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Apple Services The Next Stock Driver?

Apple is a great company, no doubt. We saw analysts making a case that Services will catapult the valuation. We wanted to see for ourselves. Let’s go through some simple math to see if Services is in fact the next big thing for Apple.

Let’s Do The Math What Services Means To Apple

Services has been growing at about a 20-30% pace.

Here’s the numbers.

PHONE
8 X
Fiscal 2017 2017 2018 2018
Cal 2017 2017 2017 2018

Jun Sept Dec Mar

Q3 Q4 Q1 Q2A
Services 7266 8501 8471 9190
Growth 21.6% 34.4% 18.1% 30.5%
2 Yr Gr 40.4% 58.8% 36.5% 48.0%
Est EBIT 3633 4250 4235 4595

Growth accelerated in the most recent quarter to 30.5%. We like to use the two-year run-rate which adds this year and last year’s growth.

If we say the underlying two-year trend is 45%, or 22.5% each year then here’s what we’d get on an annual basis for services.

Fisc 2019 2020
Cal 2018 2019

Dec Dec
Yr EBIT
19154
23378
Add’l
3514
4224
Tax Adj
2987
3590
per share
0.65
0.89
Value
$9.7
$13.4

We’re assuming the EBIT margins for Services is 50%.  If so you get an extra $.65 in earnings this calendar year and an extra $.89 for calendar 2019.

Using a 15 multiple that would give you an extra $10 in stock value this year and another $13+ value next year. Total it adds over 10% to the valuation through 2019.

That would tell you that Services profits should be a meaningful driver to the overall company.

But It Hasn’t Shown Through Yet

This deserves more work but the issue we have is that Services has already been growing ahead of the business but the higher margin hasn’t shown through to the corporate margins.

Look at Apple’s trends for corporate margins.


Jun Sept Dec Mar

Q3 Q4 Q1 Q2A
Fiscal 2017 2017 2018 2018
Cal 2017 2017 2017 2018
EBIT 10768 13120 26274 15894
Margin 23.7% 24.9% 29.7% 26.0%
bp chg -.14% -.16% -.06% -.67%

They’ve been consistently down.

Even with Services having much higher margins than the overall business and growing faster we haven’t seen Apple’s overall margins start to move up on a year-over-year basis. That tells you the rest of the business is dragging margins much lower offsetting the Services benefit.
So will Services start to be accretive to the overall valuation? That depends. Will the rest of the business continue to offset the Services margin benefit or will Services shine through?

We plan to speak to the company in June and will try to get further understanding of what it will take to have Services shine through to the bottom line.


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All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. Model portfolio trades and positions are hypothetical to be used for directional analysis and ratings purposes. Elazar and its employees do not take individual stock positions to avoid front running and other potential customer related issues.

AMD Stock: Approaching Another Breakout

AMD stock is up almost 40% since it reported earnings April 25th. We’re approaching another confirmational breakout which would mean much more to go for AMD’s stock.

We’ve been calling for AMD upside, as you know.

On April 23rd ahead of earnings we said “Look out shorts” and on May 16th we pointed out another breakout of a key level. We’re approaching a new breakout level. See the AMD chart below.

Approaching a New AMD Breakout Level

amd stock
Source

13.68 is a new breakout level.  We drew arrows on the AMD chart to the left showing that this level contained breakouts of the past.

Closing above this level would be a confirmation AMD can go higher.

AMD Short Interest Not Down That Much

Our 2018 EPS numbers are about 60% higher than the Street for this year. Our numbers last quarter proved more correct than the Street and we think we’re going to be better than the Street on AMD this year.

Since earnings the short interest is down 10% but still has about 20% of the float short. That’s still a big number.  With technical breakout after breakout and 60% EPS upside potential this year, the combination of shorts and upside can continue to propel the stock.

Still Bullish.


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All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. Model portfolio trades and positions are hypothetical to be used for directional analysis and ratings purposes. Elazar and its employees do not take individual stock positions to avoid front running and other potential customer related issues.

This Market Wants To Go Higher

Source: “Phew”

The stock market took another fundamental beating yesterday and didn’t budge. After getting excited about China economic reform and a North Korean deal, both reversed in a matter of hours and the market closed firm. That’s been happening more lately. These are signs that the stock market wants to go higher.

More Bad News Great Action

In a few hour time span President Trump called off a North Korean peace accord meeting and reversed on the China trade deal.  Markets were excited about both and have been perking up on the news.

