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Global Hydrogen Strategies

2021-11-20T11:20:00.008-08:00

Hydrogen has been heralded as the ultimate green fuel for a long time. Almost like clockwork, the British periodical "The Economist" runs an article every decade how the hydrogen economy is imminent. There were articles in 1997, 2010 and quite recently in 2020 and now 2021 that raise the familiar questions and doubts, however restate their belief in the future of a hydrogen economy.

But this time, something has changed. As the world has switched to renewable power sources, its lack of reliability has raised major concerns.

Renewable electricity cannot be turned on or off on demand. It means electricity transmission and distribution companies cannot plan their baseloads around renewable generation.
Renewable sources have caused havoc on electricity grid stability. Traditional transmission and distribution grids were designed based on one-way traffic, from generators to consumers. With distributed generation like roof top solar and wind, transmission and distribution companies need innovations in balancing loads.
While Battery Electricity Vehicles (BEVs) have finally taken off, this cannot be extended to bigger forms of transport like trains, ships and freight trucks due to the considerable weight of chemical batteries that makes these applications uneconomical.
Renewable power sources alone are not adequate to allow countries to meet their net zero and decarbonization targets. Alternate strategies need to be considered to reduce dependance on carbon based energy sources at a faster rate.
Finally countries are also realizing that decarbonization would mean loss of jobs for many energy professionals, especially those tied to transportation of fuels. This could become a secondary crisis on its own.

The answer to many of these concerns has surprisingly turned out to be hydrogen as fuel source.

Renewable sources like solar and wind can be used to generate hydrogen during times when generation exceeds demand. Once generated, hydrogen can then be stored or transported as fuel.
Hydrogen fuel cells are being used by electricity grid operators to balance their grids.
Hydrogen is very efficient as a fuel on weight basis (per kilogram) though a poor energy source on a volume basis (per litre/ per gallon). This means it can be used to power fleets of large vehicles like trains, ships and freight trucks that worry about weight but are not concerned with large volumes.
Hydrogen fuel cells are also becoming the backup power of choice for large box retailers in North America like Home Depot, Walmart, Amazon and others.
Hydrogen can be transported in trains, pipelines and ships very much like petroleum and its derivatives. All this means many jobs in the fuel transportation sector can be saved/ re-purposed.

Governments around the world, many in their wisdom and foresight, but perhaps most in anticipation of their pledges in Glasgow COP-26 summit have recently announced hydrogen strategies and roadmaps.

European Union came out with their strategy in July 2020
This was followed by countries in different continents

Japan released their strategy in 2017 and a roadmap as well.
Norway, as a country with a strong history of environmental advocacy released their hydrogen strategy in 2019.
US released their strategy in July 2020 followed by a roadmap in 2021
Government of Canada announced their national hydrogen strategy in December 2020
Not to be left behind, the UK announced their national hydrogen strategy in August 2021

Even states and provinces came out with their strategies

Alberta in Canada released their hydrogen roadmap in November 2021.

All the above have prompted consultants to look deeper and present their analysis of what is being said. Yele Consulting from France has published one such comparison. KPMG has published another one.

This yet does not change the fundamentals. Hydrogen will need a lot of investment on the demand, supply and transmission side to become a viable alternate fuel. Government investments in demand mean that private sector will have an incentive to invest in this sector. This may drive innovation and reduce costs.

Airline and Travel business - what's in store after covid

2021-09-04T19:57:00.023-07:00

As countries re-open their borders and people start to travel again after covid, a key sector that is overdue for recovery is air travel. No country and indeed no airline was spared from the lockdown and the resulting revenue losses. Now, a few key questions need to be answered.

1. Which airlines are still viable candidates to recover? On what basis?

2. Will post-pandemic travel behaviour change? How so?

3. What strategies will airlines employ to recover back to profitability?

4. Which airlines will survive and become profitable?

5. Based on this which airlines are best investment candidates?

Let's tackle each of these questions one by one based on data that is available.

Our analysis will be limited to the following airlines

1. United Airlines

2. Singapore Airlines

3. American Airlines

4. Delta

5. South West Airlines

6. Virgin Atlantic

7. Lufthansa

8. Air Canada

As can be seen from the above list, we have a mix of different airlines. We did not find much information on Virgin so we had to drop it. Here is a quick comparison of Revenue and Net income for these airlines for Trailing Twelve Months of 2021 and FY 2019.

	United Airlines	Singapore Airlines	American Airlines	Delta Airlines	South West Airlines	Lufthansa	Air Canada
Ticker symbol	UAL	SINGY	AAL	DAL	LUV	DLAKY	AC.TO
Total Revenue TTM	14.59	3.8	18.86	18.3	9.86	9.7	3.15
Total Revenue 2019	43.26	15.97	45.7	47	22.42	36.42	19.1
Net Income	-5.53	-4.2	-5.8	-6.7	-1.6	-5.6	-4.3
Net Income 2019	3	0.6	1.68	4.76	2.3	1.2	1.47
Revenue TTM / 2019 % age	33.73%	23.79%	41.27%	38.94%	43.98%	26.63%	16.49%
Costs as %age of TTM revenue	137.90%	210.53%	130.75%	136.61%	116.23%	157.73%	236.51%
2019 Costs as %age of 2019 revenue	93.07%	96.24%	96.32%	89.87%	89.74%	96.71%	92.30%

On the whole these airlines are carrying 25% to 40% of 2019 traffic. Airlines with more International travel such as Singapore Airlines are < 25% of revenue and more domestic airlines such as South West are > 40% revenue.

