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BABA: Leaning Short, But...

Takeaway: We put together a 40-page deck outlining our bearish long-term view on BABA.  But we don't have a near-term catalyst, so we're staying on the sidelines for now.  High level themes below.  More detail to follow.

 

KEY THEMES

  1. TOO LARGE TO CONTROL ITS OWN DESTINY:  BABA is essentially China’s E-commerce market, with over 80% of all E-commerce GMV, and over 75% of traffic flowing through its sites.  Without room for share gains, which historically have been tenuous, BABA will become increasingly dependent on the China Growth Story to drive its business moving forward.
  2. CHINA CAN’T GROWTH FAST ENOUGH: While BABA cites this as an opportunity, there is a reason why China lags many major economies in terms of both e-commerce and internet penetration: the Chinese consumer is relatively weaker in terms of both incomes and discretionary spend.  There is naturally room for new user growth, but it will come with a declining yield since these users have less to spend, which means the average GMV (Gross Merchandise Value) of the BABA consumer is facing decline.
  3. GROWTH WILL COME AT A PRICE: Roughly 60% of BABA’s revenues come from vendors marketing to BABA consumers; over 75% of which from P4P (Pay for Performance) ads that require user engagement (clicks) to generate revenue for BABA.  If the average GMV/Active Buyer is facing decline, then the average buyer (and their ad clicks) are worth less to BABA’s vendors. We’re expecting pricing pressure across its Marketing segment, which we’re already seeing signs of today due to the rise of mobile (low-cost vehicle to internet access in China).  Further, if the mix of mobile users continues to grow, then it may also mean less ad inventory since BABA currently isn’t offering a comparable number of ads (vs. desktop). 
  4. NEAR VS. LONG-TERM OUTLOOK: Feasible vs. Lofty Consensus Estimates (40% and 35% revenue growth in F2015 and F2016, respectively).   A strong 1Q15 (up 46% y/y) makes F2015 estimates within reason, but we’re not expecting much upside.   F2016 is a different story; the question is whether growth in Commission Revenue (~25% of total) can compensate for our expectations for a marked slowdown in growth in Marketing Revenues (~60% of total).  Commissions have a very strong tailwind from GMV (transactions) mix shift of to branded products on Tmall (where BABA collects commissions), while Marketing revenue is facing headwinds across a number of fronts (see #2 & 3 above).   We’re expecting F2015 and F2016 revenues of ¥73.0B and ¥94.5B vs. consensus of ¥73.7B and ¥99.6B, respectively.
  5. WHY WE’RE ON THE SIDELINES: First, we don’t have a catalyst in sight near-term (we don’t even have an event yet).  Second, our view here is longer-term, and we’re not as bearish on F2015 as we are F2016 and thereafter.  The stock currently trades at ~20x forward revenue, which means this is a sentiment story.  That makes the stock highly sensitive to immaterial news flow outside a fundamental catalyst, which once again we don’t have near-term, making BABA a dangerous short near term.

BABA: Leaning Short, But... - BABA   vs. China GMV 2

BABA: Leaning Short, But... - BABA   Urban Per Cap3

BABA: Leaning Short, But... - BABA   Internet Income Distribution 2

BABA: Leaning Short, But... - BABA   GMV buyers 2

BABA: Leaning Short, But... - BABA   P4P ads

 

 

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

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


Cartoon of the Day: No Russell Muscle

Cartoon of the Day: No Russell Muscle - Russell 2000 cartoon 10.20.2014

 

Don’t forget that even though the Russell was up for the first week in seven last week, over 60% of stocks in the Russell 2000 are currently crashing (-20% from their 12-month highs).

 

subscribe to cartoon of the day


MID-OCTOBER 2014 CRUISE PRICING SURVEY - EBOLA IMPACT

In mid-October, we saw weak close-in pricing for FQ4 Caribbean itineraries and a still weakening outlook for Europe.

 

 

Please see our note:  http://docs.hedgeye.com/HE_Cruise_Pricing_MidOCT.pdf



Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Video | McCullough on Fox Business Talks Macro, Markets and More

Here is a series of videos from Hedgeye CEO Keith McCullough’s appearance earlier today on Opening Bell with Maria Bartiromo.


Commodities Weekly Sentiment Tracker

Note: Using the z-score in the tables below as a coefficient of variation for standard error helps us flag the relative market positioning of the commodities in the CRB Index. It is not intended as a predictive signal for the reversion to trailing twelve month historical averages. For week-end price data, please refer to “Commodities: Weekly Quant” published at the end of the previous week. Feel free to ping us for additional color.    

