YELP: Does Europe Even Matter?

Takeaway: The US is the much bigger story, but there are some who believe the EU opportunity is a big deal. Below we explain why it's not


During our Best Ideas Short Call, we broke down YELP's US Total Addressable Market TAM).  The analysis was fairly simple.  YELP's addressable market needs to fit two criteria:

  1. Retail (vs. B2B)
  2. Affordability

YELP has suggested that its US TAM is 27M. Our analysis of the US market, using the above criteria, suggested it is only 3.4M.  We also explained why we don't believe YELP can ever penetrate more than 170K of that.  For more detail, see link at end of note. 


We didn't touch upon YELP's international market during our Best Ideas Call because the headwinds in the US are too severe for international to compensate.  However, we decided to extend our TAM analysis to the EU to prove this point.



There are 21M non-financial establishments in the EU, however the majority (65%) cater to the B2B market (vs. Retail, which is YELP's core user).  YELP's EU TAM (according to Criteria 1) is 7.4M, but that doesn't consider affordability


YELP: Does Europe Even Matter? - YELP   EU TAM by Sector



This one is tougher to back into since we can't pull business segmentation by revenue/income bracket as we did with the US market.  But we do have "Value Added" (essentially EU version of NOPAT) by firm size, which gives us a proxy for affordability.


YELP: Does Europe Even Matter? - EU   Value added by firm size


Micro firms (less than 10 employees) represent over 94% of YELP's EU TAM, but represent a disproportionately smaller portion of Value Added.  While we can't segment YELP's EU TAM with the same granularity as we did with the US market, we broke it down by average Value Added (think NOPAT) across the Micro firms in the Yelp's applicable markets.  


YELP: Does Europe Even Matter? - YELP   EU TAM Micro


The data suggests that average firm in YELP's EU TAM produces Value Added of $77K.  In turn, the cost of Yelp Advertising would be prohibitive at YELP's average ARPU (YELP suggests its typical local ad spend is $4.2K year).  It's important to note that these are averages, so YELP should be able to gain some penetration among the above-average Micro firms.  The question is how much?


In summary, the data suggests YELP's Total Addressable EU market (7.3M) is much smaller than many expect, and given that 94% of this market is composed of micro firms producing less than $77K of Value Added on average, we suspect the road to penetrating this market will be challenging.


We provide more detail on our short thesis in the note below, and far more detail in our YELP Short Best Ideas Slide Deck.  For a copy, or to discuss our thesis in more detail, let us know.


YELP: Death of a Business Model

04/04/14 10:05 AM EDT



Hesham Shaaban, CFA





Expecting only single digit YoY GGR growth for April due to sluggish VIP volumes and low hold



Daily table revenues averaged only HK$927 million, up 7% WoW but flat YoY.  MTD, the average is only up 1%.  April is certainly coming in slower than even we thought, although we believe low hold is partly responsible.  Mass headcounts appeared to be reasonably strong over the weekend but VIP volumes may have been a little weak.  For the full month of April including slots, we are now projecting YoY GGR growth of only +4-8%.  That’s probably slow enough to provide more downside on the Macau stocks.  The good news is that we expect 20%+ YoY GGR growth in May but we have to get through April and only a reasonably in-line earnings season first.


Could China Macro finally be impacting Macau?  The operators and junkets we've talked to say no.  They generally view the weakness as a temporary break from the gangbusters pace Macau has experienced since January.  Nevertheless, the Macro hasn't been great.  Most recently, last week IMF called for China to rein in credit growth, especially outside of the banking sector, increased scrutiny of junkets and players, as well as travel warnings for Chinese tourists to Malaysia.

In terms of market share, MPEL and LVS are the market share winners MTD relative to trend at the expense of Galaxy.  We continue to view LVS as a market share gainer for the rest of 2014.  Keep an eye on Wynn for evidence that the property has made moves to bolster its VIP share.  We believe management there may be contemplating a more aggressive commission advancement strategy. 




Fund Flows, Refreshed

Takeaway: In the most recent week, absolute money flow into mutual funds was balanced but fixed income continues to display relatively better trends.