On the other hand, Singapore Airlines Net Income in 2019 was a mere 0.6 B. South West who has the highest Net Income comparatively speaking (- $1.6B), had $2.3B revenue in 2019. Prior to covid, South West had the best handle on its cost (89% of revenue).

If we look at International Travel alone, the following table provides a breakdown of origin and destination across markets and their percentage share of Revenue Passenger KMs

	Africa	Asia	Central America Caribbean	Europe	Middle East	North America	South America	Southwest Pacific	Total
Africa		0.4%		4.3%	1.6%				6.3%
Asia		8.5%		8.4%	7.6%	5.7%		3%	33.2%
Central America Caribbean			0.3%	3.8%		4.6%	0.7%		9.4%
Europe				21.1%	5.5%	8.9%	2.3%		37.8%
Middle East						2%			2.00%
North America								1.3%	1.3%
South America							0.7%		0.7%
Southwest Pacific									0.0%
									90.7%

Asia and Europe account for almost 70% of revenue KMs split between them.

Post-pandemic behaviour change

This is the hardest puzzle to solve. Traditional wisdom would suggest that post-covid, domestic travellers would choose personalized mode of travel compared to air travel. Also, given that the pandemic has proven that business can be done across a screen, people will no longer be interested in traveling short distances by air for business.

However in many unrestricted markets, domestic air travel has resumed and reached pre-pandemic levels.

As can be seen from the above graph, domestic travel in US and China has is only 10% away from 2019 figures. Globally, the gap is only 15% in terms of Revenue Passenger KMs.

The above figures should not be taken at face value, as the increased domestic travel includes pent up demand due to lockdown. We can assume that many segments such as business and conference travel will not resume to the extent as it used to be.

International travel has definitely not recovered to the same extent. We can assume that this recovery will be slow over the next few quarters.

Overall, it looks like domestic airlines in US and China who have limited international exposure should be doing fine, and are perhaps closest to recovery.

	World share	RPK	ASK
Total Market	100%	-53.10%	-45.20%
Asia Pacific	38.60%	-62.70%	-54.10%
Europe	23.70%	-56.50%	-46.50%
Latin America	5.70%	-44.50%	-40.50%
Middle East	7.40%	-73.20%	-57.50%
North America	22.70%	-28.50%	-24.70%

International	45.80%	-73.60%	-63.80%
Asia Pacific	10.90%	-94.20%	-86%
Europe	18.60%	-64.20%	-53.80%
Latin America	2.20%	-66.30%	-60.50%
Middle East	7%	-74.50%	-59.50%
North America	5.40%	-62.10%	-52%

Domestic	54.20%	-15.60%	-10.70%
Australia	0.70%	-75.40%	-61.00%
Brazil	1.60%	-19.60%	-18.00%
China	19.90%	-2.50%	6.20%
India	2.10%	-59.40%	-47.10%
Japan	1.40%	-53.90%	-36.10%
Russian Fed	3.40%	28.90%	34.80%
US	16.60%	-7.70%	-7.10%

Looking at just the US carriers, we can see that with the exception of South West, everyone else is waiting for travel to resume.

Q2 2021	Revenue Passenger Miles (RPM)	Available Seat Miles (ASM)	Passenger Revenue per Available Seat Mile - PRASM (cents)	Cost per Available Seat Mile - CASM (cents)	Profit (cents)
South West	27689	33414	10.68	10.22	0.46
United	28514	39613	11.02	14.49	-3.47
AAL	42022	54555	12	12.9	-0.9
Delta	33285	48529	11	14.43	-3.43

Adding the international carriers and translating everything to KMs, we get the following results

Q2 2021	Revenue Passenger KM (RPK)	Available Seat KM (ASK)	Passenger Revenue per Available Seat KM - PRASK (cents)	Cost per Available Seat KM - CASK (cents)	Profit (cents)	Profit (% age)
South West	44,302	53,462	6.7	6.4	0.3	4.5%
United	45,622	63,381	6.9	9.1	-2.2	-23.9%
American Airlines	67,235	87,288	7.5	8.1	-0.6	-7.0%
Delta	53,256	77,646	6.9	9.0	-2.1	-23.8%
Lufthansa	14,034	27,317	7.0	12.4	-5.4	-43.8%
Singapore Airlines	1,857	12,571	2.5	7.3	-4.8	-65.8%
Air Canada	2,699	6,400	5.3	24.3	-19.0	-78.3%

As we can see from the above table, only South West airlines in the above cohort looks to be recovering their costs. The remaining airlines are operating at losses, sometimes quite significant at that. The international carriers and Air Canada are the worst off.

An important point to highlight that Lufthansa, Singapore Airlines and Air Canada despite being worst off are being supported by their respective governments. So their long term viability is not in question, but they are likely to remain in the red the longest given their high cost structures.

What strategies will airlines employ to recover back to profitability?

Already, airlines have started making changes to different aspects of their strategy. Airlines that have the option will need to focus on domestic or international cargo markets. US carriers with high Available Seat Miles (ASM) are expanding their operations to include smaller destinations, and also more equitably distributing their fleet. Again, South West seems to have the least idle capacity.

Staff salaries are the biggest component of an Airlines expense closely followed by fuel and fleet maintenance.