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1.       CFTC Net Futures and Options Positioning CRB Index: The Commodities Futures Trading Commission (CFTC) releases “Commitments of Traders Reports” at 3:30 p.m. Eastern Time on Friday. The release usually includes data from the previous Tuesday (Net Positions as of Tuesday Close), and includes the net positions of “non-commercial” futures and options participants. A “Non-Commercial” market participant is defined as a “speculator.” We observe the weekly marginal changes in the overall positioning of “non-commercial” futures and options positions to assess the directionally-biased capitulation risk among those with large, speculative positions.

 

The COTTON, SOYBEANS, and GOLD markets experienced the most BULLISH relative positioning change in the CRB week-over-week

The ORANGE JUICE, SILVER, and ULSD (HO) markets experienced the most BEARISH relative positioning change in the CRB week-over-week

 

Commodities Weekly Sentiment Tracker - chart1 sentiment

 

2.       Spot – Second Month Basis Differential: Measures the market expectation for forward looking prices in the near-term.

  • The CORN, NATURAL GAS, and WHEAT markets are positioned for HIGHER PRICES near-term
  • The RBOB GAS, LEAN HOGS, COTTON, and WTI CRUDE markets are positioned for LOWER PRICES near-term

Commodities Weekly Sentiment Tracker - chart2 spot 2nd month basis

 

3.       Spot – 1 Year Basis Differential: Measures the market expectation for forward-looking prices between spot and the respective contract expiring 1-year later.

  • The CORN, WHEAT, and SUGAR markets are positioned for HIGHER PRICES in 1-year  
  • The LEAN HOGS, LIVE CATTLE, and COCOA markets are positioned for LOWER PRICES in 1-year  

Commodities Weekly Sentiment Tracker - chart3 spot 1Yr basis

 

4.       Open Interest: Aggregate open interest measures the amount of opened positions in all actively traded futures contract months. Open interest can be thought of as “naked” or “directionally-biased” contracts as opposed to hedgers scalping and providing liquidity. Most of the open interest is created from large speculators or participants who are either: 1) Producers/sellers of the physical commodity hedging their cash market exposure or 2) Large speculators who are directionally-biased on price.

 

Commodities Weekly Sentiment Tracker - chart4 open interest         

 

Ben Ryan

Analyst

            

 


Monday Mashup: DRI, EAT and More

Monday Mashup: DRI, EAT and More - 1

 

Recent Notes

10/13/14 Monday Mashup: DFRG, EAT and More

10/14/14 DRI: No Better Time for Focus and Simplicity

10/16/14 DFRG: Timing is Critical

 

Events This Week

Monday, October 20th

  • CMG earnings call 5:00pm EST

Tuesday, October 21st

  • EAT earnings call 10:00am EST
  • MCD earnings call 11:00am EST
  • SONC earnings call 5:00pm EST

Wednesday, October 22nd

  • CAKE earnings call 5:00pm EST

Thursday, October 23rd

  • DNKN earnings call 8:00am EST
  • BJRI earnings call 5:00pm EST
 

Chart of the Day

Milk prices are up +26.2% YTD and +31.3% YoY.

Monday Mashup: DRI, EAT and More - 2

 

Recent News Flow

Monday, October 13th

  • DRI downgraded to neutral at Piper Jaffray with a $50 PT.

Tuesday, October 14th

  • DRI appointed Jeffrey Smith as Independent Non-Executive Chairman and Gene Lee as Interim CEO.
  • DRI downgraded to Ba1 from Baa3 at Moody's.
  • EAT downgraded to hold at KeyBanc.
  • TXRH downgraded to hold at KeyBanc.
  • CBRL upgraded to buy at Argus with a $120 PT.

Wednesday, October 15th

  • SBUX mentioned positively at Bernstein where it continues to be rated outperform with a $99 PT.

Thursday, October 16th

  • LOCO announced the opening of its nineteenth Las Vegas area location.
  • CAKE announced its newest opening at the new Mall at University Town Center in Sarasota, FL.

Friday, October 17th

  • MCD estimates were reduced at Janney, which reduced its PT to $90.

 

Sector Performance

The XLY (-0.9%) outperformed the SPX (-1.0%) last week.  Both casual dining and quick service stocks, in aggregate, outperformed the narrower XLY.

Monday Mashup: DRI, EAT and More - 3

Monday Mashup: DRI, EAT and More - 4

 

XLY Quantitative Setup

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

Monday Mashup: DRI, EAT and More - 5

 

Casual Dining Restaurants

Monday Mashup: DRI, EAT and More - 6

Monday Mashup: DRI, EAT and More - 7

 

Quick Service Restaurants

Monday Mashup: DRI, EAT and More - 8

Monday Mashup: DRI, EAT and More - 9

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


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 80.64%
  • SHORT SIGNALS 78.61%
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