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TWTR: Staying Short, But...

Takeaway: See SUMMARY BULLETS and SUMMARY CHARTS at the end of the note for main takeaways

SUMMARY BULLETS

  1. 4Q13 Earnings Exposes Holes in Business Model: Both Membership Growth and Engagement decelerated meaningfully in 4Q.  Street is now questioning the runway for both growth drivers.  We believe User Growth is the bigger issue.
  2. Biggest Hole Yet to Emerge: Monetization has been a considerable growth driver, but running out of runway.  Growth likely to decelerate beginning 2H14/2015.
  3. Consensus Estimates Rising: Estimates are up with the 4Q13 earnings and 2014 guidance beat; the mistake is increasing already-lofty 2015-2016 estimates as well
  4. But Continue to See Near-Term Upside: We see consensus estimates for 1H14 as more than achievable.  Since the stock has already taken a hit, a near-term beat could refuel optimism.

 

TWTR 4Q13 EARNINGS SUMMARY

  • Revenues: 4Q13 Revenue of $245M, beating both our estimate of $218.9M and consensus of $218.1M
  • Membership (Reach): Monthly Active User (MAU) growth came in lower than we expected at 30% y/y vs. our estimate of 38%.  US Growth decelerated to 20% y/y, vs. 33% in the prior quarter
  • Timeline Views/User (Engagement): Declined -3% y/y, decelerating from the 8% growth in prior quarter. 
  • Ad revenue/timeline view (Monetization): accelerated sharply, up 76% y/y vs. 49% in prior quarter. 
  • 2014 Guidance: $1.15-$1.20B vs. consensus of 1.13B and our estimate of $1.08B.  1Q14 revenue guidance of $230M-$240M is ahead of our original estimate of $230, and well ahead of prior consensus of $214. 

 

SHORT THESIS SUMMARY

Our original short thesis centered around emerging headwinds to two of TWTR’s core growth drivers 1) Reach (User Growth) and 2) Monetization (Ad Revenue per timeline view). 

  1. Reach (Membership Growth): Our major concern was understated penetration; particularly in the US.  We have seen studies suggesting that as many as 50% of twitter’s total users are no longer active; meaning TWTR already penetrated a larger portion of the US population than its Monthly Active Users (MAUs) metrics suggest.  Average Revenue per User (ARPU) in the US is considerably higher than the international market (8x greater), so if US slows, international can’t compensate
  2. Monetization (Ad Revenue per timeline view): This has been an accelerating source of growth for TWTR over the LTM.  However, we believe this has a limited runway because it was largely driven by what we call the “Mobile Migration”, which we see as a non-recurring/waning benefit.  The “Mobile Migration” is the combination of TWTR introducing its main ad products to its mobile platform (where the company has had greater success with monetization) while users were steadily adopting the mobile app.  The former can’t be repeated; the latter is near full penetration.  The only other options from here is to introduce new ad products, or the ad load itself; both will test the loyalty of its users.

 

SHORT THESIS UPDATE

  1. Reach: TWTR only picked up an additional 1M users sequentially in 4Q13 ( up 2% q/q).  For perspective, FB picked up 2M users despite US Monthly Active User (MAU) penetration that is over 3x that of TWTR (73% vs. 22%, respectively).  We continue to believe the upside to TWTR’s user growth is limited since total US penetration is higher than its MAU metrics suggest. The emerging question is whether TWTR's addressable market is as large as FB’s, and if it can achieve comparable penetration down the road.
  2. Engagement: the 4Q deceleration in timeline views/MAU is concerning.  Management suggested that user interface improvements limited the need to refresh the site as often, which is how it measures timeline views.  While plausible, we believe that users gravitating over to TweetDeck, where the company can’t measure timeline views, may also be partly to blame.  The latter would be concerning since we do not believe the company is effectively monetizing the TweetDeck platform.
  3. Monetization: the 4Q acceleration in ARPU suggests the Mobile Migration may have more near-term upside than we originally thought; although we suspect some of that acceleration is due seasonal spike in 4Q ad spending (holiday shopping season).  Regardless, our thesis hasn’t changed.  Mobile drove substantially all of TWTR’s 4Q13 ad revenue growth.  With mobile now representing over 75% of all ad revenue (vs. 55% in 4Q13), the runway gets shorter from here.  The comp setup switches from mobile representing the minority to majority of revenue moving forward.   

