Takeaway: The acquisition price for WhatsApp is greater than its app's addressable market (assuming they can ever monetize it).
Editor's note: This research note was originally published by Hedgeye analyst Hesham Shaaban on February 20, 2014 at 15:02 in Internet & Media. For more information on our subscription service click here.
- WhatsApp is a mobile messaging app with ~450M users (~70% are active daily)
- WhatsApp will continue to operate as an independent & autonomous company
- Facebook will pay ~$19B for the company ($4B cash/$15B in FB shares)
Monetization Strategy = Slippery Slope
WhatsApp CEO Jan Koum suggested that they have a clear monetization strategy in place. While WhatsApp is essentially free to download, in some instances, the app requests an annual fee of $0.99. However that isn't largely enforced if the user declines to pay. Further, the company is not running ads on the app; which means that they're essentially not monetizing the product.
Jan Koum also suggested that monetization is not a priority for the company right now; deferring to 5-10 year window as his focus. More importantly, the company is not planning to introduce ads to its service; suggesting the only means for monetization will continue to be the user, which is comical since FB doesn't even charge its users.
The assumption that Jan Koum is making is that the WhatsApp user is sticky, and that they would be willing to pay something for a service that has a series of free substitute options. While the cost is nominal, it would be a deterrent to growing its current user base, if not sustaining it, if the company tried to enforce the annual fee more aggressively.
Acquisition Price > Addressable Market
The street seems to be justifying the $19 billion acquisition price on a cost/user basis; suggesting that FB is getting a good deal since it is paying $42 per user for WhatsApp vs. its own per-user valuation of $140; essentially a 70% discount. The inherent flaw in this analysis is simple: the FB user is far more valuable than a WhatsApp user because FB can actually monetize its user base; likely by a much higher margin than is implied by the WhatsApp per-user valuation.
The more telling factor is that the $19 billion that FB will pay to acquire WhatsApp is actually larger than the total addressable market for the app. The addressable market is as follows:
- Global Paid App Market: ~$20 billion
- Global Mobile Ad Market: ~$15 billion.
Once again, Jan Koum suggested that he doesn't want to monetize WhatsApp via ads, so the current addressable market is the $20 billion Paid App Market. In actuality, it's likely much smaller. We're not sure what percentage paid messenger apps represent of the total, but given that most of these apps are free, we doubt it's a meaningful percentage (if any).
In short, the current addressable market for WhatsApp is a small fraction of what FB is paying for the company.
Now the obvious counter is that both these markets are rapidly growing and will continue to do so. We're not disputing that. But how much share can WhatsApp hope to gain in a market with existing competition that generally doesn't charge the end user for messaging services? We doubt much.
Hesham Shaaban, CFA
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Takeaway: Target and Carter's? Eek.
Editor's note: What follows below is a brief excerpt from Hedgeye Retail Analyst Brian McGough's morning research.
CRI - Carter's Leaves Much to Be Desired
So, Carter's (CRI) beat the quarter by a penny. That's obviously good enough in this tape. But the quality of earnings left much to be desired. Guidance was weak, but that's typical for CRI. They're a 'guide and beat' kind of company. But the SIGMA chart below really tells all here. The past five quarters have been a downward spiral. Margins are slowly eroding, while sales weaken and inventories build. Not good. While there are factors to explain some of this away, including international expansion, the fact is that when the line in the chart below goes down and to the left, it means that cash flow compresses.
TGT - Be Weary of Target
You know what we just wrote about Carter's? Now substitute the word Target for Carters'. That pretty much sums it up.
The only real difference is that TGT's guidance in 1Q is worse than CRI's . It makes sense given that now they have to deal with their highly publicized data breach. We'll get more details on the quantification on the company's conference call at 10:30am. But it looks like Target has thrown a very beared-up scenario into their comp. But just because they set appropriate expectations, it doesn't mean that it's worth buying. Not by a long shot.
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Takeaway: Much going on today – too much to list. Apparently all a company has to do is print a number – any number – and stock goes up. #expectations
EVENTS TO WATCH - Big Earnings Week
- TGT - Earnings Call: Wednesday 2/26, 10:30am
- TJX - Earnings Call: Wednesday 2/26, 11:00am
- JCP - Earnings Call: Wednesday 2/26, 4:30pm
- BBY - Earnings Call: Thursday 2/27, 8:00am
- KSS - Earnings Call: Thursday 2/27, 8:30am
- DECK - Earnings Call: Thursday 2/27, 4:30pm
- GPS - Earnings Call: Thursday 2/27, 5:00pm
CRI - 4Q Earnings
Carter's (CRI) beat the quarter by a penny, which is good enough in this tape. But the quality of earnings left much to be desired. Guidance was weak, but that's typical for CRI. They're a 'guide and beat' kind of company. But the SIGMA chart really tells all here. The past five quarters have been a downward spiral. Margins slowly eroding, while sales weaken and inventories build. There are factors to explain some of this away, including international expansion. But the fact is that when the line in the chart below goes down and to the left, it means that cash flow compresses.