Next generation silicon economy

2016-09-03T17:12:00.002-07:00

It is clear that there is an architecture that has emerged that will drive the next generation silicon based economy. At a high level, the overall architecture consists of

1. An energy source
2. A processing module
3. An onboard memory module
3. A data storage module (optional)
4. A learning module
5. A controller to do stuff.
6. A communication mechanism

A Raspberry Pi is a good albeit incomplete reference design for this architecture. If we look at Pi Zero (https://www.raspberrypi.org/products/pi-zero/), which is selling for a mere $5, it includes the bare minimum elements required to fulfill such an architecture.

Included elements in Pi Zero

Out of the box Pi Zero includes a processing module with interfaces that can be used to plug in other modules.

1. An energy input interface (Micro USB power)
2. A processing module (1Ghz, Single-core CPU)
3. An onboard memory module (512MB RAM)
3. A data storage module interface (A Micro SD card slot)
4. A learning module (We can deploy R or Python on a Pi Zero)
5. A controller interface (HAT-compatible 40-pin header)
6. A communication mechanism interface (Mini HDMI and USB On-The-Go ports to plug in USB dongle)

Given the above, the Pi Zero is an excellent prototype of how these architectures will evolve. As can be noticed from above, these interfaces while allowing flexibility, lack the full build out of the architecture. In many ways, the Pi Zero unit is going to be the brick of the world of Internet of Everything.

The Winners

As in the pre-IoT days, the dollars will go to solution integrators vs. component manufacturers, unless the component manufacturers manage to brand themselves and allow commoditization of the integrators. A strong DIY model with open-source solutions is a way to do just that. If that happens market power will go to the retail channels such as Amazon and others. Overall, it will be interesting to see how the market evolves for this space.

First Solar Target Price for next quarter Q1 2016

2016-03-05T14:44:00.002-08:00

Even though JP Morgan analyst recently mentioned that at $69, First Solar is fully priced, there is a possibility that stock might move up.

If we look at the trailing 12 months of EPS, the stock has an EPS of 5.35 and a P/E ratio of around 12.99.

Now, the last 3 quarters of the year were quite good and if we add the next quarter estimates, (see below) the Trailing Twelve Months EPS will be around 6.5 (even if you don't agree with my estimates).

At a P/E of 13, this means a stock at around $87, and if the P/E also comes close to a realistic value of 15 given the growth potential of First Solar, we could go all the way to $100.

Something to think about, when the next earnings are coming out.

Evaluating Intel based on Value Investing by Graham

2016-02-21T10:49:00.001-08:00

Reading across blogs today, I came across a blog that documented Benjamin Graham's formula that he adopted after 1970.

These were as follows:

1. An earnings-to-price yield at least twice the AAA bond rate.
2. A P/E ratio less than 40% of the highest P/E ratio the stock had had over the past 5 years.
3. A dividend yield of at least ⅔ of the AAA bond yield.
4. A stock price below ⅔ of tangible book value per share.
5. A stock price below ⅔ of Net Current Asset Value.
6. A total debt less than book value.
7. A current ratio greater than 2.
8. A total debt less than 2 times Net Current Asset Value
9. An earnings growth of prior 10 years at a minimum 7% annual compound rate
10. Stability in growth of earnings with no more than 2 declines of 5% or more in year end earnings in the ten years prior are permissible.

Taking Intel as an example, we will test each of these metrics to see how Intel scores.

1. An earnings-to-price yield at least twice the AAA bond rate.

>> At the time of writing this blog post, this is around 4.01%. Taking Intel (INTC) as an example, the current rate is around 8.15%.

2. A P/E ratio less than 40% of the highest P/E ratio the stock had had over the past 5 years.

>> For Intel, its 12.26% as shown below, which is around 69.2% of the highest PE for Intel of 17.70 in past 5 years.

3. A dividend yield of at least ⅔ of the AAA bond yield.

>> Current Intel dividend yield is 3.41% which is higher than 2/3rd of 4.01%

4. A stock price below ⅔ of tangible book value per share.

>> This is not true. INTC is trading at $28.71, where as book value per share is $12.93

5. A stock price below ⅔ of Net Current Asset Value.

>> This is not true. Intel's Net Current Asset Value was around $6 (= Current Assets - Current Liabilities / Total shares)

6. A total debt less than book value.

>> Intel's total debt is around $22.6B and book value is $103B

7. A current ratio greater than 2.

>> Intel's current ratio is 2.58

8. A total debt less than 2 times Net Current Asset Value

>> Total debt is around $22.B and Net Current Asset Value is around $25B

9. An earnings growth of prior 10 years at a minimum 7% annual compound rate

>> Earnings growth of prior 10 years at Intel is around 1 to 2% at best

10. Stability in growth of earnings with no more than 2 declines of 5% or more in year end earnings in the ten years prior are permissible.

>> This is probably true.

Overall, Intel misses on a few tests but comes out strong on several others.

Nokia's LTE business

2015-10-25T08:53:00.003-07:00

Trefis analysis gives a target price of $7.93 to NOK. In its valuation, it is clear that Nokia Wireless Infrastructure and Networks Services and non-core revenue makes up almost 86% of the revenue.

Out of the above Wireless Infrastructure makes up almost 46% of the revenues.

As we know right now, wireless infrastructure is undergoing an upgrade as LTE networks. As per Gartner, this market is supposed to grow at 18% CAGR from $18B globally to $36B by 2019.

Geographically, the market is split as follows

Among the various vendors the current market share is with Huawei and Ericsson. Nokia plans to correct that with the acquisition of Alcatel's business. The combined business will become the third largest business for a mobile.

