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Poll of the Day Recap: Bubble Bursting In Social Media?

In today’s Morning Newsletter, "Social Bubbles," Hedgeye CEO Keith McCullough pulled no punches critiquing the growing social media bubble in light of news that Facebook bought Oculus VR (a virtual reality gaming company) for $2 billion.

 

“Imagine that – if there were only one bubble, tulip, or social media stock left in the world – what on earth would we pay for it?... I have to give it to the folks @Facebook. They’re nailing it on “scarcity value.” I didn’t know that either of their last two acquisitions existed. After spending $21 billion on WhatsApp and Oculus, FB’s stock has broken my mo-bro line of $67.52 support too.”

 

We wanted to find out what you thought. So we asked:  Are social media stocks like Facebook and Twitter in a bubble right now?


At the time of this post, 68% of respondents said YES and 32% said NO.

 

As Keith tweeted, “Social Media bulls still not putting a dent in our poll - they may have if it was March of 2000.”

 

In this particular survey, not only did a convincing majority of people vote YES, but there were several thought-provoking responses explaining why.

  • “I work for largest utility company in California and we own a nuke, NG power plants, 1000's of miles of transmission and pipelines and NG storage fields; market cap approx 20 billion. WhatsApp free messaging service is worth 19 billion. It is all fun and games until it pops.”
     
  • “This smells so similar to the dot.com bubble a decade and a half ago. If you look back, there were hundreds of internet names, yet only a few made it -- but they made it big. There’s no reason to think the same dynamics won't play out this time. A couple big winners -- and a lot of bagels.”
     
  • “MASSIVE bubble....which doesn't burst till there is a catalyst. What is ratio of (primo) Jobs/Mkt Cap of Money-Losing Companies (public & private)?  100 times what it was in 2000? 1,000 times? Policy response then was we "needed" a housing bubble to avoid deflation. What will it be this time?”
     
  • “It looks like a one-sided bubble. Facebook and Twitter are among the few that appear to have lasting value.  Others with small footprints, one-trick ponies, or non-economic business models appear to be frothing beneath the surface. When they pop, FB and TWTR will be bruised, but they will recover.  For the others... pets.com sock-puppet, anyone?”

Of those who voted NO, one commenter said “bubbles form under the belief prices cannot collapse; 70% bearish here shows not a bubble.”

 

Another noted, “Companies may be over-valued, but that doesn't indicate a bubble (that's going to ‘pop’ suddenly).  The price of some of these stocks may deflate over some period of time, with advertising spends tapering off, but it's definitely not a bubble; these companies have significant revenue, where in 1999 some, maybe most, basically didn't --- that's the main difference.”

 

One NO voter says it’s too soon to tell: “We are in early innings of the social revolution as an ongoing business model.  Not sure we can see exactly how this model with morph.”

 

If we are indeed in a social media bubble, and it does pop, watch out.

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MARCH NOT KIND TO MACAU STOCKS

Another “slow” month in April coupled with an in line earnings season could continue to keep the lid on these high fliers.

 

 

Don’t get us wrong.  We’re bullish on Macau and Asia gaming over the long term, especially LVS.  However, we think a better entry point for LVS may be forthcoming.  MPEL and WYNN are down 10% and 8%, respectively, but we think there could be more downside there as well.  What’s wrong with Macau?  Not much but when expectations get too high, even minor catalysts such as a couple months of deceleration and an upcoming earnings season that could be just “in line” could keep a lid on these high fliers.

 

The Hedgeye forecast for 2014 monthly year/year GGR growth is approximately 15% (annually year/year) which is probably in line with consensus – I hate that.  But it is likely that our monthly model correctly predicts only a high single digit/low double digit growth March following an accurate Jan/Feb growth projection of +24%.  Moreover, April is likely to again fall below the December/January/February run rate as follows.

 

MARCH NOT KIND TO MACAU STOCKS - MACAU1

 

CONSIDER THE BACKDROP

  1. Bad press about money laundering
  2. Near peak stock valuations
  3. Property prices growth slowing 
  4. Chinese stock prices lower for the year

All of these concern us to varying degrees and are not reflected in our monthly projections that you see above.  That chart is just the Math.  Given the cushion we see in terms of demand, we are less concerned with 3 and 4 as it relates to the impact on actual revenues.  No doubt, if April is another disappointing month as we expect, the macro will be part of the storytelling – rather than the Math as we see it.  What worries us is the storytelling itself combined with 2.  Despite the equity value drawdowns in March, history tells us there is more room to fall, particularly for MPEL and WYNN given that they are not likely market share gainers.

