prev

TWTR: The Story Has Changed

Takeaway: Not for us, but 3Q14 results/4Q14 guidance raises some red flags that the street wasn’t prepared for. We remain Short.

KEY POINTS

  1. 3Q14 UPSIDE DRIVEN BY 2Q14 ACQUISITIONS?: TWTR beat consensus expectations for advertising revenues by only 2%; with y/y growth decelerating to 109% vs. 129% in the prior quarter (3Q14 also includes World Cup as well).  Much of its 3Q14 upside came from its Data segment, which grew 171% y/y vs. 91% in 2Q14.  It appears much of its guidance raise in 2Q14 may have been inorganic after all; we suspect this may become a recurring theme.
  2. 4Q14 GUIDANCE SUGGESTS AD LOAD WON’T BE ENOUGH.  4Q guidance suggests ad revenue growth will decelerate sharply from the 129% in 2Q14 to 88% in 4Q14.  There’s nothing wrong with 88% growth, but such a sharp deceleration in such a short period suggests an unraveling of its monetization strategy (rising ad load), which creates a much tougher setup for the company moving forward. 
  3. 2015 WILL BE A STRETCH (ORGANICALLY): We suspect the limitations of its monetization strategy will become more evident in 2015 as management struggles with balancing ad load vs. user growth.  The 67% revenue growth consensus is assuming for 2015 will be a stretch organically. Acquisitions could fill the void, but will the street be willing to pay up for that? This morning's pre-market action suggests that won't be the case.

 

3Q14 UPSIDE DRIVEN BY 2Q14 ACQUISITIONS?

Advertising revenues grew 109% y/y; yet only beating street estimates by 2%.  Note 3Q14 likely had some lingering benefit from ad campaigns around the World Cup, which essentially straddled 2Q14 and 3Q14 in terms of timing (June 12-July 13).

 

Still, the quarter was very strong.  Ad engagements were up over 150% y/y; reversing the concerning inflection we saw in 2Q14 when the sequential change in ad engagements lagged that of global timeline views, which suggested users were fading TWTR ads at an increasing rate.  However, that inflection wasn't particularly impressive, and it’s possible this dynamic is still occurring, but we just can’t see it in the data because TWTR may have increased ad load more than its ad engagement metrics suggest.

 

Data Licensing/Other Revenues accelerated sharply, up 171% y/y vs. 91% in the prior quarter.  We don’t believe the street was prepared for that acceleration, which suggests much of its guidance raise from the prior quarter may have been tied to its recent string of acquisitions.  Given that it just raised an additional $1.7 billion less than a year after its IPO, and now has $3.6B in cash and short-term investments, we suspect acquisitions may become a recurring theme moving forward.  Question is why?

 

TWTR: The Story Has Changed - TWTR   Ad vs. Data Revenue 3Q14 2 

TWTR: The Story Has Changed - TWTR   Ad vs. user engagement 3Q14

 

4Q14 GUIDANCE SUGGESTS AD LOAD WON’T BE ENOUGH

Management suggested that 4Q revenues will be up 28%-30% q/q in a seasonally strong quarter, which at the midpoint implies 88% growth y/y vs. 109% and 129% in 3Q14 and 2Q14, respectively.   There’s nothing wrong with 88% growth, it’s the sharp deceleration from 2Q14 that’s concerning. 

 

It’s interesting that 2H14 is when we’re seeing the slowdown in revenue growth.  That may have to do with TWTR comping past what we refer to as the 2Q13 supply shock, which we suspect was a colossal surge in ad load given the 124% sequential increase in ad engagements that occurred during the quarter.  Ad price and engagements are near perfectly inversely correlated (-.87 correlation since 2Q12), and we suspect this relationship suggests a supply-demand dynamic (we estimate ad engagements are a proxy for supply).  We don’t believe it’s a coincidence that y/y ad revenue growth is slowing precipitously now that we’re a year past 2Q13.  

 

If ad load has been the driver of its recent strength, then that puts management in a box.  The street has been punishing the stock whenever its user metrics aren’t accelerating, so the company can’t risk increasing its ad load too much for fear of pushing the casual user away.  Only ~50% of its MAUs use twitter daily, which means much of its user base is on the fringe.  In short, there may be a perverse relationship between revenue and net user growth moving forward…Maybe this is why TWTR is raising capital.

 

TWTR: The Story Has Changed - TWTR   Ad Engagement vs. Pricing 3Q14

TWTR: The Story Has Changed - TWTR   Ad Load vs. US MAUs 3Q14

 

2015 WILL BE A STRETCH (ORGANICALLY)

We suspect the limitations of TWTR's monetization strategy will become more evident in 2015 as management struggles with balancing ad load vs. user growth.  Further, TWTR will be comping past the World Cup in 2Q15/3Q15, which we believe is an underappreciated headwind.

 

We believe the 67% revenue growth consensus is assuming for 2015 will be a stretch organically.  User growth will naturally slow from here, while growth in automated accounts should continue to pressure engagement (timeline views/MAU).  So the void must be filled by monetization, which is where we are seeing the most pressure across its model.

