TWTR: Fake User Growth to Get Worse (2Q14)

Takeaway: Our concerns used to be about lofty expectations, now the story is getting hairy. How much longer will the street pay up for fake users?


  1. CRUSHED 2Q14, BUT NEW CONCERNS: TWTR beat the midpoint of its 2Q14 guidance by a whopping $37M (13.5% upside).  Both revenue segments accelerated on a y/y basis, and US User growth sharply accelerated (see below).  However, there may be an emerging trend around ad engagements that may mean its runway is shorter than initially believed.
  2. GUIDANCE RAISE DRIVEN BY ACQUISITIONS?: TWTR spent $134 million on acquisitions in 2Q, all within its Data Licensing/Other Segment, which saw considerable surge in revenue in 2Q (up 43% q/q vs. 6% in 1Q).  TWTR raised revenue guiance by ~$100M; but 40M came from 2Q upside to guidance.  The question is how much of the raise is organically driven when the Data segment saw a $10M surge in 2Q revenue alongside intra-quarter acquisitions.  Waiting for the 10-Q on this one, stay tuned.  
  3. USER NUMBERS ARE EXAGGERATED: This is the bigger story.  TWTR has a large number automated accounts (Bots) that link into twitter.  These aren't real users, so can't be monetized.  More importantly, bots are growing as a percentage of its total, and have represented a substantial portion of its user growth over the past year (+40% of new MAUs), which begs the question, what is the real runway here? 



TWTR beat the midpoint of its 2Q14 guidance by a whopping $37M (13.5% upside).  Both revenue segments accelerated on a y/y basis, with advertising revenue growing 129% y/y (vs. 125% in 1Q), and Data Licensing & Other up 91% (vs. 76% in 1Q).  The big surprise was the acceleration in US User growth, which inflected higher after 6 quarters of decelerating growth (however, there may be some distortion, see next section for more detail).  At face value, just a very solid quarter.  


Another positive is that new ad formats and stronger advertiser demand around the World Cup led to its first q/q increase in cost per ad engagement (CPE).  However, total ad engagements decelerated considerably q/q to 4% (vs. 28% last quarter).  At face value, the combination of these two factors could suggest that TWTR isn't stuffing the channel with rising ad load as aggressively as we expected. 


However, it could also mean that TWTR may still be stuffing the channel, but the engagement rate on that rising ad load is declining.  2Q14 marks the first quarter in its reported history where the sequential growth in timeline views outpaced that of ad engagements.  If the ad engagement rate is declining, it would suggest that TWTR users are starting to fade/ignore ads. In turn, rising ad engagement would increase at a proportionately lower rate than the increasing ad burden it placing on its members.  In short, the attrition risk rises for a waning yield. 


TWTR: Fake User Growth to Get Worse (2Q14) - TWTR  Timeline vs. Ad Engagements 



TWTR spent $134 million on 7 acquisitions in 2Q, all within its Data Licensing/Other Segment, which saw considerable surge in revenue in 2Q (up 43% q/q).  TWTR raised guiance by ~$100M; but ~40M came from 2Q upside to guidance, which translates to roughly $60 increase to its 2H14 outlook.


The question is how much of the raise is organically driven when the Data segment saw a $10M q/q surge in 2Q revenues alongside 7 acquisitions that were added intra-quarter, hence didn't contribute a full quarter of revenues.  2 more were announced in this quarter, both of which are likely factored into guidance as well, and we could see more coming.  It's possible that we could see a meaningful shift in revenues toward its Data segment next quarter.  We're waiting for the 10-Q to settle this one, so stay tuned.  



This is the bigger story.  TWTR has a large amount automated accounts that link into twitter with no user interaction ("bots").  These bots aren't real users, they do not engage in content, so they can't be monetized (don't click on ads).  


During 2Q14, TWTR disclosed that these bots represented 14% of its MAUs (38M); that is double the percentage from 2Q13.  Further, these bots represented a substantial portion of its user growth over the past year.  Total MAUs increased by 53M y/y in 2Q14, 23M of those were bots (+43%).  After backing out bots from its MAUs in 2Q14, real user growth was up only 15% y/y, vs. the 24% reported by management.  On a q/q basis, TWTR's real user growth has dwarfed that of total user growth over the LTM, despite the relatively smaller user base


TWTR: Fake User Growth to Get Worse (2Q14) - TWTR   Real vs. Total User Growth


Management comments suggest this may be a growing issue.  Timeline views per MAU have been declining on a y/y basis over the past 3 quarters as bots represent a growing percentage of total MAUs, in turn, inflating the denominator. Management stated during the 2Q14 call it expects timeline view per MAU will continue to decline due y/y to "product enhancements", but after backing out the impact of bots, per-user engagement is essentially flat y/y.  If management expects the trend in declining timeline views/per MAU to continue, it likely means it expects the bulk of its MAU growth will come from bots moving forward.  


