SALES:

In the chart below, we can more clearly see the large dispersion in semiconductor valuations, as the top 5 premium valued semiconductor stocks have had their EV/Fwd sales multiples expand since 2020. The median multiple has also expanded, but at a slower pace. However, the delta between the top 5 and the median semiconductor stock has started to narrow in 2022, as the median valuation remained relatively static while the top 5 has had their valuations compress. If Q4 earnings come in strong, then the market may push valuations back up to their historic highs.

EV TO FWD Sales Growth Buckets:

We can further dissect the change in semiconductor valuations by breaking up the group into high growth (>30%), mid growth (>15% and <30%) and low growth (<15%). The below chart shows the historical valuations for stocks in various growth buckets. High growth semiconductor stocks have had their valuations compress recently relative to mid-growth semiconductors. Q4 earnings will be pivotal for the high growth semiconductors, and the market will likely reward the group with higher multiples if growth remains strong going forward.

Top EV TO FWD SALES:

The below chart provides a more holistic view of the semiconductor industry ahead of Q4 earnings, sorted by their EV to Fwd revenue multiples. NVDA has the richest valuation and is valued well above the peer median of 5x. Nvidia is benefitting from multiple tailwinds, such as data center growth, gaming, cryptocurrency, and automotive. Lead tech analyst Beth Kindig outlined why she believes that Nvidia will be worth more than Apple in the future, stating that “I believe Nvidia is capable of out-performing all five FAAMG stocks and will surpass even Apple’s valuation in the next five years”.

Growth adjusted EV/Fwd Revenue (EV/Fwd Rev/Fwd Growth)

The last chart is based on EV to FWD sales but also takes into account forward growth expectations. By scaling valuation relative to forward growth, we can more clearly see which companies are cheapest relative to forward growth. A low value in the below chart means that a company is cheap relative to growth. Note that some names may be skewed due to acquisitions. It is interesting to note that NVDA falls from being the richest valued semiconductor stock to closer to the median once you take into account its strong growth rate. TXN and MTSI are some of the most expensive semiconductor stocks based on this metric and others such as AEHR and KLIC are cheapest (not shown).

Finally, the last table we will be discussing includes aggregate semiconductor operating metrics. The below table illustrates the median topline growth, margins and FCF generation for the semiconductor industry. The median growth rate was 32%, and the market expects the median semiconductor stock to grow 20% in Q4. Gross margin remains robust at nearly 50% and cashflows are also healthy at 16% of three-month sales for the median semiconductor. Strong growth, margins and cashflows highlight the strong health of the semiconductor industry, which makes sense considering the outsized demand for chips in the current market.

Strong growth and positive cashflows signal that the semiconductor industry is healthy and performing well. The I/O Fund expects this strength to continue going forward. Find out which semiconductor stocks the I/O Fund will be watching heading into Q4 earnings in our I/O Fund’s Preview of 7 Semiconductor Stocks Ahead of Q4 Earnings.

Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.

I/O Fund’s Preview of 7 Semiconductor Stocks Ahead of Q4 Earnings

Posted on January 21, 2022August 28, 2026 by io-fund

It is the first of the series of earnings previews for Q4. We chose Lam Research, AMD, Teradyne, Nvidia, Texas Instruments, Broadcom, and Qualcomm for the Semiconductor sector. To understand valuations across semis and how the sector is positioned moving into earnings, please reference our analysis, “I/O Fund’s Semiconductor Q4 2021 Earnings Preview.”

Lam Research – Earnings on January 26th

Source: YCharts and Earnings reportsYCharts and Earnings reports

According to the analysts’ consensus estimates, revenue is expected to grow 28% YoY for the next quarter. In the last earnings call, the management mentioned that early indication suggests that Wafer Fab Equipment will show another year of growth in the calendar year 2022. It will be interesting to hear their comments on WFE in the next earnings call, particularly since the analysts forecast its revenue growth to slow down for the next two fiscal years. Revenue is expected to grow 4% in the FY23 and FY24, down from 21% for FY22.

Wells Fargo in its recent report says that the chip-equipment makers will remain volatile in the upcoming earnings season. Analyst Joe Quatrochi said that trading in semiconductor capital equipment stocks, "could remain relatively volatile" over the near term as share prices are likely to be affected by any changes that companies make to their quarterly earnings and sales outlook.

