>> From theCUBE studios
in Palo Alto and Boston,
bringing you data-driven
insights from theCUBE and ETR,
this is Breaking Analysis
with Dave Vellante.
>> The steepest drop in the
stock market since June 11th
flipped the narrative and
sent investors scrambling.
Tech got hammered after a two-month run,
and people are asking questions.
Is this a bubble popping, or
is it a healthy correction?
Are we now going to see a
rotation into traditional stocks,
like banks and maybe certain cyclicals
that have lagged behind
the technology winners?
Hello, everyone, and welcome
to this week's episode
of Wikibon's CUBE Insights powered by ETR.
In this Breaking Analysis, we
want to give you our perspective
on what's happening in
the technology space
and unpack what this sentiment flip means
for the balance of 2020 and beyond.
Let's look at what happened
on September 3rd, 2020.
The tech markets recoiled this week
as the NASDAQ Composite dropped
almost 5% in a single day.
Apple's market cap
alone lost $178 billion.
The Big Four: Apple,
Microsoft, Amazon, and Google
lost a combined value
that approached half a trillion dollars.
For context, this number is larger
than the gross domestic product
for countries as large as
Thailand, Iran, Austria, Norway,
and even the UAE, and many more.
The tech stocks that have
been running due to COVID,
well, they got crushed.
These are the ones that we've highlighted
as best positioned to
thrive during the pandemic,
you know, the work-from-home,
SaaS, cloud, security stocks.
We really have been talking
about names like Zoom,
ServiceNow, Salesforce, DocuSign, Splunk,
and the security names like
CrowdStrike, Okta, Zscaler.
By the way, DocuSign
and CrowdStrike and Okta
all had nice earnings beats,
but they still got killed
underscoring the sentiment shift.
Now the broader tech market
was off as well on sympathy,
and this trend appears to be continuing
into the Labor Day holiday.
Now why is this happening, and why now?
Well, there are a lot of opinions on this.
And first, many, like
myself, are relatively happy
because this market needed
to take a little breather.
As we've said before, the stock market,
it's really not reflecting
the realities of the broader economy.
Now as we head into September
in an election year,
uncertainty kicks in,
but it really looks like this pullback
was fueled by a combination
of an overheated market
and technical factors.
Specifically, take a look
at volatility indices.
They were high and rising,
yet markets kept rising along with them.
Robinhood millennial investors
who couldn't bet on sports
realized that investing in stocks
was as much of a rush and
potentially more lucrative.
The other big wave,
which was first reported
by the Financial Times,
is that SoftBank made a huge bet on tech
and bought options tied to
around $50 billion worth
of high-flying tech stocks.
So the option call volumes skyrocketed.
The call versus put ratio
was getting way too hot,
and we saw an imbalance in the market.
Now market makers will often
buy an underlying stock
to hedge call options to ensure
liquidity in these cases.
So to be more specific,
delta in options is a
measure of the change
in the price of an option
relative to the underlying stock,
and gamma is a measure of
the volatility of the delta.
Now usually, volatility
is relatively consistent
on both sides of the trade,
the calls and the puts,
because investors often hedge their bets.
But in the case of many
of these hot stocks,
like Tesla, for example,
you've seen the call skew be much greater
than the skew in the downside.
So let's take an example.
If people are buying cheap
out of the money calls,
a market maker might
buy the underlying stock
to hedge for liquidity.
And then if Elon puts out some good news,
which he always does, the stock goes up.
Market makers have to then buy
more of the underlying stock.
And then algos kick in to buy even more.
And then the price of the call goes up.
And as it approaches
it at the money price,
this forces market makers
to keep buying more
of that underlying stock.
And then the melt up until it stops.
And then the market flips
like it did this week.
When stock prices begin to drop,
then market makers were going
to rebalance their portfolios
and their risk and sell
their underlying stocks,
and then the rug gets
pulled out from the markets.
And that's really why some of the stocks
that have run dropped so precipitously.
Okay, why did I spend
so much time on this,
and why am I not freaking out?
Because I think these market moves
are largely technical versus fundamental.
It's not like 1999.
We had a double whammy
of technical rug pulls
combined with poor underlying fundamentals
for high-flying companies like CMGI
and Internet Capital
Group, whose businesses,
they were all about
placing bets on dot-coms
that had no business models
other than non-monetizable eyeballs.
All right, let's take a look at the NASDAQ
and dig into the data a little bit.
And I think you'll see what I mean
and why I'm not too concerned.
This is a year-to-date
chart of the NASDAQ,
and you can see it bottomed
on March 23rd at 6,860.
And then ran up until June
11th and had that big drop,
but was still elevated at 9,492.