 

We’ve often talked about demand cushion.  Mass cushion is derived from the simple fact that the visa scheme and infrastructure prevents full demand – more people want to come to Macau more often than they can.  VIP cushion resides with the junket.  It’s our belief that more of the side betting has and could continue to flow through the legal channel; that is, the casino.

 

This brings us to the underside of Macau gaming – money laundering.  Balancing the PRC’s desire to show Taiwan that the SAR system can succeed and have Macau and Hong Kong prosper, the government will save face on appearances of corruption and crackdown on junkets, if necessary.  This is always a risk and would have a negative impact on near-term junket activity.  The recent flurry of media reports on Macau money laundering are not very revealing – it’s generally accepted that it happens, a lot in Macau – but that’s not really relevant.  What is relevant is if there is the appearance of a crackdown. 

 

SENTIMENT INDICATOR

The sell-side is extremely positive on Macau and the Macau gaming operators – some investors might categorize the sell-side infatuation as “extreme” as measured by the total number of buy versus sell ratings.  Recent sell-side activity was to increase price targets based on higher multiples and not higher estimates.

 

MARCH NOT KIND TO MACAU STOCKS - macau12

 

RECENT TRADING TRENDS

The first 1000 bps of underperformance vs the S&P 500 Index by each name is now in the book.  Growth is under performing and these were the best performing names in 2013.  While we expect the sell side to rally support and reiterate their buy ratings and price target - despite slowing year/year GGR growth – it may not be enough over the near-term.

 

CONCLUSION

We see a few months of tough trading for the Macau stocks which would be exacerbated by a junket crackdown.  We’re not hearing of any and believe the risk is low but decelerating growth and an in line earnings season – albeit on higher estimates following February - should keep a lid on the momentum.  The good news is that the underlying fundamentals look good and the long-term growth outlook is very positive.  LVS would likely be the first stock we would return to on the long side.


FXB: Removing British Pound From Investing Ideas

Takeaway: We are removing FXB from Investing Ideas.

We are removing the British Pound (FXB) from Investing Ideas.

 

FXB: Removing British Pound From Investing Ideas - british pound 12 3


While we still like the pound (and especially what the Bank of England's Mark Carney is doing) we simply do not see as much relative upside left versus new ideas we added yesterday with Legg Mason (LM) and Hologic (HOLX). 

 

We continue to believe that the health of a nation’s economy is reflected in its currency. The Pound has benefited from the UK’s fiscal discipline to embrace austerity before its regional peers during the global recession – a policy decision that is paying off through accelerating growth above its European peers. 

 


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Cartoon of the Day: Social Media 'Pixie Dust'

Takeaway: Imagine that – if there were only one bubble, tulip, or social media stock left in the world – what on earth would we pay for it?

Cartoon of the Day: Social Media 'Pixie Dust' - josie

 

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Bubble Up: SP500 Levels, Refreshed

Takeaway: The all-time-bubble-high of 1878 SPX is in play and if/when we tag that, the SP500 can then mean revert lower 35 handles.

POSITION: 11 LONGS, 6 SHORTS @Hedgeye

 

I’ve seen a lot in trying to trade markets for the last 16 years, but I haven’t yet seen something like this. For 3 months I feel like we’ve been watching the entire construct of consensus bang its head against the #OldWall, debating whether the US stock market is going to be -2/+2% YTD.

 

So let’s bubble this sucker right back up to the all-time-high into quarter-end and get on with it. From a #behavioral perspective, what we know is that consensus hedge funds will get net long up there (after tightening exposure on every selloff). Don’t be consensus.

 

Across our core risk management durations, here are the levels that matter to me most:

 

  1. Immediate-term TRADE overbought = 1881
  2. Immediate-term TRADE support = 1844
  3. Intermediate-term TREND support = 1815

 

In other words, the all-time-bubble-high of 1878 SPX (on a closing basis) is in play and if/when we tag that, the SP500 can then mean revert (lower) for another 35 handles once consensus is leaning too long (again).

