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Poll of the Day Recap: 64% Wouldn’t Friend Facebook Stock

Takeaway: 64% NO; 36% YES

Poll of the Day Recap: 64% Wouldn’t Friend Facebook Stock - dislike

 

Right now, 43 analysts have a “Buy” rating on Facebook and nine have “Holds” – there are zero “Sells.” Shares are currently trading at 14X revenues (with advertising revenues set to slow meaningfully through 2014 according to Facebook management). Hedgeye CEO Keith McCullough believes that “as revenue growth slows, this wacky 14x revenue multiple should compress.”
 

That said, we wanted to get your opinion by asking in today’s poll: Would you buy Facebook right now?
 

At the time of this post, 64% of voters said NO; 36% YES.
 

Several NO voters agreed that the timing isn’t right either because of #bubblesbursting, or the market being too risky, as this voter explained, “Technically the chart needs more time to base and consolidate before stepping in to buy. Second, the Nasdaq is in a downtrend presently, which is leading the market, and therefore, initiating a buy here would be trying to catch a falling knife or going against the path of least resistance. There are much better plays out there right now, but $FB will be on my watch list.”
 

Another person who voted NO said, “The multiple to ARPU at Facebook is still ~80x. Mature subscription businesses (i.e. Satellite TV) trade at multiples of ~3-4x. Facebook will have to grow ARPU 20 fold just to grow into its current valuation. That's a tall order for a small business, let alone a company of FB's size.”
 

Additionally, a different NO voter pointed out that “the business model might be powerful, but everything has a price. There have been 411 insider transactions since the IPO for net proceeds of $15.2 billion. Only one of those was an insider Buy – and that was at $21.03 for a million bucks. That's only 0.01% of the total cumulative Insider Transaction value – and was at a price that's 63% below current levels. If Insiders won't buy, then why should I?”
 

Those who took the opposite stance and voted YES said:

  • “Facebook is going beyond the traditional social network they've built thus far, and will do what Google is doing by buying companies that extend beyond the scope of their core business.  Google took the first steps with Nest, while Facebook did it with Oculus; there'll be a lot more of this.  Soon they'll both look like modern versions of General Electric.”
     
  • “As a small business owner, it is a very inexpensive way to advertise/promote to a targeted customer group.  This will help add revenue to FB, as well as, their other strategic plans. Long term buy.”
     
  • “I voted yes because analysts have price targets around $84.00 and I believe FB is investing in the next generation of relevant technologies. It's not about the teenagers anymore.” 
     
  • “I voted yes because Zuckerberg is in agreement with Hedgeye that his stock is overvalued. Using FB shares as a currency to enter new markets is a good thing.  He is not content with just being a social network and over time the bears will be proven wrong.  Oculus VR is a fantastic technology that is being underestimated by the main stream media. Facebook continues to eat Google and Yahoo's lunch in display ad revenue.  They have turned a much maligned Instagram acquisition into an engine for growth.  Sometimes companies that have the most long term potential appear overvalued, I understand the bear thesis, but do bears really understand the bull case?”
     
  • “I believe the stock with reach 80 - 85 in the next year.  Zuckerberg is too vain to do anything but succeed.”

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VIDEO | Penney: Why Panera Bread Is One of My Best Ideas on the Short Side | $PNRA

Hedgeye Managing Director and Restaurants analyst Howard Penney walks investors through the reasons why he added Panera Bread as a "Best Idea" on the short side over a year ago, ahead of its earnings report tomorrow night.


YELP: The Sad Truth

Takeaway: Our short focuses on the TREND/TAIL duration, so we don't care much about 1Q14. But, the stronger the quarter, the more bearish we become

SUMMARY BULLETS

  1. Pressure to Build Through 2014: One of the major risks facing YELP in terms of both attrition and new client growth is the sharp rise in commodity costs, which has seen its sharpest sequential increase since 2011.  SMBs will be hit hardest, making adverting expenditures tougher to swallow.
  2. Today's Strength = Tomorrow's Weakness: YELP is losing virtually all its clients annually, meaning it must continually to sign more new clients in excess of what it starts the year with in order to drive growth.  That said, it's current client base will always be its future hurdle; the larger that is, the larger the hurdle, the lower it's future growth. Given a shrinking TAM, that's a scary prospect.  