And then it ran up to over
12,000 and hit an all-time high.
And then you see the big drop.
And that trend continued
on Friday morning.
The NASDAQ Composite traded below 11,000.
It actually corrected to 10% of its high,
9.8% to be precise, and
then it snapped back.
But even at its low, that's
still up over 20% for the year.
In the year of COVID,
would that have surprised you in March?
It certainly would have surprised me.
So to me, this pullback
is sort of a relief.
It's good and actually very
normal and quite predictable.
Now the exact timing of these pullbacks,
of course, on the other hand
is not entirely predictable.
Not at all, frankly, at
least for this observer.
So the big question is
where do we go from here?
So let's talk about that a little bit.
Now the economy continues to get better.
Take a look at the August
job report; it was good.
1.4 million new jobs, 340,000
came from the government.
That was positive numbers.
And the other good news is it translates
into a drop in unemployment under 10%.
It's now at 8.4%.
And this is really good
relative to expectations.
Now the sell-off
continued, which suggested
that the market wanted to keep
correcting, so that's good.
Maybe some buying opportunities
would emerge in over
the next several months,
the market snapped back,
but for those who have been waiting,
I think that's going to happen.
And so that snapback,
maybe that's an indicator
that the market wants to
keep going up, we'll see.
But I think there are
more opportunities ahead
because there's really
so much uncertainty.
What's going to happen with
the next round of the stimulus?
The jobs report, maybe that's
a catalyst for compromise
between the Democrats and
the Republicans, maybe.
The US debt is projected
to exceed 100% of GDP this calendar year.
That's the highest it's
been since World War II.
Does that give you a good feeling?
That doesn't give me a good feeling.
And when we talk about the election,
that brings additional uncertainty.
So there's a lot to think
about for the markets.
Now let's talk about
what this means for tech.
Well, as we've been projecting for months
with our colleagues at ETR,
despite what's going on in
the stock market and its rise,
there's those real tech winners,
we still see a contraction in 2020
for IT spend of minus 5 to 8%.
And we talk a lot about the
bifurcation in the market
due to COVID accelerating
some of these trends
that were already in place,
like digital transformation
and SaaS and cloud.
And then the work-from-home kicks in
with other trends like video conferencing
and the shift to security spend.
And we think this is going
to continue for years.
However, because these
stocks have run up so much,
they're going to have very
tough compares in 2021.
So maybe time for a pause.
Now let's take a look at the
IT spending macroeconomics.
This data is from a series
of surveys that ETR conducted
to try to better understand
spending patterns due to COVID.
Those yellow slices of the pies
show the percent of customers
that indicate that their budgets
will be impacted by coronavirus.
And you can see there's a steady increase
from mid-March, which blend into April,
and then you can see the June data.
It goes from 63% saying
yes, which is very high,
to 78%, which is very, very high.
And the bottom part of the chart
shows the degree of that change.
So 22% say no change in the latest survey,
but you can see much more of a skew
to the red declines on the
left versus the green upticks
on the right-hand side of the chart.
Now take a look at how IT buyers
are seeing the response to the pandemic.
This chart shows what companies are doing
as a result of COVID in
another recent ETR survey.
Now of course, it's no surprise,
everybody's working from home.
Nobody's traveling for business,
not nobody, but most people
aren't, we know that.
But look at the increase in hiring freezes
and freezing new IT deployments,
and the sharp rise in layoffs.
So IT is yet again being
asked to do more with less.
They're used to it.
Well, we see this driving an
acceleration to automation,
and that's going to benefit,
for instance, the RPA players,
cloud providers, and
modern software vendors.
And it will also precipitate a tailwind
for more aggressive AI implementations.
And many other selected names
are going to continue to do well,
which we'll talk about in a second,
but they're in the
work-from-home, the cloud,
the SaaS, and the modern data sectors.
But the problem is those
sectors are not large enough
to offset the declines
in the core businesses
of the legacy players who have
a much higher market share,
so the overall IT spend declines.
Now where it gets kind of interesting
is the legacy companies,
look, they all have growth businesses.
They're making acquisitions,
they're making other bets.
IBM, for example, has its hybrid
cloud business in Red Hat,
Dell has VMware and it's got
work-from-home solutions,
Oracle has SaaS and cloud,
Cisco has its security business,
HPE, it's as a service
initiative, and so forth.
And again, these businesses
are growing faster,
but they are not large enough
to offset the decline
in core on-prem legacy
and drive anything more
than flat growth, overall,
for these companies at best.
And by the time they're large enough,
we'll be into the next big
thing, so the cycle continues.
But these legacy companies
are going to compete with the upstarts,
and that's where it gets interesting.