You would think the negative news reversal would spiral markets.  Instead, after an initial drop, markets crawled back all day to close near flat, as you see in the chart above.

That’s a sign of bad news, great action. When you expect something but the market does the opposite you have to take note. It’s a sign there may be something underlying that’s more powerful going the other way.

Just Like The Recent Bond Spike

3% rates oh no, it’s a catastrophe.  Markets have been worried for many months that a 3% 10 year Treasury yield would be the magic number to crash markets.

But the markets also held firm when yields spiked through 3% recently.

What’s going on?

Why’s The Stock Market Hinting Higher?

First, there’s nothing really wrong fundamentally right now.  GDP‘s improving.  The market’s now also preparing for fewer Fed rate hikes this year as seen by the spike in Fed Funds Futures after FOMC minutes this week. 

Source

Here’s those Fed Funds futures. Up means down meaning an up chart means lower Fed Funds rates are expected.

Tech fundamentals are on fire. We keep hearing that cloud company capex, which is a core driver to tech spend, is accelerating. Add to that, traditional companies are also starting to open their wallets as we heard on Microsoft and Intel’s recent earnings calls. It’s getting better out there.

Even bad macro news isn’t denting this market.

Anybody notice that change?

Conclusion

Bad news, good action is a bullish set up. Markets want to go higher.


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All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. Model portfolio trades and positions are hypothetical to be used for directional analysis and ratings purposes. Elazar and its employees do not take individual stock positions to avoid front running and other potential customer related issues.

Why Netflix Hit All-Time Highs, More To Go

Netflix stock just broke out to new highs. We’ve been bullish and think there’s more to go. Our 12 month upside target is $650. That would be another 88% upside from here.  Global business momentum has the revenues accelerating which causes our earnings targets to go nuts and are much higher than the Street.

Why New Highs?

Everybody may be reporting about Netflix valuation or how it’s too expensive. It’s not.  It’s earnings story has accelerated catching up to it’s valuation. That’s why the stock is working.

Accelerating Revenues

Revenues have been accelerating which make any company’s numbers look good.

Let’s see.

We look at growth rates two ways; both one-year and two-year.


2017 2017 2017 2017 2018

Q1 Q2 Q3 Q4 Q1A
Rev Gr YOY 34.7% 32.3% 30.3% 32.6% 40.4%
2yr growth 59.1% 60.3% 62.1% 68.5% 75.0%

Here you see the one year growth rate jump last quarter to 40%. But if you were only looking at the one-year you would not have caught that move ahead of time.

Source

We went to a Buy rating in January for subscribers (here) because we saw the two-year revenues accelerating.

Above you see “2yr growth” go from 58 to 59 to 60 to 62 to 68 to 75% last quarter. That’s how you caught this move.

The two-year simply looks at this year’s revenue growth plus last year’s same quarter revenue growth. It’s a simple tool that smooths out one-timers.

That’s what made our earnings numbers go berzerk because when you have an acceleration you have to model that continuing.  And for Netflix it’s easy to picture their continued global roll-out especially in Asia help that acceleration continue.

Our EPS Way Higher Than The Street

So if you assume the business continues our model works out to $6.50 in earnings for next year. We’re about $2.00 higher than the Street for 2019.  If we’re right, guess which way the stock’s going.

We’re using a 100 PE which, compared to its 2-400 PE it’s traded at, is conservative.

Conclusion

Who doesn’t love all-time highs. The shorts I guess. But Netflix turned into an earnings story for us in January and we guess it gets better. That’s why we think the stock’s breaking out to new highs.


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All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. Model portfolio trades and positions are hypothetical to be used for directional analysis and ratings purposes. Elazar and its employees do not take individual stock positions to avoid front running and other potential customer related issues.

Bitcoin Drop Near Downside Target

btcusd chart
Source

As you know we’ve been calling for Bitcoin BTCUSD downside over the last two weeks (here here here). The trend is still clearly down but we write this to point out that we reached a near term downside target so the short term risk/reward is not as good as it was.

Bitcoin Still In A Downtrend

Being in a downtrend means there is no way to get bullish but when you start to hit some key levels it’s not bad to take some profits and leave some too.

There is probably still downside ahead but the risk/reward tells you a bounce at any point is just as likely.

7500 Key Level

The chart above shows that 7500 was a key level for break outs and break downs.

Closing decisively below this level is more bearish.  We need to see what Bitcoin wants to do for the next leg. We’d guess lower based on the trend we’ve been pointing out.

