>> 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)

from the cube studios in Palo Alto in Boston connecting with thought leaders all around the world this is a cube conversation we've been reporting that the Kovan pandemic has created a bifurcated IT spending outlook legacy on print on-prem infrastructure in traditional software licensing models they're giving away two approaches that enable more flexibility in business agility automation initiatives that reduce human labor labor that's not value add has really been gaining traction for the past 18 months the pandemic has only accelerated to focus on such efforts and robotic process automation or RPA along with machine intelligence have been the beneficiaries relative to other segments of the IT stack welcome to this week's wiki Vaughn cube insights powered by ETR my name is Dave Volante and in this breaking analysis we're gonna update you on the latest demand picture for the red-hot RP a sector will also focus on two main areas today first we're gonna review the basics of the RP a space for those that may not be as familiar with the market next we'll share with you the spending data and outlook in the RT ARPA space from ETR and we're really dig into the kovat impact on this market segment and take a look at the competitive outlook we're gonna pay particular attention to the leaders in this space and then we're gonna wrap up so let me start with kind of the RPI basics if you're not familiar with our PA here's what you really need to know happy hour PA gained traction by taking software robots and pointing them at existing applications to mimic human behavior and automate repeatable and well understood processes keyboard behavior that is now a challenge with early RPA implementations is that most customers chose to point these bots at legacy backend office systems now that the open emails and fill out forms and the like so that's great because it digitizes processes around legacy systems awesome ROI but the problem is that these bots will they interact with a user interface of that application and many of these apps they really don't have an API so any change in data or the interface breaks the automation down now more recently automations are interacting to apps through api's that makes them less brittle but of course you know the quality of api's as you well know will vary so enter your machine intelligence into the equation there's been a lot of discussion around the intersection of our PA and AI and that's allowed organizations to automate more processes that do so in a way that takes an augmentation approach using things like natural language processing or speech recognition and machine learning to iterate and improve automations and you know this trend holds a lot of promise and is a lot of talk about it in the marketplace particularly in the form of really trying to understand which processes to automate and where the best ROI can be achieved for organization but it's important to note it's really still early days with this AI intersection nonetheless investors you know they're ahead of the game they've they've poured money into this space as we've been reporting now for you know well over a year or two uipath an automation anywhere have raised close to two billion dollars and have been growing very very rapidly we're gonna talk more about that existing players like blue prism they've actually benefited from the automation tailwind and other you know process business process players take for example like Pegasus Toombs I mean they started in the early 80s they've added our PA to their platform as have many others by the way including Microsoft who has barely been trying to crack into this market for a while in fact Microsoft just bought a small company called soft emotive and to really try to shore up its RP a game but you know just a quick aside in our view Microsoft is their well behind the leaders it's gonna take years for them to get where the leaders are today yeah but it's Microsoft so you don't want to ignore them now the big buzzword here is hyper automation evidently it's a torrent a coin term coined by Gartner and uipath has picked up on this in a big way and so is automation anywhere now those both those companies are in hyper growth so it plays more established companies for example pega yeah they look at the term differently you know of course their vision is Rp a is a small portion of their their their vision these established firms they want to incorporate their business process automation z' that have been built over decades into a systems view of the organization using existing platforms the upstarts of course they want to build from new platforms what's really happening in the marketplace and like in many situations is this emergence of a hybrid you know quasi-equilibrium here we saw this in mainframes who certainly you know saw it in middleware enterprise data warehouses and we've seen it in the cloud you know where most companies don't just throw away the investments that they've made in legacy systems now they're stable they're operationalized and rather what they do is they overlay the more modern technologies and they kind of create an abstraction layer of their business that incorporates the old and the new but the growth is much much higher in the new as we know it and that leads me to the TAM the total available market let's look at the RPM you know we think the TAM expansion opportunity is pretty substantial we put this chart together awhile back that really underscores that the progression of our PA from you know simple BOTS automating back-office functions to really infusing automations in virtually all applications you know if you expand the definition beyond our PA software into the broader automation opportunities the other thing about it this this could be a much much larger than depicted here maybe well over a hundred billion dollar Tam as a I powered automation becomes fundamental to every organization in their operating model anyway it's a big opportunity and the data suggests that it's growing rapidly so let's turn to the data let's look at the spending and bring ETR into the equation so which technologies are showing new adoptions in tech on balance the tech sector has done pretty well despite this pandemic at the time of this video the Nasdaq Composite is up about a point and a half year to date and as we know from previous surveys that heading into 2020 there was a pullback in a narrowing of new technology adoptions as organizations began to operationalize their digital initiatives and place bets this chart shows new adoptions across three survey dates the gray is April last year the blue is January which is pre-pandemic really and the survey of more than 1,200 IT buyers is really the latest one which is the April so this survey took place at the height of the US lockdown and you can see look at all PA it's got 22% new adoptions what does that mean it means that 22% of the customers in the survey we're planning our PA spend there that are planning for our PA spend are planning new adoptions now that's a figure that says hi as machine learning and artificial intelligence and of course as we said these two technologies are increasingly playing a role together so our PA adoptions more than containers more than videoconferencing which has had this tailwind from work from home and more than cloud more than mobile device management so it's really one of the hottest sectors in terms of new adoptions now let's look at some of the players in our PA and try to really better