 

De-stress and keep moving out there. Fading Beta within a risk range is a good business.

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

 

Bubble Up: SP500 Levels, Refreshed - Slide2


RH: Duration Review Into The Print

Takeaway: There will be puts & takes on the 4Q print. But the multi-year catalyst calendar starts in April. Beware getting beared-up over 1Q guidance.

Conclusion: They’ll be puts and takes on the 4Q print. But the multi-year catalyst calendar starts in April. Beware getting beared-up over 1Q guidance. We stand by our positioning on RH that we presented in our last update conference call/deck in early February. Specifically, we laid out how we’re thinking about the name across multiple durations. See the links below to both the slide deck and audio presentation. Our general view by duration is as follows.

 

TAIL Duration (long-term): One of the most powerful growth algorithms in all of Consumer. The company should earn around $1.70 this year, and we think that over 5-years that number approaches $11. Common perception is that RH is building a bunch of palaces and hoping that people will show up to shop. We think about it the other way around…they are creating assortments of product across multiple categories in the home space, and are subsequently taking a massive piece of a category where they only have 2-3% share. Yes, bigger stores are a part of this, which is critical to support the kind of product extensions we’ll see from RH. Currently, the Legacy 9,000 sq ft stores only house 20% of the SKUs and run at about $750/sq ft. The 25,000 Design Galleries highlight closer to 50% of the product, and they average an ‘per foot productivity’ rate that is 2x the existing core. People often ask us about why RH has the right to expand into new categories of Home. People asked that same question about Ralph Lauren in the 1980s when he expanded beyond neckties and polo shirts. Our full modeling assumptions are in the Deck (link below), but the key is to measure the success by product and design creation and sourcing, not by simply building stores.

 

TREND Duration (next 3-4 quarters): The trends should accelerate dramatically over the course of this year for RH. First and foremost, the product line is being meaningfully changed for the Spring. With that will come an updated Sourcebook – which the company has not released in the better part of a year. At the same time, after a full year of not adding a single square foot of space, RH will be adding four new stores throughout this year. In April/May we’ll see the much anticipated opening of Greenwich, CT, the store in the Flatiron District in NYC, then in the Fall we’ll see Los Angeles and Atlanta. As noted above, the actual stores are not as important to us as the product that goes behind them. But this year, the calendar is lining up nicely with a product refresh in the Spring and then four large stores immediately following, That’s about 12% growth in square footage. That might not sound huge for a company that will be looking at a 30%+ growth rate in square footage within two years. But it matters to us given that it has not grown square footage since before 2008.

 

TRADE Duration (Immediate-term): The TRADE duration was a slam dunk when the stock was in the $50s. The reality is the Street got beared up because just about every retailer was missing numbers due to weather and whatever else is going on out there in the economy. But with RH, 47% of it’s sales are dot.com, which are weather proof, and the category in itself is not very ‘at-risk’ due to snow. Think about it…if you want to go shopping for clothes, you might pick up a pair of jeans. If it’s snowing, that purchase is probably dead. But if your kids need new bunk beds, are you going to bag the purchase just because it’s snowing? No. We have some useful stats on the topic in the Deck. We’re not very worried about the actual number that RH reports. The company has extremely good visibility with its top line. The same factor that the Street beats this company up so often for – the long lead times in its shipping window – also gives the company great visibility into its top line for an extended time period.

 

The big question is around comp guidance for the first quarter. The company already noted that the first quarter would be its weakest comp of the year – due to the timing of the product refresh and catalog drop. The Street knows that. The consensus is printed at 11%, and we think that the whisper is for something in the high-single digits. Could guidance for 1Q be in the single digits? Yes – with no product refresh, a 41% compare vs last year, and the strong possibility that some 1Q purchases were pushed into 2Q,the upcoming quarter will be the weakest of the year – as management already indicated. What we can say is that with the tremendous delta in our estimates versus the Street over our modeling horizon – and with how good the TAIL and TREND calls are lining up, we’re not going to get too bent out of shape figuring out if people are going to freak out over guidance that was already largely given.

 

MATERIALS: CLICK HERE

AUDIO REPLAY: CLICK HERE 

 

RH: Duration Review Into The Print - rh model


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