Fund Flows, Refreshed - wallstreet2


Investment Company Institute Mutual Fund Data & ETF Money Flow


In the most recent week, absolute money flow into mutual funds was balanced between fixed income and equity products but bond trends continue to display improving rates of change versus decreasing momentum in equities.


Total equity mutual fund flow improved sequentially week-to-week but produced a tally below the 2014 year-to-date weekly average. The $3.1 billion that came into all equity mutual funds during the most recent 5 day period ending April 2nd was split between a fairly weak $949 million inflow into U.S. equity funds versus the $2.1 billion that moved into international stock funds. This higher demand for foreign equity products has been consistent over the past two years with international stock fund inflow having averaged $2.8 billion per week this year and $2.6 billion per week last year in 2013 with domestic fund products averaging an inflow of just $1.2 billion thus far in '14 and a $451 million inflow last year in comparison. The 2014 running weekly average inflow for all equity mutual funds is now $4.0 billion, still an improvement from the $3.0 billion weekly average inflow for 2013. 


Fixed income mutual fund flow improved sequentially week-to-week and the 12 week linear trend lines in the product graphs below display improving momentum for bond funds versus equity funds. For the week ending April 2nd, $3.3 billion flowed into all fixed income funds, an improvement from last week's $1.2 billion inflow. The breakout of improving bond fund inflow amounted to $3.1 billion into taxable products and a $202 million inflow into tax-free or municipal products. The inflow into taxable products this week was the 8th consecutive week of positive flow and the inflow into municipal or tax-free products was the 12th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.9 billion 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 bond fund inflow).


Exchange traded funds (ETF) experienced positive trends during the week, with a very strong week of subscriptions into stock ETFs with $4.1 billion in net inflow with bond ETFs experiencing a slightly above average inflow of $1.6 billion for the most recent 5 day period. The 2014 weekly averages are now a $421 million weekly inflow for equity ETFs and a $946 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 positive $2.3 billion spread for the week ($7.3 billion of total equity inflow versus the $4.9 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.2 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.4 billion (negative numbers imply more positive money flow to bonds for the week). 


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. ETF information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   


Fund Flows, Refreshed - ICI chart 1


Most Recent 12 Week Flow in Millions by Mutual Fund Product


Fund Flows, Refreshed - ICI chart 2


Fund Flows, Refreshed - ICI chart 3


Fund Flows, Refreshed - ICI chart 4


Fund Flows, Refreshed - ICI chart 5


Fund Flows, Refreshed - ICI chart 6


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

Fund Flows, Refreshed - ICI chart 7


Fund Flows, Refreshed - ICI chart 8


Net Results


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $2.3 billion spread for the week ($7.3 billion of total equity inflow versus the $4.9 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.2 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.4 billion (negative numbers imply more positive money flow to bonds for the week).


Fund Flows, Refreshed - ICI chart 9 


Editor's Note: This is a research note originally published April 10, 2014 by Hedgeye’s Financials team Jonathan Casteleyn & Josh Steiner. Follow Jonathan & Josh on Twitter @HedgeyeJC and @HedgeyeFIG.



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VIDEO | Macro Notebook 4/14: EUROPE OIL UST10YR

Monday Mashup: DRI Comes Under Fire

The table below lists our current Investment Ideas as well as our Watch List -- a list of potential ideas that we are in the process of evaluating.  We intend to update this table regularly and will provide detail around any material changes.


Monday Mashup: DRI Comes Under Fire - 1

Recent Notes

04/07/14  Monday Mashup: BWLD, PNRA and More

04/07/14  New Best Idea: Short BNNY

04/11/14  BNNY: Intermediate-Term Downside

Events This Week

04/17/14  CMG earnings call 11am EST

Chart Of The Day

Despite underperforming the SPX, quick service and fast casual stocks were a pocket of relative strength last week within the XLY, as 13 out of the 17 companies we track outperformed the broader index.