So let's get into some
of the specific names
that we've been talking
about for over a year now
and make some comments
around their prospects.
So what we want to do is let's start
with one of our favorites: Snowflake.
Now Snowflake, along with Asana, JFrog,
Sumo Logic, and Unity,
has a highly anticipated upcoming IPO.
And this chart shows new
adoptions in the database sector.
And you can see that Snowflake,
while down from the October 19th survey,
is far outpacing its competitors,
with the exception of Google,
where BigQuery is doing very well.
But you see Mongo and AWS remain strong,
and I'm actually quite encouraged
that it looks like Cloudera
has righted the ship
and you kind of saw that
in their earnings recently.
But my point is that
Snowflake is a share gainer,
and we think will likely
continue to be one
for a number of quarters and years
if they can execute and compete
with the big cloud players,
and that's a topic that
we've covered extensively
in previous Breaking Analysis segments,
and, as you know, we think
Snowflake can compete.
Now let's look at automation.
This is another space
that we've been talking about quite a bit,
and we've largely focused on two leaders:
UiPath and Automation Anywhere.
But I have to say, I
still like Blue Prism.
I think they're well-positioned.
And I especially like
Pegasystems, which has, for years,
been embarking on a
broader automation agenda.
What this chart shows is net score
or spending velocity
data for those customers
who said they were
decreasing spend in 2020.
Those red bars that we showed earlier
are the ones who are decreasing.
And you can see both
Automation Anywhere and UiPath
show elevated levels within that base
where spending is declining,
so that's a real positive.
Now Microsoft, as we've reported,
is elbowing its way into the market
with what is currently an
inferior point product,
but, you know, it's Microsoft,
so we can't ignore that.
And finally, let's have a look
at the all-important security sector,
which we've covered extensively
and put out a report recently.
So what this next chart
does is cherry-picks
of a few of our favorite names,
and it shows the net score
or spending momentum and the granularity
for some of the leaders
and emerging players.
All of these players are in the green,
as you can see in the upper right,
and they all have decent
presence in the dataset
as indicated by the shared NS.
Okta is at the top of the
list with 58% net score.
Palo Alto, they're a more mature player,
but still, they have
an elevated net score.
CrowdStrike's net score
dropped this quarter,
which was a bit of a
concern, but it's still high.
And it followed by SailPoint and Zscaler,
who are right there.
The big three trends
in this space right now
are cloud security,
identity access management,
and endpoint security.
Those are the tailwinds,
and we think these trends have legs.
Remember, net score in this survey
is a forward-looking metric,
so we'll come back and
look at the next survey,
which is running this month
in the field from ETR.
Now everyone on this chart
has reported earnings,
except Zscaler, which
reports on September 9th,
and all of these companies are doing well
and exceeding expectations,
but as I said earlier,
next year's compares won't be so easy.
Oh, and by the way, their stock prices,
they all got killed this week
as a result of the rug pull
that we explained earlier.
So we really feel this
isn't a fundamental problem
for these firms that we're talking about.
It's more of a technical in the market.
Now Automation Anywhere and UiPath,
you really don't know
because they're not public
and I think they need to
get their house in order
so they can IPO,
so we'll see when they
make it to public markets.
I don't think that's an if,
that I think they will IPO,
but the fact that they haven't filed yet
says they're not ready.
Now why wouldn't you IPO if
you are ready in this market
despite the recent pullbacks?
Okay, let's summarize.
So listen, all you new investors out there
that think stock picking is easy,
look, any fool can make money
in a market that goes up every day,
but trees don't grow to the moon
and there are bulls and bears and pigs,
and pigs get slaughtered.
And I can throw a dozen
other cliches at you,
but I am excited that you're learning.
You maybe have made a few
bucks playing the options game.
It's not as easy as you might think.
And I'm hoping that you're
not trading on margin.
But look, I think there are going to be
some buying opportunities ahead,
there always are, be patient.
It's very hard, actually
impossible, to time markets,
and I'm a big fan of
dollar-cost averaging.
And young people, if you make
less than $137,000 a year,
load up on your Roth,
it's a government gift
that I wish I could have
tapped when I was a newbie.
And as always, please do your homework.
Okay, that's it for today.
Remember, these episodes, they're
all available as podcasts,
wherever you listen, so please subscribe.
I publish weekly on wikibon.com
and siliconangle.com,
so check that out,
and please do comment
on my LinkedIn posts.
Don't forget, check out etr.plus
for all the survey action.
Get in touch on Twitter, I'm @dvellante,
or email me at
david.vellante@siliconangle.com.
This is Dave Vellante for
theCUBE Insights powered by ETR.
Thanks for watching, everyone.
Be well, and we'll see you next time.
(gentle upbeat music)