With regard to Lam Research, he says that the ongoing supply chain issues and the company ramping up production at a new facility in Malaysia are having a negative impact on the company’s gross margins.

Barclays analyst Blayne Curtis raised the firm's price target to $750 from $625 and keeps an Overweight rating on the shares. The analyst sees "positive outlooks providing some relief" for the semiconductor group but still struggles with "just how much upside is left as cyclicality still looms for many names."

Mizuho analyst Vijay Rakesh raised the firm's price target to $770 from $700 and keeps a Buy rating on the shares. The analyst gave his outlook across semis and automotive technologies and his top sectors in 2022 are memory, wafer fab equipment, data center, 5G and electric vehicles.

Please note, the I/O Fund may or may not agree with the financial analysts mentioned above yet we objectively report what the Street is saying. You may view our previous analysis on the company below:

I/O Fund’s Preview of 7 Semiconductor Stocks Ahead of Q3 Earnings

Advanced Micro Devices Inc – Earnings on February 1st

Source: YCharts and Earnings reportsYCharts and Earnings reports

AMD’s stock rose around 570% in the past three years. The company’s strong revenue growth is due to its superior products have also boosted its share price.

The company’s revenue grew more than 50% YoY in the last five quarters. The analysts’ consensus estimates suggest revenue to grow 40% YoY in the next quarter to $4.53 billion. The company’s data center revenue more than doubled in the last quarter and it will be interesting to hear the management’s comments on this in the next earnings call.

Source: YCharts

Wells Fargo analyst Aaron Rakers has an overweight rating and a $180 price target. He believes that the company will likely continue to take market share over the next five years while growing its total addressable market, which could boost earnings to $6 per share by 2025. “With an expectation that the PC CPU market will sustain a structurally higher post-COVID TAM (est. a ~$40B TAM), an estimated mid/high-single digit CAGR in AMD's data center TAM [CPU + GPU], and with the inclusion of a ~$8.5B incremental TAM via Xilinx, we estimate that AMD now addresses a $100B-110B+ TAM (vs. $79B TAM outlined at March '20 Analyst Day)".

KeyBanc analyst John Vinh has an overweight rating and price target of $155. In his words, "One of the most compelling data center growth stories, given its exposure to cloud and continued market share gains,". He further added, "We view AMD as one of the most compelling server growth stories in the semiconductor industry, given its outsized exposure to CSPs vs. enterprise. Additionally, we expect AMD to significantly outpace cloud industry growth in 2022 of high teens, as we expect continued market share gains."

AMD Stock is Approaching a 20 Year Roadblock – Will History Repeat?

Teradyne Inc – Earnings on January 26th

Source: YCharts and Earnings ReportsYCharts and Earnings Reports

Teradyne’s revenue grew 16% YoY in Q3 and the consensus estimates suggest revenue to grow 14% YoY in the next quarter. Industrial automation currently constitutes roughly 10% of the total revenue. According to the management this could be one of the growth areas for the company’s future as the penetration is low.

The company’s outlook for 2022 and the medium-term earnings outlook update is expected in the next earnings call. This is particularly important as analysts expect slower revenue growth of 9% for 2022 and 2023.

Source: Investor PresentationInvestor Presentation

Deutsche Bank analyst Sidney Ho has raised the price target to $170 from $150. The analyst is more optimistic about long term demand drivers, rising capital intensity, and the regional push for semiconductor manufacturing capabilities entering 2022. This should lead to wafer fab equipment spending sustaining at a high level. He believes semiconductor capital equipment stocks can justify trading at multiples above historical averages.

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Piper Sandler analyst Weston Twigg has a price target of $173. The analyst has a positive view on the company's fundamentals given its Arm test opportunities, memory market share gains, and continued robotics growth. He expects Teradyne's annual robotics revenue to exceed $1B by 2025 on "strong post-pandemic automation trends." Twigg views the company as a "compelling robotics automation play, coupled with good multi-year core test market tailwinds."

NVIDIA Corporation – Tentative Earnings date is February 24th

Source: YCharts and Earnings ReportsYCharts and Earnings Reports

Nvidia’s revenue grew over 50% YoY for the past six quarters. Analysts expect revenue to grow 48% YoY in the next quarter to $7.43 billion. Growth has been particularly strong in the data center, which grew at a compounded annual growth rate of 82% from FY17 to FY21.