However, in terms of capabilities Gartner ranks Huawaei, Ericsson and Nokia in dead heat, with Alcatel behind the pack in vision and execution.

From a books perspective, the acquisition will create an entity with a combined revenue of around $30B, with each entity making 50% of that number. From an EPS perspective though, Nokia made $0.30 where as ALU made $0.05 EPS.

The acquisition would convert each ALU stock to 0.55 shares of NOK, which implies that the combined entity should make $6 revenue per share in the combined entity. Currently revenue per share numbers for Nokia is $4.1. If Nokia can translate its lower cost base and efficiency to the new entity, the company could again become quite profitable. I can easily see the combined entity having a share price between $10 to $12 post-merger.

The business of cloud computing

2015-10-24T11:09:00.000-07:00

MSFT, AMZN and Google all reported their recent most quarter, and it was surprising to see a 10% jump in stock price across the board. Like Facebook had crossed a chasm in its transition to mobile a few years earlier, it seems all the above three companies have made the transition to cloud successfully.

The lure of cloud is now obvious in the enterprise. In 2014, large companies spent around $690 per employee in IT spending. Small companies in contrast spent more than $2200 per employee. By transitioning to cloud, large companies can become even more efficient, and smaller companies can operate at per employee costs similar to larger companies.

On the other hand, companies such as Microsoft have figured out, that transition to cloud is inevitable. With the new CEO it has put its plan in motion, and is now beginning to see the results. In the Financial investor conference held earlier in the year (April 2015) it alluded to have a strong adoption by enterprise users.

It then talked about a Product transformation as part of its cloud strategy. As you can see below, there is an emphasis on moving the product components that are deployed on premise to providing more solution components that can be wired together in a cloud environment.

Accompanying the product transformation was a proposed economic transformation that focused on lifetime value of a customer.

Microsoft's finally stated its goal is to make cloud a $20B a year business.

Come October 2015, this was clearly reflected in their recent quarter earnings.

While Microsoft is currently averaging $6B in cloud revenue each quarter, Oracle as well has posted in May that its PAAS and SAAS revenues were around $600M per quarter. Given that Oracle has historically had a decent presence in the corporate data centers, it is likely that these numbers will grow quite a bit.

Benefits for customers

For customers, benefits of cloud are obvious:

1. No need to seek a capital outlay to acquire new hardware and software, instead focus on a rental/ subscription model

2. Less reliance on stretched internal IT resources to setup infrastructure and environment.

3. Reduced implementation time, from years and months to weeks

Earlier seen as a skunkworks initiative in the organization, Cloud has surprisingly become part of main stream IT strategy relatively quickly.

In looking at who was operationalizing the Corporate cloud environments, an Oracle appointed study conducted by Harvard Business Review in 2015 found that bulk of the services were in fact led by IT departments in the organization indicating that everyone including IT had jumped on the cloud bandwagon.

As the transition to cloud becomes more secular it is clear that the companies that will make more money in the near term are companies that will help in the build out of data centers. To me it translates to the following components in a Data center

Computing + Storage + Electricity + Bandwidth = Cloud Computing Infrastructure

This is conformed by Microsoft Research, which states typical costs of cloud data center are as follows:

Based on the above, we can see that the leaders of the cloud revolution are going to be the thought and execution leaders in these spaces. These are as follows (in my opinion)

1. Computing : Intel (INTC)

2. Storage : Storage has a few players (EMC and HP seem the strongest)

3. Electricity: I think the trend in Electricity for cloud will move towards solar given lower recurring costs and environmental benefits. Since the peak electricity charges are more, data centers are better investing in peak power systems such as solar or wind. Google, Microsoft and Apple have negotiated Purchase Power Agreements (PPAs) and an whitepaper from Google explains how this works. Companies like FSLR will benefit from these trends as they are typically working with utility level projects.

4. Network bandwidth: Here the complexity of networks in a data center means much more complex network providers can meet their needs and Cisco perhaps jumps to mind.

All in all, there are a few organizations that will benefit as customers and traditional software companies rush to cloud en-masse.

Medium term market outlook September 2015

2015-09-13T07:53:00.001-07:00

Last few weeks have left the market cold. As many analysts have commented much of it was expected. In this post, I analyze the current secular trends and likely impact on markets.

China

Chinese stock market was a bubble, and when it burst, it has wiped out the savings of a lot of common people. For a country that was trying to shift to a consumption based model, the consumers are likely to suspend their consumption for a little while. I suspect the stock market impact on consumer behavior to last 6 to 8 months.

The impact of China slowdown will be felt by commodity producers feeding China as well as consumer discretionary companies targeting Chinese markets for a little while. I expect that the commodity and supplier slowdown to be more secular, as a recovered China will still be focusing more on internal consumption than an export led growth, which will be slower and more sustainable. Thus impact on commodity prices will be more sustained.

OPEC

OPEC has decided to punish the oil oversupply created by fracking in the US. It has tried to do that by increasing production and lowering prices. Even with the impact it has had on the earnings of primary oil producers, OPEC has decided to continue down this path. However, with China and most other economies slowing down and the move away from hydrocarbons as a secular trend, it is not known how sustainable this trend will be. Once oil rises to its natural price, the marginal producers will swing back into action and into viability. This will have an impact on economies such as Canada that had boomed in the era of high oil prices and fracking led production.

Europe

Europe is going through a slowdown. With an aging population and reducing workforce, it is looking at innovation to sustain its economy and looking for ways to reduce its operating costs in terms of energy. European companies that are profitable and innovative will look at entering new markets and perhaps look at innovation to offer superior products and services. Investment on its own infrastructure is likely to be low till it figures out how to get to a more sustainable operating model.