Pressure to Build Through 2014

We're not seeing as much risk to 1Q14 Revenues; largely because what we've seen in terms of macro pressure didn't begin until mid February, which was after the company issued 2014 guidance (2/5/14).  That said, the backdrop has materially deteriorated since then, and will only get worse through 2014.

 

We previously pointed out the sensitivity of YELP's customer penetration levels to commodity prices in our YELP Short Best Ideas presentation.  Dating back to 1Q11, the y/y change in customer penetration levels is almost perfectly inversely correlated (-.93) with the change in commodity prices on a y/y basis.  

 

The point is that SMBs see a disproportionate impact from rising input costs given lower economies of scale.  In turn, advertising expenditures become increasingly discretionary when the SMB P/L is under pressure.

 

The CRB index has seen its sharpest sequential increase since 2011; most of that acceleration occurring after the company issued guidance.  More importantly, commodity comps ease throughout the year, so unless commodity costs decline materially, the y/y pressure will intensify.  

 

Put another way, as we move through the year, each SMB that is debating whether to renew its contact with YELP will be in a progressively worse situation than it was when it initially decided to advertise with YELP.

 

YELP: The Sad Truth - YELP   CRB vs. Ad Penetration 2

Today's Strength = Tomorrow's Weakness

YELP loses virtually all its clients annually, meaning it must continually sign more new clients in excess of what it starts the year with in order to drive growth.  That said, it's current client base will always be its future hurdle; the larger that is, the larger the hurdle, the lower it's future growth.  

 

The sad truth is that YELP's current year strength will become next year's weakness since it can't hold on to its customers, and it's addressable market is much smaller than many believe (see note below more detail).  In turn, the stronger YELP's 1Q14 revenues, the more bearish we become.  

 

YELP: The Sad Truth - YELP   Start vs. Lost Members 

 

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

http://app.hedgeye.com/feed_items/34518

 

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.49%

Cartoon of the Day: Icebergs

Takeaway: Q1 GDP will likely have a 1% handle on it (down hard from the sequential peak of +4.1% in Q413). No worries, it was just the weather. Right?

Cartoon of the Day: Icebergs - GDP cartoon 04.28.2014


TGT - ADDING TO BEST IDEAS LIST AS A SHORT

Takeaway: We’re Adding TGT to our Best Ideas list as a short. We’ll be hosting a call Wed. 4/30 at 11am ET to review our thesis. Call details below.

The crux of our argument? Wall Street's perception of Target's financial trajectory is more upbeat than Main Street. When the stock glossed over the company's weak 4Q earnings report, it was because Steinhafel (CEO) issued guidance that he hoped the company would grow into if the Company repaired its reputation after the data breach - not guidance that he knew TGT could meet or beat. We don't think that the Street is giving TGT credit for a) a miss this year, and b) another one in 2015.  The reality is that when a customer has a great experience in retail, they tell a friend. When a customer has a bad experience, they tell 20. Just ask JC Penney or Lululemon. Some of these 'fire your customer' events are worse than others, but there's one commonality - they take a very long time to recover.  

We think that TGT will be lucky to earn $3.75 this year, and $4.00 in 2015. The current 15x multiple is about as high as TGT has seen in 5-years - clearly the market is not factoring in a miss. We think that multiple compression alone on a weaker EPS number gets to a $48-50 stock, or $12-13 downside. If we're wrong, then we're looking at about $5 upside. That's about 2.5x to one, which we like on sleepy mega-cap shorts in Retail. 

 

TGT - ADDING TO BEST IDEAS LIST AS A SHORT  - TGT Bestidea

 

KEY TOPICS WILL INCLUDE: 

  1. The biggest risks to current consensus expectations. 
  2. Target's visitation statistics (via one of our proprietary consumer surveys). 
  3. How key competitors are reacting to the opportunity to gain share from Target.  
  4. Target's value proposition compared to the rest of Retail, particularly Wal-Mart. 
  5. Has target.com suffered the same customer attrition fate as Target stores?
  6. Which categories is Target winning? Where is it losing?
  7. Historical margin cycles for Target and other major retailers, and where we are in that cycle today.  

CALL DETAILS

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 917515#
  • Materials: CLICK HERE

For more information contact .