Monday Mashup: DRI Comes Under Fire - 22

Recent News Flow

Monday, April 7

  • YUM News hit the tape that the company is testing a new chicken concept, Super Chix, in Arlington Texas as an exploratory concept for potential international purposes.  Super Chix, similar to Chick-fil-A has a very basic menu which includes a chicken sandwich, chicken tenders, fries, drinks and frozen custard.
  • BOBE was downgraded to underperform at CL King

Tuesday, April 8

  • SONC was rated the #1 Burger Chain and #5 Brand Overall by the Temkin Group in its Experience Ratings report. 

Wednesday, April 9

  • El Pollo Loco chose Jefferies and Morgan Stanley as underwriters for its IPO which is expected later this year.
  • RT announced 3QF14 earnings, beating analyst estimates on both the top and bottom line as company-owned same-store sales only declined -190 bps vs expectations of -550 bps.  Its store closures in the quarter largely stemmed the recent massive declines in sales. In addition to these closures, management has identified $13mm in annual cost saving initiatives and is continually looking for more cost cutting opportunities. 

Thursday, April 10

  • RT raised to neutral at Tigress Financial

Friday, April 11

  • ISS and Glass Lewis released reports recommending shareholders should submit consents to Starboard in its ongoing effort to call a Special Meeting.  DRI released a public statement disagreeing with the firms conclusions, stating that Glass Lewis’ “assertions regarding Darden’s record of engagement are demonstrably false.”  Later that day, Darden announced that a smaller independent proxy advisory firm, Egan Jones, recommended that shareholders reject Starboard’s effort to call a Special Meeting.
  • DRI A group of Darden shareholders filed a lawsuit against the company over its recent bylaw changes.  The shareholders are alleging that these recent bylaw changes were enacted specifically to prevent them from voting on the Red Lobster spinoff.

U.S. Macro Consumption

The XLY (-3.7%) underperformed the SPX (-2.6%) last week, although both casual dining and quick service stocks, in aggregate, outperformed the broader XLY benchmark.  The Hedgeye U.S. Consumption Model continues to be a bearish signal and is now flashing red on 8 out of 12 metrics.  Confirmed by last week’s performance, we continue to believe the current environment is more conducive to select fast casual and quick service restaurants than casual dining restaurants.


Monday Mashup: DRI Comes Under Fire - 3

XLY Quantitative Setup

From a quantitative setup, the sector remains bearish on an intermediate-term TREND duration.


Monday Mashup: DRI Comes Under Fire - 4

Casual Dining Restaurants

Monday Mashup: DRI Comes Under Fire - 5


Monday Mashup: DRI Comes Under Fire - 6

Quick Service Restaurants

Monday Mashup: DRI Comes Under Fire - 7


Monday Mashup: DRI Comes Under Fire - 8



Howard Penney

Managing Director


Fred Masotta



Inflation Slowing Growth

Client Talking Points


Year-to-date leaders are lagging this morning – Cyprus -2.6%, Denmark -2.2%, Austria -1.8% – as the DAX dips back below my intermediate-term TREND line of 9381. We currently have no European Equity exposure – Pain Trade is probably lower, for now #Waiting.


WTI broke out back above our TREND line last week (up again this morning to +6% year-to-date). I get a lot of questions about Oil – because it was one of the few commodities not going up – so this move plus Natural Gas up +13% YTD = #ConsumerSlowing. It isn’t good.


Treasury yield of 2.63% remains decisively broken (bullish for our slow-growth Gold Bond call) as the Street continues to expect #RatesRising in 2014 (that was the 2013 call). That’s not happening if we’re right on inflation slowing growth (Fed has 0% credibility fighting inflation).

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds.  Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


We remain bullish of Gold, in $GLD terms @KeithMcCullough


"Hard work without talent is a shame, but talent without hard work is a tragedy." - Robert Half


Twitter is having no trouble signing up users. But some new research provides an update on the size of an ongoing problem: getting people to tweet. A report from Twopcharts, a website that monitors Twitter account activity, states that about 44% of the 974 million existing Twitter accounts have never sent a tweet. To be sure, people don’t have to actively tweet to find the service useful, but the report highlights Twitter’s user retention issue. (WSJ)

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