So what is the real runway on MAU growth? What happens when the street catches on to the disparity between active and real users, and what happens when its real user growth slips into the single-digits? 15% growth in 2Q suggests we're not that far away.  We remain short.  


Let us know if you have any questions, or would like to discuss further.  



Hesham Shaaban, CFA




July 30, 2014

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CHART OF THE DAY: Keeping a Close Eye on the Dollar

Takeaway: Rather than be wed to any particular macro theme, we’ll let Mr. Macro Market give us hints as to what we should do next here.

CHART OF THE DAY: Keeping a Close Eye on the Dollar - Chart of the Day

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Fleeting Emotions

“Fleeting emotions tempt us to make decisions that are bad in the long term.”

-Chip & Dan Heath


That’s another important quote from the recent #behavioral book I finished this week – Decisive, by Chip & Dan Heath.


How do you overcome your short-term emotions in markets? Does loss aversion drive your decision making? How does mere exposure to something going against you affect your #process?


The Heath boys suggest that “our decisions are often altered by two subtle short-term emotions: 1. Exposure to what’s familiar to us; and 2. Loss aversion.” (pg 174) Both 1 and 2 sound like a market’s last price to me.


Fleeting Emotions - 4v


Back to the Global Macro Grind


Real-time prices are very familiar to us. Unless you’re someone who doesn’t do #timestamps (in Independent Research terms) or have a buy-side P&L, so is loss aversion. Which brings me to the one major macro position that is currently going against me – the US Dollar.


If you pull up a 2 year chart of the US Dollar Index, you’ll note that:


  1. It made a long-term higher-low in Q4 of 2012 around $79 when we made the US #GrowthAccelerating call
  2. It made a #GrowthAccelerating cycle peak around $85 in Q3 of 2013 (Q313 GDP = +4.1%)
  3. As #GrowthSlowing took hold from Q413 to Q214, it retraced all of those gains back to $79 and change


If you only look at a 6-7 month (YTD) chart of the US Dollar Index:


  1. It dropped from $81.5 in January back down to $79.5 in May
  2. Then it bounced hard off that May low when Draghi devalued the EUR/USD
  3. And now it’s right back to where it was in January


In other words it really hasn’t done anything. That said, it could go up or down a lot from here. If it continues to track both Fed Policy and the rate of change (slope of the line) in US Growth, there’s no reason why it can’t go straight back down to $79.5.


But what if US growth continues to slow, the Fed gets incrementally dovish, and Draghi gets even more dovish? Unfortunately, God didn’t call me this morning with that answer – so I don’t know.


Rather than be wed to any particular macro theme, I’ll let Mr. Macro Market give me hints as to what I should do next. If the Fed does what consensus has been looking for all yr (continues to taper/tighten), and USD heads higher, that would be bearish for Commodities (and bullish for the US consumer). Everyone in America (other than the guys running #YieldChasing MLP schemes) should want that.


In other news that is un-related to my current macro mistake:


  1. Industrial Stocks (XLI) were -1.3% yesterday (-2.2% for July) and are now signaling bearish TREND @Hedgeye
  2. Equity Volatility (VIX) was up again yesterday to 13.28 (+19% since 1st wk of July) = bullish TREND @Hedgeye
  3. Both the Russell 2000 and UST 10yr Bond Yield continue to signal bearish TRADE and TREND @Hedgeye


What’s most interesting to me about the Industrials (XLI) joining the US Consumer and Housing stocks (XLY and ITB are down 2014 YTD too) is that some of them are classic early-cycle indicators.


“So,” setting aside my own personal US Dollar baggage, what if the bigger picture here is that the entire US economy is heading into an early cycle recession? Wouldn’t that be just peachy?


Don’t forget that we are 62 months into a US economic “expansion.” Both that and the SP500 not having had a 10% correction in 33 months (hasn’t happened since 1990) might just be a tad longer in the tooth than a 2-3 month US Dollar dead cat bounce.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.44-2.54%


RUT 1131-1154

VIX 11.94-14.41

USD 80.61-81.39

EUR/USD 1.33-1.35

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fleeting Emotions - Chart of the Day


TODAY’S S&P 500 SET-UP – July 30, 2014

As we look at today's setup for the S&P 500, the range is 18 points or 0.51% downside to 1960 and 0.41% upside to 1978.                                   













  • YIELD CURVE: 1.93 from 1.92
  • VIX closed at 13.28 1 day percent change of 5.73%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, July 25 (prior 2.4%)
  • 8:15am: ADP Employment Change, July, est. 230k (prior 281k)
  • 8:30am: GDP Annualized q/q, 2Q, est. 3% (prior -2.9%)
  • Personal Consumption, 2Q, est. 1.9% (prior 1%)
  • 2pm: FOMC seen maintaining overnight bank lending rate target near 0%, reducing QE by another $10b