 

Acquisitions could potentially fill the void; we suspect this is why TWTR raised an additional $1.7B in capital when it already had roughly over $2.2B in cash and S/T investments on its balance sheet.  This ads an extra level of risk being short into the 2015 guidance release, but the question is whether the street is willing to pay up for inorganic growth? TWTR's pre-market action this morning suggests that won't be the case.

 

TWTR: The Story Has Changed - TWTR   HRM vs. Consensus 3Q14

 

Let us know if you have any questions, or would like to discuss in more detail. For additional detail on our thesis, see the two notes below.  

 

Hesham Shaaban, CFA

@HedgeyeInternet

 

 

TWTR: Has the Story Changed?

09/17/14 08:51 AM EDT

http://app.hedgeye.com/feed_items/38023

 

TWTR: What the Street is Missing

05/19/14 09:09 AM EDT

http://app.hedgeye.com/feed_items/35420


 


New Best Idea: Short CHUY (Corrected)

Takeaway: We’re hosting a flash call, Wednesday, Oct. 29th at 11:00am EST. Dial-in details and associated materials to follow.

We’ve covered the majority of our shorts in the casual dining space, but remain bearish on a select few stocks.  Today, we’re adding one of these names, CHUY, to the Hedgeye Best Ideas list as a short.

 

Three Key Points:

  1. In addition to being phonetically challenging, the Chuy’s brand is having difficult generating awareness is new markets.  The street is assuming that other states will be able to produce the same levels of revenues and returns generated in its core market (Texas) as it pursues its nationwide expansion plans.
  2. The issues associated with a disappointing 2013 class of restaurants are not a one quarter issue.  In fact, AUVs have declined every single quarter since 4Q12, a trend we believe will persist for the balance of 2015.  The concept has already proven it doesn’t travel well, suggesting growth expectations are being overvalued in the marketplace today.  Considering an onslaught of new, underperforming restaurants, the cost structure of the company is deleveraging.  This, coupled with increasing food and labor costs, likely means that more margin deterioration is on the way – precisely what the street is missing.
  3. Trading at 33x consensus NTM EPS, CHUY is currently one of the most expensive publicly traded casual dining stocks.  The company has maintained a premium valuation despite declining AUVs, returns and consensus EPS estimates.  Furthermore, we believe 2014 and 2015 earnings estimates are too high, which would imply this 33x multiple is closer to 39x by our estimates.  We see 30-40% downside in this name and believe 3Q14 earnings will be the catalyst the shorts are looking for.

 

CHUY has been on our Long Bench for the majority of 2014, until recently when we spotted several disconnects between the street’s expectations and reality.  For this reason, we believe the current issues the company faces will take longer to correct than most are giving them credit for.  At 39x NTM EPS, we believe there are too many risks in the current business, and the future of the business, to support such a multiple.  Importantly, we believe 3Q14 earnings will be the downside catalyst shorts are hoping for.

 

Our short thesis focuses on the following:

  • Disappointing new unit productivity
  • Cash burn necessitates the current new unit growth rate
  • Rampant support from the biased bulls (read: high expectations, aggressive estimates)
  • Significant insider selling
  • Strong sell-side sentiment and unjustified premium multiple
  • Significant food inflation (dairy, beef, avocados, produce)
  • Overly optimistic consensus food and labor cost assumptions in 2H14
  • A lack of leverage in the business model considering higher year-over-year G&A, D&A and pre-opening spend
  • Aggressive 2H14 and 2015 EPS estimates
  • Approximately 30-40% downside to the name

 

We’re in the early stages of this earnings season and, so far, we’ve seen bigger casual dining chains posting slightly stronger sales trends than a year ago.  While this trend is important to consider, some of this sales growth is coming at a significant cost to margins.  To that extent, Wyman Roberts, CEO of Brinker, recently said on the company’s earnings call: “If you look at NPD numbers 12 months rolling August, the category hit the highest deal rate that it’s ever hit, and some players in there are reaching some pretty aggressive numbers.”

 

So while gas prices may be helping the macro picture, it’s undoubtedly difficult to gauge the impact that increased discounting is having on several players in the industry.  What we do know, however, is that discounting is never good for margins.

 

Chuy’s looks to be one of the promising companies that can beat on the top-line, however, we suspect it will miss on margins and earnings.  The bulls on CHUY will likely point to stronger industry trends and the unexpected price increase management enacted sometime in September (we believe) to help mitigate the margin pressure the company is facing.  While both of these may likely occurred in the quarter, it will not be enough to save it. 

 

The underperformance of new units, in addition to lower margins, puts the company in a difficult spot, increasing the need for the company to tap the capital market in order to deliver on aggressive unit growth plans.  Over the past 12 months, capital spending has grown by 29%, while the cash burn has more than doubled to $12 million.

 

From a sentiment standpoint, one issue of concern on the short side is the 18% of short interest.  The average casual dining chain is running closer to 9.8%, so Chuy’s issues are fairly widely known.  Given the massive declines we’ve seen in restaurant stocks this year (with higher short interest) and the fact that insiders have been selling shares faster than gazelles, we believe the short side is a much better place to be.

