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MACAU ESTIMATES: HOW LOW WILL THEY GO?

Takeaway: A rash of estimate cuts has the Street closer to us. But every day we lose more confidence in our numbers.

THE CALL TO ACTION

 

Street estimates are being lowered but there is no evidence that “the bottom is in”. Relief rally following earnings notwithstanding, significant risks remain and further downside to estimates is likely. As a Macau pure play and with the cheapest valuation, MPEL looks like the best long trade into earnings to benefit from another relief rally. Our Q4 EBITDA estimate exceeds the Street. On the other hand, WYNN may post the biggest miss in Q4 and looks to be the most at risk in 2015 as well.

 

Please see our detailed note: http://docs.hedgeye.com/HE_Macau_1.13.15.pdf


Tomorrow at 8:30AM ET - Hedgeye’s Morning Macro Call Live With CEO Keith McCullough

Excellent news for investors, traders, and everyone in between. We are streaming our Institutional Morning Macro Call with CEO Keith McCullough live on Hedgeye TV tomorrow morning at 8:30AM ET.

 

The best part? It's free.

All viewers will be able to submit questions to Keith on Twitter or on the YouTube page and he'll answer them live on the air. 

 

Stick around until the end of the call for a special announcement from Hedgeye.   

Our Morning Macro Call is an institutional product that takes place every weekday which synthesizes and prioritizes the world’s biggest market and economic risks and opportunities. 

 

 

 


Cartoon of the Day: Pass the Dramamine

Cartoon of the Day: Pass the Dramamine - boat race cartoon 01.13.2015

As the new year begins, it's a fair wind for some sectors and a perfect storm for others.


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P: Webcaster IV = Powder Keg

Takeaway: Anything short of the best case scenario won't be good enough. P may have to exit certain markets in 2016, curbing its long-term prospects.

KEY POINTS

  1. WORLDS APART: In mid November, P disclosed the progress of its Webcaster IV proceedings with SoundExchange regarding music licensing rates starting in 2016.  The two sides are world apart, particularly on ad-supported music, where SoundExchange is proposing rates 125% above that proposed by P.  We estimate that roughly 90% of P's music is streamed by ad-supported users. 
  2. A COMPROMISE WON'T BE GOOD ENOUGH: We're not suggesting that SoundExchange gets the rates it's proposing.  But anything short of the best case scenario for P won't be good enough.  P's model can't absorb any more cost, and we expect P will have to cut listener hours to curb content costs in 2016.  Once P cuts the chord on those users, it will much tougher to get them back, especially with growing competition for listener hours.

 

WORLDS APART

In mid November, P disclosed the progress of its Webcaster IV proceedings with SoundExchange regarding music licensing rates starting in 2016.  The two sides are worlds apart.    

  1. Pandora: Greater of 25% of revenue or $0.0011-$0.0013 for ad-supported streams and $0.00215-$0.00240 for Pandora One subscribers.
  2. SoundExchange: Greater of 55% of revenue, or $0.0025-$0.0029 for all streaming music.

The most glaring difference between the two sides is that SoundExchange is not distinguishing between ad-supported and subscription hours, which is a deviation from the current agreement.

 

SoundExchange's proposal translates to an increase of roughly 125% in ad-supported licensing rates, which is a major concern given that roughly 90% of P's listener hours are ad-supported.  

 

P: Webcaster IV = Powder Keg - P   Webcaster rates

 

If SoundExchange's proposed rates were in effect in 2014, we estimate P would have paid out nearly all its YTD revenues in licensing costs (at least 91% under the SoundExchange proposed rates vs. the 52% P actually incurred YTD).

 

A COMPROMISE WON'T BE GOOD ENOUGH 

We're not suggesting that SoundExchange gets the rates they're proposing.  But anything short of the best case scenario for P won't be good enough; P can barely support its business model at its current content cost structure.  

 

P: Webcaster IV = Powder Keg - P   Cash Flow

 

It is important to note that P has to pay for every song it streams regardless of whether it is monetizing that listener.  Management had previously suggested that is monetizing less than 50% of its listener hours, so any material increase in content costs would drain a lot of cash out of the model.  While P's relatively low monetization levels suggests a ton of runway for future revenue growth, incremental monetization of those hours will require incremental investment in its salesforce.  

 

Below, we aggregated P's content acquisition costs and sales & marketing expenses (net stock-based comp) into a single expense line (expressed as a percentage of revenue).  Whatever leverage P has achieved in content acquisition costs over time has been lost to incremental investment in its salesforce.  That essentially means there is no leverage in its model.  

 

P: Webcaster IV = Powder Keg - P   Op Leverage.

 

So, what are P's options when its largest single expense is facing a considerable rate hike, prior to the company achieving any meaningful operating leverage, or generating consistent positive operating or free cash flow?

 

The most likely outcome is that P will have to directly cut it content costs, especially since it is monetizing less than half of the associated hours.  That likely means implementing listening caps, or exiting certain geographies altogether.  Once P cuts the chord on those users, it will much tougher to get them back, especially with growing competition for listener hours.  

 

 

We are hosting our P Short Best Ideas call this Thursday at 1pm EST.  Please let us know if interested in joining the call.

 

 

Hesham Shaaban, CFA

@HedgeyeInternet 


Don’t Be a Macro Meatball: Resist Your Inner Consensus Urges

Editor's note: This is a brief excerpt from our morning research. For more information on becoming a subscriber click here.

*  *  *  *  *  *  *

The 10-year Treasury yield is at 1.88% now. It started the year at 2.17%. And yet, Old Wall consensus is still saying it’s going to 3.06% by year end?

 

Significantly, the non-commercial net SHORT position in futures/options contracts (CFTC data) is as big as it’s been in six months at -250,163. Meanwhile, consensus is long SPX Index and Emini contracts on the other side of that!

 

Don’t Be a Macro Meatball: Resist Your Inner Consensus Urges - mball

 

Please. Whatever you do. Don’t be consensus.

 

Our most important macro call remains: Global #GrowthSlowing + #Deflation = Long The Long Bond


McCullough to Underperformers: Stop Whining

In the Q&A portion of today’s Morning Macro Call, Hedgeye CEO (and Mite Hockey Coach) Keith McCullough discusses the drastic performance divergences in early 2015 and offers his insight for investors who are under-performing early in 2015. Keith also reveals where he has received the most pushback on the 1Q15 Macro Themes and why the bond market is refuting those concerns.


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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