Source: Investor PresentationInvestor Presentation

Citi analyst Atif Malik opened a "Positive Catalyst Watch" on shares of Nvidia post the Consumer Electronics Show. Management commented on the "strong" holiday gaming season, "solid" data center demand trends and gaming/networking foundry supply improvements in the second half of the year. The analyst views Nvidia's January quarter earnings, launch of a new data center and potentially gaming 5nm products at a conference in March as positive catalysts for the stock.

BofA analyst Vivek Arya reiterates a Buy rating on Nvidia with a $375 price target after hosting an investor call with the company's CFO, Colette Kress. The analyst "heard confidence around momentum" heading into 2022 across gaming, data center and "nascent omniverse/autos opportunities." Capacity remains a bottleneck, with demand outpacing supply throughout 2021, especially in gaming, though management noted they are working hard on securing supply and they expect constraints to ease in the second half of 2022. The analyst calls Nvidia a "top compute pick" and continues to believe the company is best positioned to "address several of the most important, multi-decade secular growth opportunities."

Please note, the I/O Fund may or may not agree with the financial analysts mentioned above yet we objectively report what the Street is saying. You may view our previous analysis on Nvidia below:

Throwback: Nvidia will Surpass Apple’s Valuation in 4.5 Years

The Key To Unlocking The Metaverse Is Nvidia’s Omniverse

Holding Nvidia Stock Will Pay Off Due to Two Impenetrable Moats

Texas Instruments Inc – Earnings on January 25th

Source: YCharts and Earnings ReportsYCharts and Earnings Reports

Texas Instruments revenue is expected to slow down drastically from 22% YoY growth in Q3 to 9% growth in the next quarter. The company has been steadily increasing its dividend payments over the years and has a decent dividend yield of 2.31%. At the time of writing, the stock has returned about 8% in the past year.

Source: YCharts

Barclays analyst Blayne Curtis raised the firm's price target to $180 from $170 and keeps an Underweight rating on the shares. The analyst sees "positive outlooks providing some relief" for the semiconductor group but still struggles with "just how much upside is left as cyclicality still looms for many names."

The company was downgraded by Citi. Analyst Christopher Danely lowered his rating to neutral and cut his price target to $187 from $220. In his words, "We estimate the new fab and higher depreciation will negatively impact gross margins by roughly 1%-3% in 2022 and our C22 EPS estimate is 6% below consensus.”

Broadcom Inc – Tentative Earnings date is March 4th

Source: YCharts and Earnings ReportsYCharts and Earnings Reports

Broadcom’s revenue grew 15% YoY in Q4 FY21 and the consensus analysts estimate suggest revenue to grow 14% in the next quarter. The company has good free cash flows and for the fiscal year 2021, it constituted 49% of the total revenue. The current dividend yield is 2.58% and the quarterly dividend was increased by 14% to $4.10. One risk to watch is Apple planning to make chip components in-house. The company’s shares rose about 30% in the past year.

Source: Investor PresentationInvestor Presentation

Piper Sandler analyst Harsh Kumar raised the price target to $750 from $680 and keeps an Overweight rating on the shares. For 2022, the analyst favors "larger, more profitable, cash generating names that have a clear growth path ahead of them based on end-markets." Kumar sees cloud, enterprise, 5G infrastructure, electric vehicles, and connectivity as the primary areas of focus. He's cautious on the automotive end-market more broadly and PCs.

Bank of America analyst Vivek Arya, who rates Broadcom buy with a $750 price target and Skyworks neutral with a $190 price target, notes that both companies have significant exposure to Apple (AAPL), with 20% for Broadcom and 59% for Skyworks, but industry checks suggest the impact is "overblown in the near to medium term." Apple's hiring could be for its plans to develop its own 5G modem, which would hurt Qualcomm and not Broadcom or Skyworks.

Read our past coverage on the stock below:

I/O Fund’s Preview of 7 Semiconductor Stocks Ahead of Q3 Earnings

Will Dividend Stocks Become the Inflation Trade?