 

We look forward to sharing more with you on the call.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


New Best Idea: Short CHUY

Takeaway: We’re hosting a flash call, Wednesday, Oct. 27th at 11:00am EST. Dial-in details and associated materials to follow.

We’ve covered the majority of our shorts in the casual dining space, but remain bearish on a select few stocks.  Today, we’re adding one of these names, CHUY, to the Hedgeye Best Ideas list as a short.

 

Three Key Points:

  1. In addition to being phonetically challenging, the Chuy’s brand is having difficult generating awareness is new markets.  The street is assuming that other states will be able to produce the same levels of revenues and returns generated in its core market (Texas) as it pursues its nationwide expansion plans.
  2. The issues associated with a disappointing 2013 class of restaurants are not a one quarter issue.  In fact, AUVs have declined every single quarter since 4Q12, a trend we believe will persist for the balance of 2015.  The concept has already proven it doesn’t travel well, suggesting growth expectations are being overvalued in the marketplace today.  Considering an onslaught of new, underperforming restaurants, the cost structure of the company is deleveraging.  This, coupled with increasing food and labor costs, likely means that more margin deterioration is on the way – precisely what the street is missing.
  3. Trading at 33x consensus NTM EPS, CHUY is currently one of the most expensive publicly traded casual dining stocks.  The company has maintained a premium valuation despite declining AUVs, returns and consensus EPS estimates.  Furthermore, we believe 2014 and 2015 earnings estimates are too high, which would imply this 33x multiple is closer to 39x by our estimates.  We see 30-40% downside in this name and believe 3Q14 earnings will be the catalyst the shorts are looking for.

 

CHUY has been on our Long Bench for the majority of 2014, until recently when we spotted several disconnects between the street’s expectations and reality.  For this reason, we believe the current issues the company faces will take longer to correct than most are giving them credit for.  At 39x NTM EPS, we believe there are too many risks in the current business, and the future of the business, to support such a multiple.  Importantly, we believe 3Q14 earnings will be the downside catalyst shorts are hoping for.

 

Our short thesis focuses on the following:

  • Disappointing new unit productivity
  • Cash burn necessitates the current new unit growth rate
  • Rampant support from the biased bulls (read: high expectations, aggressive estimates)
  • Significant insider selling
  • Strong sell-side sentiment and unjustified premium multiple
  • Significant food inflation (dairy, beef, avocados, produce)
  • Overly optimistic consensus food and labor cost assumptions in 2H14
  • A lack of leverage in the business model considering higher year-over-year G&A, D&A and pre-opening spend
  • Aggressive 2H14 and 2015 EPS estimates
  • Approximately 30-40% downside to the name

 

We’re in the early stages of this earnings season and, so far, we’ve seen bigger casual dining chains posting slightly stronger sales trends than a year ago.  While this trend is important to consider, some of this sales growth is coming at a significant cost to margins.  To that extent, Wyman Roberts, CEO of Brinker, recently said on the company’s earnings call: “If you look at NPD numbers 12 months rolling August, the category hit the highest deal rate that it’s ever hit, and some players in there are reaching some pretty aggressive numbers.”

 

So while gas prices may be helping the macro picture, it’s undoubtedly difficult to gauge the impact that increased discounting is having on several players in the industry.  What we do know, however, is that discounting is never good for margins.

 

Chuy’s looks to be one of the promising companies that can beat on the top-line, however, we suspect it will miss on margins and earnings.  The bulls on CHUY will likely point to stronger industry trends and the unexpected price increase management enacted sometime in September (we believe) to help mitigate the margin pressure the company is facing.  While both of these may likely occurred in the quarter, it will not be enough to save it. 

 

The underperformance of new units, in addition to lower margins, puts the company in a difficult spot, increasing the need for the company to tap the capital market in order to deliver on aggressive unit growth plans.  Over the past 12 months, capital spending has grown by 29%, while the cash burn has more than doubled to $12 million.

 

From a sentiment standpoint, one issue of concern on the short side is the 18% of short interest.  The average casual dining chain is running closer to 9.8%, so Chuy’s issues are fairly widely known.  Given the massive declines we’ve seen in restaurant stocks this year (with higher short interest) and the fact that insiders have been selling shares faster than gazelles, we believe the short side is a much better place to be.

 

We look forward to sharing more with you on the call.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

HOT Q3 2014 EARNINGS PREP

Takeaway: We expect a beat and a more positive tone from management regarding capital return to shareholders

Consensus estimates, management guidance and commentary, and questions for management in preparation for the earnings release/call tomorrow

 

Please see our note http://docs.hedgeye.com/HE_HOT_EarningsPrep_10.27.14.pdf



Cartoon of the Day: It Is Fall After All

Cartoon of the Day: It Is Fall After All - falling leaves cartoon 10.27.2014

 

It’s the season for #Quad4, which means both growth and inflation are slowing.

 

subscribe to cartoon of the day

 


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next