 

CONSENSUS ESTIMATES LOFTY, BUT MORE REASONABLE NEAR-TERM

Following the beat on both 4Q13 Estimates and 2014 Guidance, Consensus estimates have risen substantially.  Where we take issue is 2H14 and 2015; more so on the latter.  While it may be premature to look that far out, TWTR’s stock will ultimately trade on growth expectations.  While TWTR is down 33% from its highs, it still trades at a premium to social media comps FB and LNKD.  As soon as the street realizes that company can’t grow +50% in perpetuity, the stock will lose further momentum. 

 

Timing that catalyst is the challenge; especially since we see upside to 1H14 estimates.  TWTR’s 4Q13 results have rebased expectations for the Reach and Engagement operating metrics, so we expect revenue growth will become the more important driver for the stock near-term.

 

 

SUMMARY CHARTS

 

User Growth: Significant Slowdown in US User growth.  We suspect TWTR's US penetration is much higher than its MAU metrics suggest given that some users have joined and are no longer inactive.  Runway is shorter than many expect.

 

TWTR: Staying Short, But... - TWTR   MAU Growth 4Q13

TWTR: Staying Short, But... - TWTR   US penetration scenario 4Q13

 

Engagement: Decelerated Considerably, which management suggest is partly due to Twitter interface improvements, but we believe users migrating to TweetDeck is also to blame.  We suspect this could a secular theme, which would pressure ARPU.

 

TWTR: Staying Short, But... - TWTR    Timeline Views 4Q13

TWTR: Staying Short, But... - Google Trend   Tweetdeck

 

Monetization: the Mobile Migration may have more immediate upside than we originally thought, although we suspect some of the 4Q13 acceleration is due the holiday shopping season.  

 

TWTR: Staying Short, But... - TWTR   ARPU 4Q13

 

Hedgeye vs. Consensus: We see upside in the near term to consensus estimates, but we expect ARPU growth to slow beginning 2H14 as the mobile tailwind begins to subside.  With mobile now representing over 75% of all ad revenue, the comp setup switches from mobile representing the minority to the majority of revenue moving forward.    

 

TWTR: Staying Short, But... - TWTR   Hedgey vs. Consensus 1Q14 4Q15

 

Valuation: This is just for perspective.  TWTR trades at a much higher multiple than its peers, but that can be explained by the lofty growth estimates assumed by consensus.  As soon as the street realizes that company can’t grow +50% in perpetuity, the stock will should trade more inline with its peers. 

 

TWTR: Staying Short, But... - TWTR   valuation 2 7 13

 

 

Let us know if you have any questions, or would like to discuss in more detail.

 

 

Hesham Shaaban, CFA

@HedgeyeHC2


Fund Flows Refreshed, Global Jitters

Takeaway: Retail mutual funds continued their lagged correlation with equity inflow while institutional ETFs reflect global equity fears.

Editor's note: This complimentary, unlocked research note was originally published February 06, 2014 at 08:05 in Financials by Hedgeye Financials analyst Jonathan Casteleyn. For more information on how you can subscribe to our products click here.

Fund Flows Refreshed, Global Jitters - q1

Investment Company Institute Mutual Fund Data and ETF Money Flow:

 

Total equity mutual funds experienced another week of inflow as the lagged effect of fund flow chasing performance from last year has been strong enough to offset near term worries about emerging markets. Within the total equity fund result, domestic equity mutual funds had $1.8 billion of inflow in the most recent 5 day period, just ahead of the 2014 weekly average for domestic funds of $1.4 billion in inflow. International equity funds netted more than domestic funds posting a $3.5 billion inflow. This most recent result coupled with the strong result from the week prior has now moved the 2014 weekly average for total equity mutual funds to a $4.9 billion inflow average to start 2014, a continuation on 2013's positive trends where $3.0 billion per week on average flowed into total stock funds. 