Qualcomm Inc – Tentative earnings date is February 3rd

Source: YCharts and Earnings ReportsYCharts and Earnings Reports

The company’s adjusted revenue grew 43% YoY in the Q4 FY21 and the analysts’ consensus estimate suggests revenue to grow 27% in the next quarter. However, growth will slow down to around 8% in the FY23 and FY24, down from about 19% revenue growth in the FY22.

The management expects future growth from automotive and the Internet of Things as the company looks for opportunities beyond the smartphone business. The company expects its addressable market to grow from the current $100 billion to $700 billion in the next decade.

KeyBanc analyst John Vinh raised the price target to $210 from $185 and keeps an Overweight rating. The analyst notes that at its analyst event, Qualcomm derisked concerns about Apple (AAPL), indicating its share of the 2023 iPhone would decline to 20% and would exit fiscal 2024 at a low-single digit percentage of QCT revenues, yet expects handsets to still grow at the industry three-year CAGR of 12%, as Android is expected to grow faster and offset. Qualcomm pointed out it has secured multiyear chip agreements over the next two years with all handset OEMs, Vinh adds. The analyst also highlights that auto revenues are expected to grow to $3.5B, anchored by key wins at General Motors and BMW.

Deutsche Bank analyst Ross Seymore raised the firm's price target to $210 from $190 and keeps a Buy rating. “It laid out an impressive roadmap of accelerated and diversified growth, further bolstered by a wide array of customer testimonials," The company's "impressive" financial targets are "significantly de-risking" by removing 80% of Apple in fiscal 2024, albeit with no certainty that the business will indeed be lost by that much that soon, according to the analyst.

Disclaimer: This is not financial advice. Please consult with your financial advisor in regards to any stocks you buy.

Snowflake Accelerates In Revenue While Growth Stocks Sell Off

Posted on January 18, 2022August 28, 2026 by io-fund

This article was originally published on Forbes on Jan 13, 2022, 04:54pm ESTForbes on Jan 13, 2022, 04:54pm EST

Snowflake was listed on September 2020 and the shares more than doubled on the day of the listing. It was one of the biggest tech IPOs of all time raising roughly $3 billion with a road show that attracted risk-adverse Warren Buffet.

In my deep dive published on Forbes, I noted Snowflake’s sky-high revenue growth of 173% in the year prior to the IPO. Another key metric that led to the success was the net retention rate of 158%, which was the highest for any cloud company at the time of listing; this metric is even higher now. Snowflake closed the opening day with a market cap of $70.3 billion that was more than five times its last private valuation of about $12.5 billion. Snowflake has been public for over a year and now trades at a market cap of $92.5 billion for a gain of roughly 33%, at time of writing.

Below, we revisit the product and the company’s financials now that it’s been a public company for a decent length of time. The information in this analysis is partly why we have decided to build a position with more information on what makes Snowflake stand apart provided to our premium members.

Snowflake Inc Price % Change – YCHARTS

Snowflake’s Rare Acceleration in Net Retention

There are a few key metrics that Snowflake discloses that help investors better understand the demand for its products and the cadence of its growth going forward. One of the key metrics is its net retention ratio (NRR), which increased YoY from 162% to 173%, the highest level since it went public and a notable (RARE) acceleration.

Since Snowflake uses a ‘land-and-expand’ sales strategy, growth with existing customers is critical to scale its business. An increase in its NRR metric demonstrates that customers sign on and then rapidly ramp spending as they fully deploy on Snowflake’s platform.

However, CFO Michael Scarpelli, cautioned investors that NRR will decline going forward, but nevertheless will still remain well above 140% for a “very long time”. Specifically, he stated that, “I'm not going to guide long term. It's hard to do that. I'm just going to reiterate again what I said to Derrick is we will [keep NRR] above 160% for this year. And I do expect longer term as our customer base gets bigger and bigger and more mature, that number will come down, but I still think it will be well above 130%, 140% for a very long time”.