    • President Obama speaks on the economy in Kansas City
    • Sec. of State John Kerry in India, joined by Commerce Sec. Penny Pritzker for 5th U.S.-India Strategic Dialogue
    • 10am: Sen. Judiciary Cmte hearing on Violence Against Women Act, protecting women from gun violence
    • 10am: Senate Banking subcmte hearing on flood insurance
    • 10am: House Judiciary Cmte hearing on need for special counsel to investigate IRS
    • 10:45am: Sens. McCaskill, D-Mo.; Heller, R-Nev.; Blumenthal, D-Conn.; Grassley, R-Iowa; Gillibrand, D-N.Y.; Ayotte, R-N.H.; Rubio, R-Fla. hold news conf. to introduce bill to combat sexual assaults on college, university campuses
    • 12pm: Sen. Minority Leader McConnell, R-Ky.; and Rep. Kelly, R-Pa., hold news conf. on economic consequences of EPA’s proposed power plant rule



  • EU joins U.S. in escalating pressure on Russian finance
  • Putin jeopardizes Russian firms’ access to $600b in funds
  • MSCI in “active dialogue” with global investors on Russia
  • Fed Decision-Day Guide: QE tapering, job gains, inflation debate
  • AstraZeneca to buy respiratory rights from Almirall for $875m
  • SEC may revise speed rules on IEX exchange plans: Reuters
  • McDonald’s Japan pulls profit forecast amid supplier scandal
  • Toyota outsells VW, GM in 1H on rising demand for SUVs
  • Former Time Warner CEO Parsons says Fox offer “Way Off Mark”
  • Barclays returns to 2Q profit on costs, provisions
  • ECB says bank credit standards eased for first time since 2007
  • Argentine debt talks to resume today as default deadline looms
  • Ending ‘too big to fail’ may rest on obscure contract language
  • Shelling of UN shelter in Gaza kills 20 as fighting worsens
  • Japan’s output drops most since 2011 as consumers spend less
  • Osram to cut ~7,800 jobs worldwide



    • ADT (ADT) 6am, $0.47
    • AllianceBernstein (AB) 7:15am, $0.41
    • American Tower (AMT) 7am, $0.53 - Preview
    • Booz Allen Hamilton (BAH) 6:30am, $0.42
    • Carlyle (CG) 6:30am, $0.74
    • Cenovus Energy (CVE CN) 6am, C$0.50 - Preview
    • CGI (GIB/A CN) 6:30am, C$0.73
    • Dominion Resources (D) 7:30am, $0.62
    • Energizer (ENR) 7:30am, $1.54 - Preview
    • Franklin Resources (BEN) 8:30am, $0.95
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    • Humana (HUM) 6am, $2.19
    • Huntsman (HUN) 7am, $0.48
    • Intact Financial (IFC CN) 6am, C$1.55
    • InterActiveCorp (IACI) 7:30am, $0.79
    • Lorillard (LO) 7am, $0.88 - Preview
    • Lumber Liquidators (LL) 7am, $0.63
    • MeadWestvaco (MWV) 7:25am, $0.50
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    • Phillips 66 (PSX) 8am, $1.69 - Preview
    • Pitney Bowes (PBI) 6:30am, $0.46
    • Public Service Enterprise Group (PEG) 7:30am, $0.51
    • Revlon (REV) 6:30am, $0.46
    • Rockwell Automation (ROK) 7am, $1.55
    • Sealed Air (SEE) 7:30am, $0.38
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    • SodaStream Intl (SODA) 7:30am, $0.40
    • Sonus Networks (SONS) 7am, $0.01
    • Southern (SO) 7:30am, $0.67
    • Sprint (S) 7:30am, $(0.05)
    • SPX (SPW) 6:30am, $1.19
    • Taser Intl (TASR) 7:30am, $0.08
    • Thomson Reuters (TRI CN) 7am, $0.46
    • TransAlta (TA CN) 7:45am, $0.01
    • Valero Energy (VLO) 7:49am, $1.20 - Preview
    • Valley National Bancorp (VLY) 7am, $0.14
    • WellPoint (WLP) 6am, $2.26
    • Wisconsin Energy (WEC) 7am, $0.52