Conclusion

Reading our work you knew our bearishness on Bitcoin was two-fold. One the trend was down. Two that Bitcoin didn’t bounce with the Consensus conference which was sign of “bad action.”  More likely than not there is still downside in Bitcoin. But this fast run to 7500 balances the very near term risk-reward.

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All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. Model portfolio trades and positions are hypothetical to be used for directional analysis and ratings purposes. Elazar and its employees do not take individual stock positions to avoid front running and other potential customer related issues.

Bitcoin Still Points Lower

Bitcoin’s price is still in a downtrend.

We’ve pointed out that Bitcoin (BTCUSD) is in a downtrend despite many expectations of a positive Consensus conference reaction. That’s a sign of good news “bad action” and is a bearish trading signal.

As bullish as you might be on crypto’s future we have to acknowledge the price trends not to get carried out.  Add to that so many are trading on leverage that it’s all the more important to care about what the technicals are telling you.

Let’s review the technicals.

Each Jump Gets Met With Selling

Every time there’s hope for a bottom and Bitcoin jumps selling comes in.

Let’s see.

btcusd chart trend
Source

You have a clear downtrend in the chart to the left. You also see every pop gets quickly followed with selling.

Conclusion

Before getting bullish you have to see Bitcoin start moving back up.  A downtrend, said simply, is bearish.  With a lack of clear fundamental catalysts we have to respect the price trend. Currently that’s still going down as we pointed out here and here.


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All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. Model portfolio trades and positions are hypothetical to be used for directional analysis and ratings purposes. Elazar and its employees do not take individual stock positions to avoid front running and other potential customer related issues.

Facebook Chart On Its Way To New Highs

Facebook news has quieted down which has let the stock rise secretly passed a key level. Earnings upside from here can help this stock finally break out to new highs once again.

Stock Price Cooperates Higher

We pointed out on April 25th that the last earnings reaction could lead to upside follow through. Facebook’s stock has responded with that upside follow through.

Key Level $183 Now

As we show in the chart below 183 was a key level that saw breakouts and breakdowns for Facebook stock.

Passing this level and holding above it is an amazing sign that we’re passed the onslaught of bad news.

Chart levels matter because they are implanted in the brains of all those traders and investors over those trading days. So a breakout topside as the news quiets down is important.

Source

There it is, to the left, the key level of multiple breakouts, holds, and breakdowns.

Now scan right on that chart and you see Facebook’s stock has done a great job of holding that level and may be a sign of more highs to come.

Earnings Upside

Facebook has consistently shown about 20-30ct upside versus the Street consensus each quarter.

Our model shows that upside should accelerate to 25-60ct upside over the next three quarters. That’s one reason we have a Buy Rating on Facebook.

Earnings are what propels stocks. Facebook showing technical strength can set up a stock break out if we’re right about the earnings upside to come.


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All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. Model portfolio trades and positions are hypothetical to be used for directional analysis and ratings purposes. Elazar and its employees do not take individual stock positions to avoid front running and other potential customer related issues.

US-China Deal To Remove Major Stock Market Risk

Treasury Secretary Steve Mnuchin today said that China Tariffs are “on hold.” Trade-deal progress would be bullish clearing one of the biggest stock market risks of the Trump administration. One of the biggest beneficiaries would be the tech sector.

Bullish For Tech Stocks

Mr. Mnuchin said trade negotiation have “specific targets industry by industry.”

While agriculture and energy were two specific industries mentioned today China has shown interest in buying more semiconductors from the US.  That was an early sign that a trade deal would directly benefit the tech sector.

Mr. Mnuchin said that a trade deal would include improving “structural issues.” Fixing those issues likely include protecting US companies’ intellectual property and increasing competitiveness in China.

That would potentially open the doors to a huge market for many qualified US companies without risking patents and intellectual property.

Bullish For The Stock Market

One of the biggest concerns early on about a Trump presidency was trade war risk.  We may be inches away to rectify this core stock market concern.  If this negotiating momentum continues markets have an excuse to retest old highs.

Prelude To North Korean Deal

Negotiations with China and setting up a peace deal with North Korea are occurring simultaneously and probably not by coincidence.

China accounts for 90% of North Korea’s trade.

Closing a deal with China could involve China adding pressure on North Korea to settle the current stand-off.

Even though North Korea recently backed out of planned peace negotiations, the US and China’s joint pressure did manage to get initial acceptance by North Korea of a meeting.