Dollar-Based Net Revenue Retention Rate – INVESTOR PRESENTATION

While Snowflake uses a “land -and-expand” sales strategy, it also uses a consumption billing model. For instance, Snowflake bills customers based on the amount of data they store and transfer and what resources they use. Accruing revenue based on consumption rather than a ratable subscription model decreases the predictability of quarterly revenue, but it leaves revenue uncapped. This provides revenue upside, because if consumption soars, then so will revenue. We can see with the NRR metric discussed above that existing customers are ramping consumption. Furthermore, this consumption is also contracted, meaning that a portion of forward topline growth is locked in which provides visibility into future sales.The company’s robust NRR metric of 173% discussed above also backs up management’s claim that customers often exceed their original contract amounts. Furthermore, since sales are accrued under a consumption model rather than a subscription model, there doesn’t appear to be a ceiling on customer spending. For instance, Snowflake disclosed that customers spending over $1 million (enterprise customers) grew 128% YoY to 148. Moreover, these customers accounted for 53% of total revenue, up from 46% in the year ago quarter. This implies that spending per enterprise customer increased 6% YoY to $3.4 million. While the outsized growth in enterprise count is impressive, it is also great to see spending per enterprise customer rise as well, signaling that large customers keep getting bigger.

As a result of the improvement in the metrics disclosed above, the company’s revenue accelerated by 110% YoY to $334.4 million. The topline growth was very strong and has been above 100% for at least five quarters in a row (since the company went public). Growth was led by financial, media, technology, and retail customers.

The company has a growing customer base. As mentioned above, customers with trailing 12 months product revenue greater than $1 million were 148, up 128% YoY. Furthermore, total customers increased 52% YoY to 5,416 customers, while Fortune 500 customers grew by 30% YoY to 223.

Total Customers Chart – COMPANY WEBSITE

The company is also growing internationally and the growth is higher than the company’s total growth. International revenue which was 14% of the total revenue in the Q3 FY21 has increased to 18% in the Q3 FY22.

In the earnings call, Frank Slootman said, “We continued our international expansion with product revenue from EMEA and Asia-Pacific outstripping the company's year-on-year growth, up 174% and 219% respectively. We recently launched operations in three new countries Israel, Korea, and the United Arab Emirates.”

Revenue by Geography – INVESTOR PRESENTATION

Another key metric, remaining performance obligation grew by 94% YoY to $1.8 billion. This represents revenue that is contracted but not yet realized.

Of the total $1.8 billion the management expects about 55% to be recognized as revenue in the next one year. Some of the notable large multi-year deals in the recent quarter include a $100 million three-year deal to an existing customer and additional five eight-figure multi-year deals. This is a positive trend that the company has been able to win large contracts.

The company’s margins continue to show improvement. Total gross margin is 64% and adjusted gross margin is 71% when compared to 58% and 67% respectively, for Q3 FY2021. Adjusted product gross margin came in at 74.6% when compared to 73.6% in the previous quarter and 70% in the same period last year.

Net loss came in at $154.9 million or ($0.51) per share compared to $168.9 million or ($1.01) per share for the same period last year.

The company’s free cash flow improved to $9.5 million from a free cash outflow of $37.9 million for Q3 FY2021. Adjusted free cash flow came in at $21.5 million compared to adjusted free cash outflow of $37.1 million in the same period last year. The company has maintained a strong balance sheet as it has cash and investments of about $5.1 billion.

Adjusted Free Cash Flow As % of Revenue – INVESTOR PRESENTATION

Update on Snowflake’s Platform:

Snowflake’s decoupled architecture allows for compute and storage to scale separately with the storage provided from any cloud provider the customer chooses. By processing queries using massively parallel processing (MPP), where each node in the cluster stores a portion of the data set locally, the virtual warehouses can access the storage layer independently so as not to compete for compute power. With the competitors, such as Redshift, where compute and storage are coupled, more time is spent reconfiguring the cluster.

Snowflake calls this offering a virtual data warehouse where workloads share the same data but can run independently. This is crucial because Snowflake’s competitors combine compute and storage and require customers to size and pay based on the largest workload.

Data warehouses are centralized data repositories that collect and store information across many sources that are both internal and external. The raw data is ingested into the data warehouse and processed to answer queries. One key product differentiator is that Snowflake is not built on Hadoop, rather the company uses a new SQL database engine with cloud-optimized architecture. Overall, this translates to faster queries and also reduces costs by scaling up or down for both capacity and performance. This also allows the shift to the cloud while still honoring traditional relational database tools. Just like cloud infrastructure does not require you to hold server space for peak times year-round, a cloud data warehouse does not require you to plan, acquire or manage resources for peak data demand (i.e. elasticity).