    • Agnico Eagle Mines (AEM CN) 5pm, $0.28 - Preview
    • Akamai Technologies (AKAM) 4:01pm, $0.55
    • Albemarle (ALB) 4:03pm, $1.10
    • Allstate (ALL) 4:05pm, $0.66
    • American Equity Investment (AEL) 4pm, $0.50
    • Barrick Gold (ABX CN) Aft-Mkt, $0.15 - Preview
    • BioMarin Pharmaceutical (BMRN) 4pm, $(0.43)
    • Duke Realty (DRE) 4:11pm, $(0.03)
    • Enbridge Energy Partners (EEP) 4:01pm, $0.24
    • First Quantum Minerals (FM CN) 5pm, $0.25 - Preview
    • FMC (FMC) 4:15pm, $1.02
    • FNF (FNF) 4:03pm, $0.52
    • Fortune Brands (FBHS) 4:01pm, $0.54
    • Halcon Resources (HK) 4:15pm, $0.04
    • Hartford Financial (HIG) 4:15pm, $0.67
    • Hologic (HOLX) 4:01pm, $0.34
    • Intersil (ISIL) 4:05pm, $0.18
    • KapStone Paper (KS) 4:15pm, $0.60
    • Kinross Gold (K CN) 5pm, $0.04 - Preview
    • Kraft Foods (KRFT) 4pm, $0.82 - Preview
    • Lam Research (LRCX) 4:05pm, $1.23
    • LifeLock (LOCK) 4:05pm, $0.04
    • Lincoln National (LNC) 4:10pm, $1.36
    • Lundin Mining (LUN CN) 5pm, $0.06 - Preview
    • Manitowoc (MTW) 4:25pm, $0.43
    • MetLife (MET) 4:05pm, $1.41
    • Moelis (MC) Aft-Mkt, $0.25
    • Murphy Oil (MUR) 5:01pm, $1.22
    • Noble (NE) 5pm, $0.66
    • Penn Virginia (PVA) 4:05pm, $(0.04)
    • Pilgrim’s Pride (PPC) 4:45pm, $0.66
    • Questar (STR) 4:14pm, $0.22
    • Rovi (ROVI) 4:05pm, $0.40
    • RR Donnelley (RRD) 4pm, $0.35
    • Ruckus Wireless (RKUS) 4:05pm, $0.05
    • Service Intl (SCI) 4:15pm, $0.23
    • ServiceNow (NOW) 4:01pm, $(0.07)
    • Solazyme (SZYM) 4:25pm, $(0.39)
    • Spansion (CODE) 4:03pm, $0.25
    • Suncor Energy (SU CN) 10pm, C$0.98 - Preview
    • Superior Energy Services (SPN) 4:05pm, $0.41
    • Tesoro (TSO) 4:30pm, $1.82 - Preview
    • Unum (UNM) 4pm, $0.87
    • Weight Watchers Intl (WTW) 4:05pm, $0.77
    • Western Digital (WDC) 4:15pm, $1.73 - Preview
    • Whiting Petroleum (WLL) 4pm, $1.26
    • Whole Foods Market (WFM) 4:03pm, $0.39
    • Williams (WMB) 4:05pm, $0.22
    • Yamana Gold (YRI CN) 4:20pm, $0.03 - Preview
    • Yelp (YELP) 4pm, $(0.03) - Preview



  • WTI’s Discount to Brent Shrinks as Russia Sanction Impact Muted
  • Stolen India Coal Sent to Market in Modi’s Backyard: Commodities
  • Commodity Assets Seen by Barclays Increasing to $325 Billion
  • Thai Sugar Offered at Discount to New York, Green Pool Says
  • Gold Holds Two-Day Decline as Investors Weigh U.S. Outlook
  • Japan Buys 26,340 Mt of Feed Wheat 122,750 Mt of Feed Barley
  • Soybeans in Chicago Climb as Much as 0.3%, Reversing Decline
  • Haze Fines Win Indonesia’s Support With Caveats: Southeast Asia
  • Rubber Drops as Japan Industrial Output Falls More Than Forecast
  • HSBC, ABN Sue Metals Trader Detained in Qingdao Loan Fraud Probe
  • Cocoa Arrivals in Brazil’s Bahia Advance 2.3%, Hartmann Reports
  • China Rows Back on Shale Ambitions as Expertise Falls Short
  • Aluminum Beating Copper as Supply-Demand Flips: Chart of the Day
  • Oil Market Losing Faith in Libya’s Ability to Ramp Crude: Energy


























The Hedgeye Macro Team

















Chart of the Day:  Statistics cloud recent speculation that Vegas is benefiting from weak Macau VIP


  • Contrary to a recent assertion, we found very little correlation between VIP volume in Macau and Baccarat volume in Las Vegas
  • In fact, the weak correlation is actually positive which makes it unlikely that Las Vegas is benefiting from the weak Macau VIP volumes
  • Weakness in Macau VIP appears to be secular to that market while Vegas continues its rebound


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 80.47%
  • SHORT SIGNALS 78.70%