United States

US is currently the global innovation leader. It has dramatically increased and allowed innovation in all areas of its economy including energy, infrastructure, technology, products and services. As long as this trend continues, the US economy will continue to re-invent itself. Inspite of major homeland security threats, two massive bubbles in the past decade and a half, US has shown it can innovate itself out of problems that would cripple or destroy most countries. As its growth is largely innovation led, it will get affected by slowdowns in China and Europe but will maintain a secular growth trend.

The big fear ofcourse seems to be the imminent crash of the debt bubble. The federal reserve seems to be keen to start raising interest rates and that is likely to bring the bond prices down that have gone up in the recent past.

India

The Indian market has also contracted slightly but the economy is growing well. Largely driven by domestic consumption, economy is growing thanks to low fuel prices. However, as oil prices come back up this may get affected slightly.

Conclusion

Based on the above, it seems better to move away from companies that are carrying a lot of debt and focus on innovators specially those with a global footprint.

Analyzing IoT players

2015-09-13T06:23:00.002-07:00

Internet of Things (IoT) is the name given to a utopian scenario where inanimate "things" in our surroundings, will become network aware and will start interacting with each other.

IoT Analytics released a list of companies that they analyzed to be creating the buzz around IoT (http://iot-analytics.com/20-internet-of-things-companies/).

Here is the list...

As we can see, this includes some very large players that either became big because of the Internet and Smartphone revolutions, or lost out on it. They can be categorized either as platform companies, infrastructure companies or consumer companies.

Companies like Intel (INTC) have of course learned that they need to allow a lot of startups and innovators to flourish that eventually become competitors to their partners, if they want to keep customers to keep coming back to them. In the past, Intel waited for partners such as Microsoft (MSFT) to innovate and as a consequence lost out on the smartphone revolution. They still managed to survive in the server space as x86 and x64 became the dominant platform. Microsoft has ofcourse re-established itself as the cloud and Office applications tool company.

Future of companies like Blackberry (BBRY) is more uncertain, who are now trying to become a Platform As a Service (PAAS) for IoT. Companies like Amazon (AMZN) that defined the cloud as we know it today, ofcourse are much further than most.

A big driver of IoT is likely going to be Autonomous and Connected Driving platforms that seem to be gaining a lot of traction in the US. With an aging population who have an unmet need for mobility in sprawling American cities, to the worthy goal of zero fatalities, US federal and state governments are quite rapidly aligning themselves around this initiative. This is a space that may see the first real true IoT implementations as everything from cars to roads and traffic signs all become "smart".

A few companies like Here, earlier owned by Nokia (NOK) who are creating the digital representation of the roads will be equally big. Now owned by a consortium of Mercedes, BMW and Volkswagen, it is clear that these companies are set on ensuring that their future fleets are seen as the epitome of luxury and technology advancement.

Intel: The road ahead

2015-07-12T18:00:00.002-07:00

Intel is due to release quarterly earnings later this week. It is likely that due to falling PC shipments the overall revenue falls and has an impact on how the market sees the stock.

Based on Trefis analysis, Intel's current valuation is based on the following revenue components.

We can see that Server, Notebook and Desktop are nearly neck to neck. While server volumes seem to be going up slightly each year, it is unlikely that notebook and desktop replacements will provide the growth that is needed.

The current consensus is that EPS would come in at 2.12 which at Price to Earnings at 12.5 would translate to a target price of 26.5. An EPS of 2.5 or higher could only justify the current price.

This would become clear on Wednesday.

Simplistic Technical Analysis of the Russell 2000 (January 18th 2015)

2015-01-18T15:58:00.001-08:00

I am resuming the practice of posting simplistic technical analysis. This time, we are looking at 1 year candlestick chart for Russell 2000 on Yahoo stocks, with the following indicators on the chart.

1. Bollinger Bands at 20 days and 2 Standard deviation
2. 20, 50 and 200 day Simple Moving Averages
3. MACD indicator for 26, 12 and 9
4. 14 day Money Flow Index

We can see that the stock is now trending up with higher highs and higher lows. Also, 15 day Simple Moving Average (SMA) is above the 50 day Simple Moving Average (SMA) which is above the 200 day Simple Moving Average. All these to me are bullish indicators.

Based on above, we can see that the Russell is setting itself up for going higher (highlight 1). The MFI has moved fallen indicating a push higher is imminent (highlight 2). However, the MACD divergence has sloped down indicating that downward pressure is no longer there. Given indicators 1 and 3, it seems these are bullish indicators hinting that the index has room to move higher.

Based on the above, my amateur predictions are as follows:

1. The index will move higher to 1220 to 1250 points within a month from now.

2. The index could push all the way higher to 1280 or beyond by mid March.

Please do your own research before making any financial decisions.

Simplistic Technical Analysis for AMZN (November 9th 2014)

2014-11-09T14:43:00.000-08:00

Last week I had predicted that AMZN would encouter resistance at $305 or even at $310 and then head down. Turns out that the stock hit resistance at $305 and reversed.

Through the week, the stock trended down after encountering resistance at $305 and ended the week marginally below $300.

The overall trend continues downwards with lower highs and lower lows (highlight 1). Looking across at similar MACD separations (highlight item 2, 3 and 4) we can see that the stock moved upwards in each case. At highlight 2, the stock moved considerably higher since the overall trend was positive. At highlight 3, the stock moved marginally higher but predominantly sideways.