The need for resources could change by either increasing or decreasing (scaling up or down). Customers that have a need for storage but less of a need for CPU computations do not have to pay up front and can shrink the environment dynamically. Users either pay for terabytes or are billed on a per-second basis for computations. As discussed above, Snowflake charges by execution-based usage and is not a cloud SaaS-company that charges by subscription.

Snowflake has a multi-cluster architecture which is unique from single cluster databases. The multi-cluster approach allows the clusters to access the same underlying data yet to run independently. This allows for heavy queries and operations to run very quickly and with fewer errors because the queries are not accessing the same data warehouse.

Beyond the value proposition of separating storage from compute for speed, and also scaling up or down to reduce costs, the third takeaway is that Snowflake is also much easier for customers to use as it’s designed to remove the role of a database administrator for monitoring and/or to tune query performance.

The end goal of choosing Snowflake is that you load data, run queries, and do little else – which is an immense value proposition due to the amount of time wasted prepping, balancing, tuning and monitoring traditional data warehouses originally built for on-premise.

Snowflake is capitalizing on the multi-cloud trend and growing rapidly with customers who want a choice in public cloud provider despite the cloud giants having their own data warehouse systems, such as Amazon Redshift, Azure Synapse and Google Big Query.

In our first article written at the time of Snowflake’s public listing, we discussed competitors Google’s Big Query and Amazon’s RedShift. Big Query has a strong following of about 2X customers compared to Snowflake, growing at 40% and also offers separate storage and compute. The differences between BigQuery and Snowflake include pricing structure where Snowflake is a time-based pricing model where users are charged for execution time and BigQuery is a query-based pricing model, where users are charged for the amount of data returned from the queries. Redshift has growth of 6.5% and is not as competitive due to coupling compute and storage.

In 2020, The Enterprise Technology Research study showed 80% of AWS accounts plan to spend more on Snowflake in 2020 relative to 2019 with 35% adding Snowflake as new compared to 12% adding Redshift as new. In Azure, 78% plan to spend more on Snowflake with 41% adding new. On Google Cloud, 80% plan to increase spending on Snowflake.

Granted, this study was in 2020 but this helps drive home why Big Tech owning the data centers is not a deterrent for Snowflake’s rapid adoption. Judging by Snowflake’s revenue growth, these preferences are likely still intact.

The company also launched support for unstructured data earlier this year, which is another strength compared to the SQL legacy competitors. Due to the increasing use of unstructured data, there is demand to support unstructured data for big data analytics.

Data Sharing and Data Marketplaces

Snowflake allows businesses to share their data with other external businesses on the platform. Data Marketplace allows free or monetized data sets to be exchanged. This has helped Snowflake break into new industries with use cases that other data lakes and competitors do not currently offer.

For example, earlier this year, Snowflake announced support for Unified 2.0, an open sourced and transparent identity framework that will help publishers, advertisers, and its partners identify users. When browser providers like Google plan to eliminate third party cookies, Unified 2.0 is seen as one of the potential replacements by ad tech firms.

In the Q2 earnings call, Jeff Green, the CEO and Founder of The Trade Desk, mentioned, “I think Snowflake adopting UID2 is one of the biggest headlines that has happened for UID to date and not enough has been said about it. I don't think most people understand why this is so big.” He further added, “So in the same way that Wix made it really easy for companies to build websites, Snowflake makes it really easy for companies to put their data to work.”

The management has maintained since its IPO that the opportunity in data sharing is substantial and largely untapped. In the recent earnings call, the CEO mentioned, “Generally I agree with what your assessment that we are just seeing the tip of the iceberg. Snowflake was built from the ground up as a data sharing platform and we've been at it from the beginning. You see a lot of other players following our lead in this regard, but we are in the beginning.”

The company also follows a consumption model, which makes investment decisions easier for its customers to decide which business units need the workloads. The management gave an example of the financial sector in the earnings call. The CEO mentioned, “That really mitigates the sticker shock, people can make investment decisions as they go along and as it warms it, we're seeing with some of our large banking customers as they went from recomputing loan rates on a monthly basis to doing it every night, while they had a business case for.”