TGT - 4Q Earnings
Please check out what we just said about Carter's. Now substitute the word Target for Carters'. That pretty much sums it up. The only real difference is that TGT's guidance in 1Q is worse than CRI's . Makes sense given that now they have to deal with their data breach. We'll get more details on the quantification on the company's conference call at 10:30. But it looks like they've thrown a very beared-up scenario into their comp. But just because they set appropriate expectations, it doesn't mean that it's worth buying. Not by a long shot.
ANF - 4Q Earnings
Notice a trend anyone? Over the past 5 quarters ANF looks just like the names above. ANF clearly put up a good number relative to expectations -- which is has to do given that it's in the midst of a management coup and it has to put its best foot forward. ANF actually did what CRI and TGT did not…it took a turn in the SIGMA analysis up and to the left, which is almost always an extremely bullish signal. Let's not declare victory here, as the move is a small one. But we'll take it.
JCrew - J. Crew Said to Be Talking With Banks About 2014 IPO
- "J. Crew Group Inc...is interviewing banks as it weighs an initial public offering in the U.S. later this year, people familiar with the matter said."
- "With 451 stores and about $2.4 billion in annual sales, J. Crew may fetch a valuation of as much as $5 billion, one of the people said, asking not to be identified discussing private information. That’s almost twice the $2.64 billion value of J. Crew’s buyout by TPG and Leonard Green three years ago."
Takeaway: Remember when going private at its all-time high was a great idea AFTER JCG went on a blistering run from $9 to $43 back in 2010/11? Well… let's forget that. Now going public is an even better idea. This article says that J Crew is 'interviewing' bankers, but something tells us that the bankers had this planned all along. Now Drexler's appearance at ICR last month makes all the more sense.
UA - UnderArmour set to release Speedform Apollo 2/28
Takeaway: Like 'em or not, UA is doing an outstanding job marketing this new footwear launch. It's heads and tails above prior launches. Quite frankly, if you did not see an UA reference, you'd probably otherwise think that this is Nike. UA is turning footwear into a two-horse race in the US. Adibok is no longer a factor.
ADDYY - World Cup T-shirts pulled by adidas after Brazilian tourism board complain they 'encourage prostitution'
- "Sports brand adidas have accepted a request from Brazil's tourism board to stop selling two T-shirts it marketed ahead of this year's World Cup because they encourage sexual tourism."
- "One shirt shows a bikini-clad woman with open arms on a sunny Rio de Janeiro beach under the word-play 'Looking to Score.'"
- "The other has an 'I love Brazil' heart resembling the upside-down buttocks of a woman wearing a thong bikini bottom."
Takeaway: I think I've got to bow out of commenting on this one.
MW, JOSB - Men's Wearhouse Wins First Battle
- "Men's Wearhouse on Tuesday won court approval to expedite its request for a hearing on whether it can bar the planned acquisition of Eddie Bauer by Jos. A. Bank Clothiers Inc."
- "Delaware Chancery Court Vice Chancellor J. Travis Laster made the ruling... said that Men's Wearhouse made a 'credible basis for believing that the Eddie Bauer transaction is defensive' and that it was in response to a 'hostile bid.' He also noted that the features of the Eddie Bauer transaction 'totally may well fall outside the range of reasonableness,' noting for example the termination fee and its 'alleged magnitude.'"
Takeaway: This whole thing has turned into a circus sideshow, but we've gotta say that we're happy to see MW come out ahead on this one. The move to buy Eddie Bauer on the part of JOSB is one of the more laughable M&A moves we've seen in retail -- ever.
ARO - Aeropostale Said to Consider Investment From Private Equity
- "Aeropostale Inc., the teen apparel retailer under pressure from an activist investor to sell itself, is working with Barclays Plc to explore options such as the sale of a convertible note or preferred stock to a private-equity firm, people with knowledge of the matter said."
- "Aeropostale is also weighing a straight-up sale, said the people, who asked not to be identified because the talks are private. The New York-based retailer contacted at least two buyout firms as of last month as management weighs alternatives, people familiar with the situation said then."
TGT - House oversight panel seeks documents on Target breach
- "A House of Representatives committee with broad investigative jurisdiction has turned up the heat on Target Corp, demanding that the No. 3 U.S. retailer turn over internal documents and messages describing how and when it learned of a recent massive consumer data breach."
- "In a letter made available on Tuesday to Reuters, the House Committee on Oversight and Government Reform requested that Target turn over all documents or communications generated between November 1 and December 13, in which Target employees or 'agents' discuss 'any suspicion' that a data breach had occurred."
LVMH - All Eyes on Nicolas Ghesquière's Debut at Louis Vuitton
- "Nicolas Ghesquière is fashion’s man of the hour: 10 a.m. on March 5, to be precise. That’s when one of the most anticipated events of this international fashion season takes place as the French designer makes his runway debut at Louis Vuitton…"
- "Since being appointed to succeed Marc Jacobs as artistic director of Vuitton in October, roughly one year after ending a 15-year tenure at Balenciaga, Ghesquière has given scant indication about where he might steer the storied French firm, which is marking its 160th anniversary this year."
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