 

Fixed income mutual funds had continued net outflows during the most recent week, a continuation from the negative performance of 2013. In the week ending January 29th, total fixed income mutual funds experienced a $896 million outflow, which broke out into a $1.4 billion redemption in taxable bonds and a $520 million inflow into tax-free bonds, the third straight week of inflow for munis. The 2014 weekly average for fixed income mutual funds now stands at a $635 million weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion but a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in the bond market).

 

ETFs, a more institutional product, reflected the nascent risks in emerging markets and slightly weaker U.S. economic data with a massive outflow in stock ETFs and a slight redemption in fixed income ETFs. Stock ETFs lost a substantial $13.2 billion in the 5 day period ending January 29th, the biggest weekly outflow in our data set spanning 18 months of information, with bond ETFs experiencing a $639 million redemption. The 2014 weekly averages considering this latest data are now a $3.0 billion weekly outflow for equity ETFs and a $22 million weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $6.2 billion spread for the week (-$7.7 billion of total equity outflows versus the -$1.5 billion outflow within fixed income; positive numbers imply inflows for stocks; negative numbers imply inflows for bonds). The 52 week moving average has been $7.3 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) and a 52 week low of equity/debt weekly spread of -$9.2 billion (negative numbers imply a net inflow into bonds for the week). 

 

In last week's ICI report, we outlined the historical relationship between retail mutual fund flows and market performance. In analyzing 12 years worth of data, our research shows that fund flow chases or lags performance by 6 months for equities and 9 months for fixed income (the best fit line between these two variables). Thus the strong return for stocks in 2013 of 30% in the S&P 500 and the first loss in the Barclay's Aggregate bond index in 14 years is still driving the direction of retail fund flows currently (see late week's report here). 

 

 

Fund Flows Refreshed, Global Jitters - cast

Fund Flows Refreshed, Global Jitters - ICI chart11

 

 

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product:

 

 

Fund Flows Refreshed, Global Jitters - ICI chart3

 

Fund Flows Refreshed, Global Jitters - ICI chart4

 

Fund Flows Refreshed, Global Jitters - ICI chart5

 

Fund Flows Refreshed, Global Jitters - ICI chart6

 

Fund Flows Refreshed, Global Jitters - ICI chart7

 

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:

  

 

Fund Flows Refreshed, Global Jitters - ICI chart8

 

Fund Flows Refreshed, Global Jitters - ICI chart9

 

 

Net Results:

 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $6.2 billion spread for the week (-$7.7 billion of total equity outflows versus the -$1.5 billion outflow within fixed income; positive numbers imply inflows for stocks; negative numbers imply inflows for bonds). The 52 week moving average has been $7.3 billion (positive spread to equities), with a 52 week high of $30.9 billion (positive spread to equities) and a 52 week low of equity/debt weekly spread of -$9.2 billion (negative numbers imply a net inflow into bonds for the week). 

 

 

Fund Flows Refreshed, Global Jitters - ICI chart12

 

 

 

Jonathan Casteleyn, CFA, CMT 

203-562-6500 

jcasteleyn@hedgeye.com 

 

Joshua Steiner, CFA

203-562-6500

jsteiner@hedgeye.com

 


MISSING'S MATTERED: 4Q13 EARNINGS SCORECARD

Takeaway: Beat-Miss Spread Expanding, Consumer Company operating performance decelerating, forecasting fundamentals is making a comeback.

PERFORMANCE vs. THE PRINT:   After what feels like a multi-year deference to macro trends and serial crises, forecasting fundamentals has shown a mini-resurgence in 4Q13.  