In the most recent quarter, Data Marketplace grew 41%, which is “steady” but expected to could expand at a “meteoric rate” due to the non-linear way data sharing expands.The company recently introduced two industry data clouds: Financial Services Data Cloud and Media Data Cloud. The customers include companies like Allianz, Blackrock, New York Stock Exchange, State Street, Disney Advertising Sales, The Trade Desk, and Experian, among others.

Developers Building Apps with Snowpark

Snowpark offers the ability to migrate business logic with popular programming languages Python, Scala/Java Virtual Machine or Java. The library and DataFrame API allow querying and processing data without having to move data to where the application code runs. This extends programming functionality for ML model training and allows data processing to run natively in the data cloud.

Prior to Snowpark, code deployment required separate infrastructure. Building applications that interact with Snowflake’s virtual warehouses minimizes processing time and lowers the learning curve/broadens adoption of complex data pipelines by removing the need to move or copy data into other systems to overcome working with SQL.

The recent announcement of adding Snowpark for Python is key because of Python’s widespread popularity among developers. With the Snowpark Accelerator, Snowflake is courting developers to build more applications and this is likely to help Snowflake maintain a competitive advantage with a newer class of machine learning startups. The company had 23,000 developers register for the last Snow Day event.

As stated, unstructured data has recently become available in public preview, and this is being leveraged through Snowflake’s newer programmability as customers can now store new data types.

Risks

The company’s revenue growth has been exceptional. However, the company is undergoing losses. There is no clarity as to when the company will be profitable on a GAAP basis. In last year’s Investor Day presentation, the company has laid its roadmap to reach $10 billion in annual product revenue in the FY 2029 and adjusted operating income margin of 10%. So, it suggests that the competition is very high for its bottom line to improve significantly.

The company’s current revenue growth rates might not sustain long-term. The management expects long-term product revenue to grow by 30%. Overall revenue growth is down from 174% in FY 2020 to 124% in FY 2021, and for this year, analysts expect revenue to grow about 104% YoY.

Another key risk we will be monitoring is the reduction in payment terms, as Snowflake is migrating from annual upfront invoicing to quarterly upfront invoicing. This reduces the amount of cash customers have to pay upfront, which can temporarily juice sales. We will need to monitor this trend going forward to ensure that growth will be sustainable as customers fully migrate.

Another risk is the company’s consumption billing model, which is inherently unpredictable. This can make growth lumpy and some quarters may disappoint the Street. Investors should expect increased volatility in growth from Snowflake in the near term as new customers ramp consumption. However, management does expect revenue growth to smooth and become more predictable in the aggregate as customer consumption scales and matures on the platform.

Valuation

Considering the company’s strong metrics discussed further above, it makes sense that Snowflake trades at a premium multiple compared to other high growth companies. At time of writing, it’s 1-year fwd P/S multiple is 46x and Snowflake trades at a 29x 2-year forward multiple.

Table – I/O FUND

Looking forward, management guided Q4 product sales to increase 95% YoY to $348 million at the midpoint and for FY2022 product sales to increase 104% YoY to $1.1 billion. One year forward, the Street expects FY2023 sales to increase 66% YoY to $2.0 billion and then to further deaccelerate to 56% YoY growth in FY2023 and reach $3.1 billion. EBITDA is also expected to turn positive in FY2023 and then rapidly expand to over $260 million by FY2024.

Snowflake EPS Estimates for 2 Fiscal Years Ahead – YCHARTS

Conclusion

Snowflake separates compute and storage which allows companies to store large amounts of data while running complex queries at high performance. The company also drives down costs for customers newly onboarded due to its pricing model where you pay for only what is used. Snowpark now allows data processing to occur natively on the data cloud instead of external Spark clusters and is opening up complex data pipelines with popular programming languages, such as Python.

The company is disrupting legacy databases while keeping a strong focus on how to lower the barrier of entry for data applications and machine learning workflows. The product is not where the company is often disputed by investors rather it’s the valuation. Those on the sidelines for the past 1.5 years have only given up 30% in gains (in terms of market cap) and have saved themselves a rather rocky, volatile ride. Snowflake has always been a strong company yet the last earnings report was a perfect 10. We think the company may be finally gathering its strength to truly earn its valuation once and for all.

I/O Fund analysts Royston Roche and Bradley Cipriano contributed to this analysis.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.