understand their positions here's a chart that uses the two primary met work net metrics that we've been sharing over the past year net score or spending momentum is on the y-axis and market share which is a measure of pervasiveness in the data set is on the x-axis the chart plots are PA players in the et our data set and you can see uipath in automate anyway our the to market leaders they show both spending momentum and market awareness then you see blue prism and peg is in there and the rest of the pack and I'll say this about pegye systems I recently spoke to their CEO Alan trifler he's an amazing self-made billionaire he's got a great business you know peg that really doesn't see you know itself anyway as an RPA play and I don't either our PA is really a small part of their story but they're in the data set and certainly automation related so it's what's showing but it's a bit of an oranges and tangerines comparison now notice in the upper right of this chart you can see that the net scores are in the green shade and there's a little bit of red in there but remember net score is a simple metric sort of like Net Promoter Score in PS it subtracts customer spending less from those spending more and that's the difference and you can see very very strong net scores for both uipath in automation anywhere and I'm gonna discuss that more in a moment but there's lots of green in the chart and even pega or as I said it's really not an RPA specialist they've got a solid net score now let's look at a time series of this net score in the spending momentum what we do here is this chart takes the three leaders uipath automation anywhere and blue prism and it plots their net scores over time goes all the way back to the January 18 survey now let me make a couple of points here uipath in automation anywhere 70% plus net scores is very impressive and amongst the highest in the data set even though you see some of the Lawson momentum in the UI path line and the convergence with automation anywhere they're both very very strong and you can see in the upper right you can see the shared end which is an indicator of the presence of the company in the data set how many response is out of the 1200 plus so you might say well wait a minute you I passed the I had they had layoffs last fall and automation anywhere they more recently just recently had layoffs how can they show such strength well I make a few points first fast-growing companies like this that have raised you know nearly a billion dollars each they've got investors to serve and they're going to course-correct when they feel like there's some slack in the system yet to me it's not a sign of fundamental trouble second both of these companies are going to continue to invest heavily on research and development uipath has 60 openings on its website mostly in engineering automation anywhere they only have nine openings but I would expect both companies to up their engineering hiring especially given the Microsoft acquisition today third remember this is not an indicator of the amount of money spent in absolute dollars rather it looks at spending momentum of the doll in dollar terms as well if you were to cut the data by larger companies let's say the Fortune 1000 where the average contract values are higher you'd see that you I pass a net score jumps to 77% automation anywhere would drop into the 60s and blue prison would stay about the same where it is today today so let's look for example in the global 2000 so we'll expand that notion of a fortune 1000 let's go to the global 2000 where there's more of an end slice and you can see the picture changes from the overall data sample this chart shows the net scores in the global 2000 where the ends are more than 25 responses across all the three surveys gray as last April blue was January yellow is April 2020 and you can see the year-on-year decline and the modest step down during the the Colvin lockdown which again surveyed in April but still very elevated net scores for uipath and automation anywhere and respectable for the other so the point is Co vyd has not really crushed the RPA market I mean if anything is witnessed by the new adoptions it's maybe it's certainly better off than most IT sectors now let's dig into the net scores of the two leaders a little bit more uipath and automation anywhere remember net scores of very important metric and I want to spend the moment explaining how we use it you see this wheel chart this red green gray it really shows how the net score method is applied now we've taken the UI path example from the April survey net score works by asking buyers relative to last year are you adopting new that's the 28% are you increasing spend by 6 percent or greater that's 51 percent are you expecting flat spending that's 15 percent or a decrease in spend of 6 percent or more or finally are you replacing the vendor checking them out so look at this you can see for UI path added up 79 percent of respondents expect to increase spending in 2020 relative to 2019 and again remember this survey was taken at the height of the kovat lockdown let me show you the data for automation anywhere same exact methodology 72 percent of automation anywhere a customer's plan to spend more only 1 percent plan to spend less with zero replacements so very strong fundamentals as it relates to spending momentum for both UI path and automation anywhere now how is presents or what we call market share in the data set changing on a year-on-year basis well this is the last data point that I want to show and it relates to that metric of market share which again is the measure of pervasiveness it's calculated by dividing the number of mentions of a vendor in a sector by the total mentions of that sector in this case RP a and this chart shows the year-on-year change in customer growth comparing market share from the April 20 survey with that from the April 19 data and you can see the yellow line at 11% is the sector average uipath has the fastest growth automation anywhere is growing faster than the market average and blue prism is below the average now this looks back to last year and it'll be interesting to see how this picture changes with the next survey based on what we're seeing with the next net scores which is a forward-looking metric all right let's wrap so we're seeing that the bifurcated market is high that the automation trend generally is real and that the RP a drill down specifically shows us an example in action we think that kovat 919 not hit these numbers would actually be higher by maybe as much as 10% but in the near near to mid term we would expect a pretty fast return to normal patterns of demand if I put normal and air quotes for our PA in fact you know we don't expect a real v-shaped recovery across the board but our PA is you know one of those areas where we actually may see such a rebound the pandemic really underscores the need to accelerate digital transformations our PA we think is going to be a central player in that movie along with AI the cloud all right we have to leave it there for now so remember these episodes they're all available as podcasts just all you got to do is search breaking analysis podcasts please subscribe to the series would appreciate that and check out ETR dot plus for all the data I also publish a full report every week on wiki bound comm tons of data there as well and Silicon angle comm has all the news and I published there alright this is Dave Volante thanks for watching this episode of the cube insights powered by ETR we'll see you next time [Music]