Looking at highlight 4, and overall trends, here are my amateur predictions for the coming week...

1. The stock will move marginally higher and max out at $302.50 or $308.50

2. The stock will reverse again and fall to between $290 and $295 over the period of next 2 to 3 weeks.

Lets see how this pans out..

Simplistic Technical Analysis for NFLX (November 8th 2014)

2014-11-08T15:37:00.002-08:00

Last week, I had predicted that Netflix was going to go higher. More specifically I had predicted the following...

1. Netflix will rise to $400 by end of next week and continue to 410-415 for the week after.

2. Netflix may test $425 for the week after, but will revert to 410 or so within a 4 week period.

In hindsight these predictions did not turn out to be true for primarily two reasons.

1. As per my fundamental analysis, the stock was already trading near its intrinsic value of $390.

2. From a technical analysis, the bollinger band had contracted perhaps and the stock was touching the top.

This week again, we are again looking at the 6 month candlestick chart for Netflix on Yahoo stocks. The following indicators have been added to the chart.

1. Bollinger Bands at 20 days and 2 Standard deviation

2. 20, 50 and 200 day Simple Moving Averages

3. MACD indicator for 26, 12 and 9

4. 14 day Money Flow Index

If we look at the charts this week, we can see that the stock has trended down after touching the top of the bollinger and has also reflected from the bottom by the end of the week (highlight 1). From a MFI perspective, the stock is not overbought as yet at 62 odd. MACD divergence (highlight 3) has marginally moved to positive territory, while MACD and signal are very much in oversold territory. Crossing the 20 day and 50 day SMA is a trigger for the stock to move higher and is liked by the bulls. So expect some upward tick if the stock crosses these thresholds.

Here are my short term amateur predictions for the week.

1. The stock will end the week at the upper Bollinger at 394.

2. It will reverse to below 390 the week after and then get pushed to around 405-410 around three weeks from now.

These are amateur predictions so please do your own research.

Simplistic technical analysis for Russell 2000 (November 8th 2014)

2014-11-08T14:41:00.000-08:00

Last week I had predicted that against all expectations, the Russell may push higher before reversing itself by end of the week.

The way things actually proceeded was that the Russell moved sideways and ended the week pretty much at the same place as last week.

Again, we are looking at 6 month candlestick chart for Russell 2000 on Yahoo stocks, with the following indicators on the chart.

1. Bollinger Bands at 20 days and 2 Standard deviation
2. 20, 50 and 200 day Simple Moving Averages
3. MACD indicator for 26, 12 and 9
4. 14 day Money Flow Index

Looking at the above, we can see that the Bollinger band has broadened, giving the stock room to grow (highlight 1). The MFI has moved sideways from last week indicating that a downward movement is likely but not guaranteed (highlight 2). However, the MACD divergence has sloped down indicating that downward pressure has reduced. Given indicators 1 and 3, it seems these are bullish indicators hinting that the index still has room to move higher.

I would also like to include the following chart... XLE (Energy index), XLP (Consumer Staples) and XLY (Consumer Discretionary). We can see that XLY is quite correlated to the Russell. The Discretionary spending outlook is weak indicating that Russell will continue its long term down ward trend eventually.

Based on the above, my amateur predictions are as follows:

1. The index will move higher by 10 or 15 points in the coming week (1185-1190) , before starting to fall.

2. By end of second week, the index would again fall marginally below 1180.

Please do your own research before making any financial decisions.

Simplistic Technical Analysis for FB (November 2nd 2014)

2014-11-02T12:10:00.001-08:00

Like most stocks that announced earnings this quarter, FB too fell from where analysts expected it to be.

Unlike other stocks, its short term technical indicators, indicate an imminent reversal that could start as soon as early next week. If that happens the stock could fall to almost 70 by end of next week.

Lets see how it turns out.

Simplistic Technical Analysis for AMZN (November 2nd 2014)

2014-11-02T11:40:00.003-08:00

Like many other technology companies, Amazon's earnings disappointed a lot of analysts who were expecting a rosier outcome.

The stock that fell after hours the earnings report, has been trying to recover much of last week.

In the last week, the stock has trended up and is showing signs of a continued momentum in the coming week. Both MACD indicator as well as MFI are indicating low to severe under bought territory indicating that stock will trend higher.

My estimate is that stock will encounter resistance at 305.50 (closing price on Friday) or even at 310-315 before trending down.

Simplistic technical analysis for NFLX (November 2nd 2014)

2014-11-02T06:50:00.001-08:00

Last week saw NFLX climb back above $390 to at around $392.77 by the end of the week. In my previous post last week, I had mentioned that trends seem to indicate that Netflix was going to cross 390 at head towards 400 in 2 to 3 weeks.

That turned out to be true. Let us examine this week, what the trends seem to indicate.

To conduct my analysis, I am using the following indicators. We are looking at 6 month candlestick chart for Netflix on Yahoo stocks. I have added the following indicators to the chart.

1. Bollinger Bands at 20 days and 2 Standard deviation
2. 20, 50 and 200 day Simple Moving Averages
3. MACD indicator for 26, 12 and 9

I have also added a fourth indicator

4. 14 day Money Flow Index

Based on last week, it is clear that $380 was a support level that needed to be tested. Once the stock tested that level on Thursday, it moved up. The growth trajectory seems similar to the rise in beginning of August that was a 3 week trend. Assuming a similar trend started October 16th when the stock bounced back from a poor earnings call, we can see that we are mid way of that trend. This implies by second week of November, we may be testing $415 or so.