 

In particular, earnings results relative to expectations have shown a strong relationship to subsequent performance.  Bottom line shortfalls continue to be sold hard as eighty percent of EPS misses have gone on to subsequently underperform the market by -5.3% on average. 

 

The relationship between sales beats/misses and subsequent performance has been comparably modest.  

 

MISSING'S MATTERED: 4Q13 EARNINGS SCORECARD - EPS BM Perf

 

MISSING'S MATTERED: 4Q13 EARNINGS SCORECARD - Sales BM Perf

 

BEAT-MISS:  With roughly two-thirds of SPX constituents having reported, Sales & EPS Beat-Miss spreads remain above both the 3Q13 (53%/74%) and TTM (54%/73%) averages as 66% and 76% of companies have beaten Sales and Earnings estimates, respectively.   Revenue disappointments out of Consumer Staples companies have emerged as the primary negative divergence.   

 

MISSING'S MATTERED: 4Q13 EARNINGS SCORECARD - ES Table 020714

 

FUNDAMENTAL PERFORMANCE TRENDS: In contrast to positive Beat-Miss trends, the slope of improvement in operating performance has been decidedly lackluster with just 48% and 53% of companies registering sequential acceleration in sales and earnings growth, respectively. 

 

The percentage of companies reporting sequential operating margin expansion in 4Q13 remained unchanged WoW at an uninspiring 42% according to bloomberg data. 

 

From a sector perspective, Financials and Industrials have led operating performance while Consumer Discretionary and Consumer Staples remained the relative, fundamental laggards.  

 

MISSING'S MATTERED: 4Q13 EARNINGS SCORECARD - ES OP Table 020714

 

STYLE FACTOR PERFORMANCE:  Reported results vs expectations across style factors has flattened out a bit WoW but High Beta, Low Yield, and Low Leverage equities have performed notably better vs. prevailing topline estimates than their inverses. 

 

MISSING'S MATTERED: 4Q13 EARNINGS SCORECARD - ES SFP 020714

 

MISSING'S MATTERED: 4Q13 EARNINGS SCORECARD - SPX SFPV

 

 

Christian B. Drake

@HedgeyeUSA

 

 


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PM: Strong Pricing in Challenged Geographies

PM reported strong Q4 2013 results yesterday with revenues of $7.78B (slightly missing consensus expectations of $7.81B) and adjusted diluted EPS that beat consensus by 1 cent at $1.37. 

 

The headwinds we see for the company over the next two quarters have not changed – what’s impressive however is how well PM has been able to take pricing in the quarter to make up for volume declines and tax increases across most of its geographies. Overall volume declined -4.3% in Q4 and -5.1% in FY2013 while net pricing rose a robust +6.9% in Q4 and +6.6% in FY2013. Additionally, the company gained market share in all four of its main regions.

 

Concerns for us over the coming quarters remain volume declines in many of its core geographies on additional excise tax hikes, weak macro and consumer environments, and currency and illicit trade headwinds. In 2014, excise tax hike concerns remain in Japan, Indonesia, and the Philippines; weaker macros include Europe and Russia; and we expect currency weakness across much of the emerging market, including the Russian Ruble, Turkish Lira, and Argentine Peso, as the illicit trade across the region skims results.   

 

The company announced that it has issued 60% of its pricing for 2014 as of today (versus ~75% this time last year). We think the significant risks to it making its 1H numbers include: its ability to take additional pricing in Japan (it has submitted requests to the government for price hikes in April but has yet to be approved); weakness beyond its forecasts in the Philippines as the Mighty Corporation continues to undercut price (it only declares half of its production for tax); and macro weakness in Europe beyond its forecast of -6% to -7% (versus previous 2014 guidance of down -7% to -8%).