CHH Q1 2014 - CONF CALL NOTES

Slow and steady mid-scale segment, but new development beginning...

PREPARED COMMENTARY

  • Franchise revenues +6% based on royalty fees +5%
  • RevPAR:  domestic +5.6% based on occupancy +200 bps and ADR +1.1%, expect greater demand for hotel rooms, strongest results were in pacific and mountain regions
  • Improved outlook for remainder of 2014
  • Increasing RevPAR guidance by 100 bps to 4.5% to 5.5%
  • 59 new franchise development contracts in Q1 2014, stronger due to availability of financing
  • Now expect franchise contracts will exceed 2013 levels
  • Reservations made via central res system increased 42.6%, up 320 bps YoY for Q1 2014
  • EBITDA from franchising activities +15% in Q1 as result of franchise revenues +6% and 500 bps margin, franchise SG&A less than expected (delay in timing of certain expenses)
  • Domestic royalty revenues +5.5%
  • Franchise system hotel count +2.4%, driven by Ascend and Quality Inn brands
  • Comfort Hotels - 97 hotels cancelled in 2013, repositioned 33 of 97 within other brands.
  • Aggressive new construction plan for Comfort Hotels in key markets.
  • Additional SG&A in new construction team for 2014 for Comfort and Cambria Brands
  • Costs: less than anticipated, resulting in franchise margins expanding from 55.1% to 60.2%
  • Skytouch $3.3m of expenses, but lower than expected
  • Sales:  sold 2 of 3 MainStay hotels, expect to sell remaining hotel in Q2
  • Outlook remainder 2014: 
    • 30.8% tax rate
    • No share repurchase
    • Revpar 5% for 2Q  4.5 to 5.5% for 2014
    • Unit growth 1%-2%
    • Royalty rate will decline by 3 bps for the full year
    • Full year EBITDA of $227-232 million from franchise activities
    • Outlook considering franchised, owned and Skytouch activities:
      • 2Q EPS $0.48
      • FY EPS $1.87-$1.93  
      • FY EBITDA $207-212m
  • Strong start, optimistic, trends better, consumer expectations rising, economy picking up momentum, improving development cycle.

Q&A

  • What specific trends gave upbeat view - focused on employment trends as well as very low development starts = confidence for 2014 and next several years
  • Development financing - seeing constant improvement by local and regional lenders, CMBS coming back, leverage levels increasing from 50% to 65%/75%, even higher for stronger sponsors.  Core franchisee using local lender, while National franchisees use National lenders.
  • Any real inventory additions will be (at the earliest) late 2015 to early 2016
  • Construction timeline for average hotel -- 2 to 2.5 years, 9-12 months of actual construction, usually 12 months of zoning and entitlement process
  • Aggressive Comfort Hotel incentive plan will drive new development and room additions for Choice!
  • Conversion activity/trends -- up 1% to 2% but expect higher terminations
  • Cash increasing & how view dividend -- substantially all current cash is held off-shore, so off-shore cash not linked to dividend outlook.  Could use off-shore cash for acquisitions, development, or growth at Cambria brand.
  • View of leisure consumer vs. business consumer - leisure is very strong, getting stronger, and getting better for CHH.  
  • Easter shift impact to Q1 -- CHH not impacted by Easter shift because of Dec, Jan, & Feb results for franchisees.
  • Comfort Hotel brand revitalization -- new design, new protype, standards, bedding, breakfast, increase quality expectations, required performance incentive plans for franchisees, not Cambria-like, "Comfort Property Improvement Process" (CPIP). Goal to accomplish nationwide completion with 2-3 years.  Seeing $10 ADR improvement following CPIP, drop to bottom line.
  • Competitor reaction to CPIP - competitors moved early, expect to leapfrog Fairfield and Holiday Inn. 
  • Upper Mid-scale risk of oversupply -- not likely because supply is going to Upper and Upper Up Scale segments.
  • Details on CapEx total vs. Skytouch vs. development -- $15 million for systems, SkyTouch limited and usually expensed, Comfort Inn key money, Cambria mezz or JV money.  Framed $20-$40 million but could be higher.  Seeing opportunities in key urban markets, thus CapEx could be higher -- viz, Washington DC, NYC, White Plains, Phoenix, Chicago, etc.    
  • 30 Cambria Suites under construction by year end 2014.

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