Even looking at oversold, overbought indicators, MACD and MFI, we can see that stock still has room to grow from here. This may be tested at $400 and $410 levels for some profit taking since the valuation outlook has not changed substantially. My valuation of intrinsic value remains at $390 for Netflix.

Here are my short term amateur predictions

1. Netflix will rise to $400 by end of next week and continue to 410-415 for the week after.

2. Netflix may test $425 for the week after, but will revert to 410 or so within a 4 week period.

These are the predictions of an amateur so please make your own decisions based on individual analysis or professional advice.

Simplistic technical analysis for Russell 2000 (November 2nd 2014)

2014-11-02T04:59:00.003-08:00

In my last week's post I had speculated that Russell 2000 would touch 1160 and then a reversal would take place. However, this week, against all expectations Russell continued to move higher beyond 1160 and closed beyond 1173.

Lets see if we can assess the next moves for the index for the coming week.

I am using the following indicators

We are looking at 6 month candlestick chart for Russell 2000 on Yahoo stocks. I have added the following indicators to the chart.

1. Bollinger Bands at 20 days and 2 Standard deviation
2. 20, 50 and 200 day Simple Moving Averages
3. MACD indicator for 26, 12 and 9

I have also added a fourth indicator

4. 14 day Money Flow Index

Last week, the Russell had ended the week at 1118.82 and 1160 seemed far away. In one week the index climbed more than $55 to end at $1173.51. There was also a Breakaway gap on October 30th where the stock went from a previous day close of $1155 to next day open of $1169 (see item 6 on chart above), indicating some market news that raised market expectations. Whether it was the Feds announcement or Japanese announcing their own quantitative easing, or a combination is difficult to tell.

Looking at the MACD indicator, it has already touched 10.35 (item 1 in chart above). I was expecting a reversal above 7.35 indicated in my last week's post. The market is in overbought territory but is not done. So where do we go from here?

If we look at Money Flow Indicator (MFI), which is a lead indicator that combines 14 day price and volume movements, lets look back to beginning of October (item 2). It was a downward trend, but the MFI indicated an upward trend. It implied that a reversal would happen at some point. The stock fell further and then reversed.

However, if we look at current MFI (item 3), it is at 77 odd. While it supports that the stock is overbought, a value above 90 would have indicated unsustainable overbought levels. The present value does not indicate so. To me, this means that the upward trend will continue till we see a reversal or flattening out on the MFI. If we look at previous 6 month highs (item 5) we can see that MFI flattened first while price continued to rise a little bit before the trend reversed (item 7). MFI was at 72 odd when it reversed in that particular instance.

Again, coming to my amateurish predictions, I suspect the following:

1. The start of week the uptrend will continue to push index higher.

2. Russell 2K will continue to test previous highs at 1183 (item 4) and even 1208 (item 5).

3. Perhaps by end of next week we will see the beginning of the reversal.

Once again, I am learning technical analysis, so please do your own research before making any decisions.

Simplistic technical analysis for NFLX (October 26th 2014)

2014-10-26T11:21:00.000-07:00

It's already more than 10 days since Netflix fell through the bottom after announcing its latest earnings. Last week based on fundamental analysis, I proposed an intrinsic price of $390 odd. The stock has moved rapidly towards its intrinsic price.

There is not much to analyze when looking at long term trends, and we can see that the stock is steadily rising. I had suggested in my last week's blog post that price would rise above 375 in next 4 weeks. It has already gone past that in 1 week, which implies bulls are seeing a long term potential for the stock above $400.

Also, when focused on last 10 days pricing, we can see that the stock has crossed the 4 and 6 day moving averages and is approaching the 8 day average, which I suspect it will cross the coming week.

Based on the above, my amateur predictions are that the stock will approach its intrinsic value of $390 this coming week. I do feel that for $390 price to be validated, a lot more news on the international side of the business needs to show up as positive, but purely based on momentum, we should see the price rise to around $400 to $405 in the next 2 to 3 weeks. We may see some short term profit taking at 400 as well, which seems to be the next logical resistance point.

Simplistic technical analysis for Russell 2000 (October 26th 2014)

2014-10-26T08:26:00.003-07:00

In my previous week's post, I had suggested that the Russell 2000 Index will rise to 1160 and then fall. This past week the index did rise as suggested, but not all the way to 1160 as yet. The index reached 1120 and I think it will continue that trend till 1145-1150 by the end of the week.

In terms of technical analysis, I will use the similar set of indicators as previous week, with minor changes.

We are looking at the one year candlestick chart for Russell 2000 on Yahoo stocks. I have added the following indicators to the chart.

1. Bollinger Bands at 20 days and 2 Standard deviation
2. 20, 50 and 200 day Simple Moving Averages
3. MACD indicator for 26, 12 and 9

If we look at past week's action, the overall downward trend continued from July 2014 (shown by red arrows 1 and 2).

The daily candlestick formation indicates a pause before the stock will continue the upward trend in the near term (next 3 to 4 days). This is highlighted in the red boxes (5, 4 and 3) to compare with historical trends.

The short term reversal will start perhaps middle to end of next week, as the index touches the top of the bollinger band as well as MACD divergence histogram touches 7.3. The MACD and signal however are much below zero indicating that the price will continue higher in the short term though at perhaps a slower rate.

My amateurish predictions:

1. The index price will now rise at a slower rate (with temporary pullbacks on some days of the week) to 1150 -1160 towards the end of the week.