 

The company forecasts EPS guidance for 2014 of $5.02 to $5.12 (including a currency headwind of $0.71). It said it expects industry volumes to be down 2-3% in 2014 (ex-China), versus ~4% in 2013 and it will spend $4Billion in share repurchases in 2014 versus $6B last year. The company spent a very small amount of time discussing its Reduced Risk Products (RRPs), including e-cigs, despite major investments and partnerships that were announced in Q4 of last year -- this is concerning unless the company is particularly good at hedging its excitement about the segment (and contribution to earnings down the line). Remember late last year it announced  €500MM to build a RRP manufacturing facility in Italy, to be operation in 2016 with capacity of 30B units, and a strategic partnership with Altria (MO) to sell and partner with its non-combustion technology.  

 

We’ve had a bearish bias on the PM over the last two quarters and continue to suggest a pair trade of long LO versus short PM. See chart below on price performance.

 


What We Liked

  • Illicit trade in Europe has moderated. Sales in back half of 2013 have moderated versus larger declines in1H 2013.
  • In EU Region grew market share by 0.5% to 38.5% in 2013 vs 2012. Increases were across all brands.
  • Russia strong: pricing actions expanded profitability despite volume -7.6% in Q4. It increased pricing in December, and expects another hike at the end of February.  Volume in 2014 expected to be down 9 to 11%.

What We Didn’t Like

  • Japan still remains a challenged market. Company believes it will be able to fully meet consumption price tax increase in Japan from 5% to 8% in Japan in April with pricing, however risk that the government doesn’t approve it.
  • PM says demand for e-cigs in Europe has decelerated, which PM posits should boost traditional cigarette volumes in 2014.
  • Italian tax environment continues to be unfavorable.
  • Moderation in Turkey results on increased competition in Low and Super-Low segment. 

Call with questions. Have a great weekend!

 

Matt Hedrick

 

PM: Strong Pricing in Challenged Geographies - yy. spread


A TALE OF TWO SURVEYS: JANUARY EMPLOYMENT

This morning’s Employment data for January confirmed the slowdown observed in December and, on balance, was a disappointment vs NFP consensus at +180K. 

 

We highlighted, in detail, the emergent deceleration in the domestic, fundamental macro data in our flash call on Wednesday. 

 

The link to the presentation and replay is below and I would direct you to that for a fuller discussion of the data and how to be positioned for (on the margin) #InflationAccelerating and #GrowthDecelerating.

 

PRESENTATION >> HERE

REPLAY >> HERE

 

A TALE OF TWO SURVEYS: JANUARY EMPLOYMENT  - Employment Summary Table Jan

 

BULL/BEAR:  The January employment data was soft on balance but again offered a bevy of talking points for the bull & bear contingents.

 

On the BEAR side, the Establishment Survey was weaker for a second month with Non-farm and Private payrolls increasing +113K (vs. +180K exp.) and +142K (vs. +185K exp), respectively. 

 

Further, there was no meaningful, positive revision to the December figures which were revised +1K to +75K. 

 

With the NFP numbers now beginning to decelerate on a Trend (3M/6M) basis the implications for prospective policy adjustments become more substantive.   

 

On the BULL side, the incremental improvement in the unemployment rate to 6.6% was a function of positive dynamics, specifically higher employment and higher labor force participation.  

 

The Household Survey showed a strong gain in employment with an estimated +638K jobs added in January with Total Unemployed dropping -115K sequentially. 

 

The labor force participation rate increased to 63% from 62.8% as the net change in the labor force (+523K), driven by the positive change in employment, increased at a premium to the +170K increase in the Civilian Population. 

 

Overall, despite the ongoing decline in the U-3 rate, the preponderance of labor market metrics remains largely middling – expect the Fed to highlight that reality and increase discussion around an inflation floor or similar as we move toward breaching the unemployment ‘target’ on the downside.  

 

A TALE OF TWO SURVEYS: JANUARY EMPLOYMENT  - NFP Revision

 

SEASONALITY:  The marked deceleration in the reported, seasonally adjusted payroll numbers is, perhaps, even more remarkable given that seasonality should be serving to buttress the numbers as we build towards the positive peak in seasonality in February. 