A strengthened US-China trade deal could again increase pressure on North Korea to return to the table. Any resolution would ease tensions in the region benefiting the economy and encourage further US-China trade momentum.

Conclusion

The stock market may be about to hurdle one of its biggest risks with the progress of US-China trade negotiations. The tech sector would be one of the main beneficiaries which could set up a retest back to the old stock market highs.


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All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. Model portfolio trades and positions are hypothetical to be used for directional analysis and ratings purposes. Elazar and its employees do not take individual stock positions to avoid front running and other potential customer related issues.

Bond Yields Spike But Stocks Not Budging: Bullish

Bond yields have been breaking out higher but the stock market’s been holding firm. Investors still cringe about February’s market meltdown due in part to spiking yields. Concern is of course warranted but “market action” may be more important. Holding firm this time around would be bullish.

Bullish Action, New Highs Ahead?

The concern about rising rates is clear. Everybody would expect that this recent rise in rates should hit the stock market once again.  But if it doesn’t, what does that mean?

We always watch “action” which is the trading tool to compare what should happen to what does happen.

What should happen? The market should start to crash again.

What’s actually happening? The market’s holding firm.

Despite the negative catalyst the market’s not responding negatively yet this time which tells you there are other stronger positive forces on the market.

It’s a bullish sign that despite rising rates, the market has the ability to move higher.

Let’s Go To The Video Tape

30 year treasury versus S&P 500 SPY chart
Source

On the left you see that late January, early February’s yield spike helped markets into a mini-crash.

Scan to the right and you see yields spiking all over again real-time but you also notice the S&P 500 ETF SPY isn’t budging this time.

That’s a case of “bad news” “good action” and it’s a bullish trading signal.

But Why Are Rates Jumping This Time? Price Or Demand. That May Be The Answer

GDP is forecast to accelerate in Q2.

Our contacts in tech have been saying that demand is broadening out to not only cloud/hyperscalers spending, but the rest of enterprise, traditional companies, the rest of the economy.

That’s bullish and tech usually leads.

So maybe just maybe rates are moving up this time not because of inflation fears but because demand is just better.

CPI came in with a very low last reading.

Low inflation and high growth is of the Goldilocks variety, something we haven’t really seen since the 90s. Oh boy that would be nice, right?

Rising rates, but not because of inflation, may be the reason that the market’s not dropping off this time. Inflation is a market thorn. No thorn, no pain.

Conclusion

We’re all bulled up.  Tech fundamentals are strong led by a broadening out of tech spend. Relatively low rates and inflation and “bad news” “good action” can get this market back to new highs soon once again.


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All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. Model portfolio trades and positions are hypothetical to be used for directional analysis and ratings purposes. Elazar and its employees do not take individual stock positions to avoid front running and other potential customer related issues.

Telsa: Goldman Bear Makes Bullish Comments

Goldman Sachs came out with a call saying it’s all over for Tesla. They are going to need capital in 2020.  Wait a minute, 2020!?! Didn’t bears think this company’s going belly-up this or next quarter. 2020?? Sounds bullish to me.

Goldman Bear Bullish Comments On Tesla

Goldman Sachs Bear David Tamberrino made incredibly bullish comments without realizing it.

He said that Tesla needs capital in 2020. That’s amazing news, not negative news. 2020 is much further out than next quarter. All the shorts are hoping and praying that Tesla will run out of cash next quarter.

Last Quarter Implied Strong Cash Trends

After last quarter’s earnings report we show in our model (click TSLA and scroll all the way down) Tesla is funded through 2019. If model 3 ramps near expectations they can go cash flow positive in Q3.

We have them stacking up $6B+ in cash by the end of 2019.

More than that the company is expecting profits in Q3 or Q4, which in itself is pretty sick.

I don’t understand how shorts can just ignore that.

Short Squeeze Run-Up Into The Q2 Report

Similar to last year’s run-up into the Model 3 launch, shorts can blink as we approach a potential profitable Q3. And 30+% of the float is short. A CEO calling for profit has to be factored into the scenario. Doing that can spook shorts into doubting their position before we ever get to earnings.

Conclusion

Accidental bullish comments from a big ol bear. I like that. Huge short interest and chance for profits. Short squeeze, here we come.


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All investments have many risks and can lose principal in the short and long term. The information provided is for information purposes only and can be wrong. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC, and their related parties harmless. Model portfolio trades and positions are hypothetical to be used for directional analysis and ratings purposes. Elazar and its employees do not take individual stock positions to avoid front running and other potential customer related issues.