2. The reversal will not start before the end of the week, by end of 2 weeks we may see the price testing new lows at 1030 or lower.

FB Valuation (October 2014)

2014-10-19T11:58:00.001-07:00

As per the Trefis chart, the fair valuation of FB is $65.50

This assumes a diluted EPS of $1.73

Netflix Valuation (October 2014)

2014-10-19T11:21:00.000-07:00

Netflix fell almost 27% as soon as the latest earnings were reported. It was assumed that NFLX would add to subscribers, but subscriber growth was under the expectations and so was EPS growth.

In this post, I will present my assessment of NFLX intrinsic value. Netflix's valuation is based on its growth in US and international subscribers, margins per subscription category as well as content costs for the different segments.

Trefis the online valuation team assessed NFLX valuation to be $315 prior to latest earnings release. You can see that the price is made up of $5.37B revenue and $5.15B in expenses for 2014.

1. Average fee per subscriber will rise from $7.61 (2014) to $8.78 (2021)

2. US Domestic Streaming Subscribers will rise from 39.6 million customers to 57 million in 2021

3. Average fee per subscribing international customer will rise from $$7.17 in 2014 to $ 8.31 in 2021

4. International subscribers will rise from 26.2 million to almost 100 million

5. The other element where my assessment of Netflix's trajectory is different in terms of international contribution margin. I feel this will grow from 3% in 2014 to 42.5% which will bring it more in line with Domestic contribution margin.

6. Last element where my assessment is different from Trefis team is Technology R&D costs. I think as Netflix becomes more international, it will have opportunities to lower its Technology R&D costs by at least 0.5%.

7. Final analysis reveals a target of $390....

Ofcourse, the market is not factoring an international growth of similar proportions and it is unlikely that it will do so for a while...

Update October 26th: The stock price closed on Oct 24th at $385, which implies that the market has factored in a more rapid international market growth. We could see the stock cross its valuation of $390 in the coming week and perhaps north of $400 in first two weeks of November 2014.

Simplistic technical Analysis for NFLX (19th October 2014)

2014-10-19T08:43:00.001-07:00

Last week when Netflix announced its earnings, it fell in a free-fall to almost $330 from $455 odd. The company had missed earnings, missed adding new subscribers at the rate it was anticipated, as well as given a lower guidance for the year.

Many long term investors jumped ship after hours, leading to a massive drop in the price. The stock wiped off all the gains it had made since April.

Looking at the 1 year chart some interesting things emerge...

1. A typical precipitous drop takes 7 to 9 weeks to recover. Stock has recovered in 7 to 9 weeks in the last year everytime it has dropped 20 to 30% .

2. There is long term support between 320 and 330.

3. There are resistance levels at 400 and 450.

Given these indicators, I suspect, we will find the stock above 375 and most likely below 400 in 4 weeks time.

Looking at the 2 year graph, we can see that the stock has not stayed below the 200 day SMA for too long.

Given that the 200 day SMA has been on a positive slope for the past 2 years, it seems unlikely that bulls will reverse their thesis for too long. In fact, bulls may see it a buying opportunity to take bigger positions, which will see the stock slowly trend upwards.

Lets see how it pans out.

Simplistic Technical Analysis for Russell 2000 (October 19th 2014)

2014-10-19T06:30:00.001-07:00

I am fairly new at trying to do technical analysis. But in this post, I thought I will give it a shot. I am looking at the Russell 2000 to understand the direction it will take.

We are looking at the one year candlestick chart for Russell 2000 on Yahoo stocks. I have added the following indicators to the chart.

1. Bollinger Bands at 26 days and 2 Standard deviation
2. 15, 50 and 200 day Simple Moving Averages
3. MACD indicator for 26, 12 and 9

The way I see it, based on last trading day of Friday 17th October 2014 the stock is set for a short term reversal. It has bottomed out at the 52 week low, and is set for a short term reversal, but for a further fall in the medium term.

There are a few things to consider.

1. Overall we are getting lower highs and lower lows, so long term trend is down. (Red arrows in the chart).

2. The latest down turn included three consecutive days of losses, which indicates the secular trend is down as well. (Indicated by red squares on the chart)

3. This is different from indicators of a reversal where we start with morning stars and end with evening stars (indicated in green boxes). Here we start with evening stars and end with morning stars meaning, the chart is failing to break a falling resistance line.

My amateurish predictions:

1. The index will rise to 1150 or 1160 in the near term (under a week), and then reverse and fall 70 to 100 points.

2. By end of 2 weeks, the index will be at 1040 or 1060.

This is my line in the sand. Lets see how it pans out.

Blackberry unveils new strategy

2014-07-06T14:33:00.002-07:00

In the latest earnings call, CEO John Chen, clearly articulated the long term strategy for turning Blackberry around. It was simple. In the developed markets, focus on Enterprise and Security, and in developing markets on a Consumer phone that promotes BBM.

In line with these strategic proclamations, Blackberry has out-sourced its device manufacture for developing markets to Foxconn, and the App eco-system to Amazon. This means that the brand will now go back to its roots of Enterprise and Security for its core markets.

The core capability that allows Blackberry's secure enterprise offering is its QNX Operating System. QNX Operating System is also useful for other high performance embedded applications. In the latest move, Blackberry has sold part of its R&D capabilities to Volkswagon to allow a dedicated channel for that business.

Playing on its two strengths would definitely help Blackberry focus its brand and its offerings to what matters most in these markets.