 

A TALE OF TWO SURVEYS: JANUARY EMPLOYMENT  - NFP Seasonality 2

 

INDUSTRY EMPLOYMENT: Construction and Manufacturing were the notables, reversing last month’s weakness, gaining +48K and +21K, respectively

 

The laggards were Retail (-13K) and Education and Health Services (-6K).  In fact, Healthcare saw a net decline in employment MoM for the first time since July 2003!

 

A TALE OF TWO SURVEYS: JANUARY EMPLOYMENT  - HC EMp Jan

 

GOVERNMENT EMPLOYMENT:  Federal Gov’t Employment Declined -12K MoM  (-4K ex-Postal Service).  State & local Government lost -17K jobs in December, but on a year-over-year basis growth remains positive at +0.17%. 

 

HOURS & WAGES:  Hours and wages, which shouldn’t show material distortion from weather, were largely flat sequentially.  Weekly hours worked held at 34.4 while hourly earnings grew +1.9% YoY – note that the longer-term trend in wage growth is ~ +3% and with PCE growth running at +3.6% as of the latest December reading, wage growth has some heavier lifting to do to maintain the current pace of household spending.

 

WEATHER:  Unlike last month, employees out of work due to bad weather wasn’t an upside outlier in January.  BLS reported that 262K individuals missed work due to inclement weather in January, which compares to the longer-term January average of ~250K. 

 

A TALE OF TWO SURVEYS: JANUARY EMPLOYMENT  - Weather Emp Jan

 

CES Benchmark Revision: The BLS revised the total nonfarm employment level for March 2013 upward by 369K with the total level of NFP employment for year-end 2013 revised from 136.9M to 137.4M, or a positive revision of ~500K. 

 

A TALE OF TWO SURVEYS: JANUARY EMPLOYMENT  - CES Revision

 

Employment By Age:  Employment growth by age accelerating sequentially for all age cohorts except 20-24 year olds.   Despite the sequential improvement from -0.9% YoY to -0.5%, 45-54 Yr. olds remain the lone age demographic still mired in negative employment growth.  With the exception of a few months in mid-2012, 45-54 years olds have yet to see positive job growth in any post-recession month according to BLS data.

 

A TALE OF TWO SURVEYS: JANUARY EMPLOYMENT  - Employment by Age

 

 

Christian B. Drake

@HedgeyeUSA


Sell'em: SP500 Levels Refreshed

Position:  4 Longs, 5 Shorts @Hedgeye

 

We highlighted the emergent deceleration in the domestic fundamental macro data in a flash call on Wednesday (ping for the replay) and, on balance, this morning’s payroll data confirms that broader slowdown.   

 

Sure, there was plenty of fodder for both perma-camps in this morning’s employment release with the Establishment Survey discretely soft (+113K vs 180 exp) while the Household Survey (+638K employment, 6.6% Unemployment, Higher Participation Rate) was almost unanimously positive – but from a quantitative perspective, virtually nothing has changed. 

 

The dollar is down and ten year yields are off 3bps with equities bouncing on the expectation of Yellen-being-Yellen in the face of #GrowthSlowing

 

So, inclusive of this morning’s price action, the SPX, $USD and 10Y all remain Broken TREND while the VIX remain in BULLISH Formation and well above TREND Support at 14.91.

 

For the S&P500, here are the lines that matter:

  1. Intermediate-term TREND Resistance = 1786
  2. Immediate-term TRADE Support =1735
  3. Long-term TAIL support = 1683

 

In other words, if we can’t close above 1786 with volume confirming and the price signals across the constellation of macro factors mentioned above corroborating, further drawdown risk remains acute and we’ll remain sellers of strength.   

 

Still keeping it tight here with a low gross and tight net.   

 

Christian B. Drake

 

Sell'em: SP500 Levels Refreshed - Levels

 


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