BABA: New Best Idea (Short)

Takeaway: We've already highlighted BABA's secular risks. Now that we saw the turn in its last major growth driver, it all bubbles to the top.


  1. GMV GROWTH TO SLOW PRECIPITOUSLY: China's upper class drives the bulk of BABA's GMV.  There is no other plausible explanation after comparing BABA's reported metrics to China consumer demographic data.  That means the next wave of user growth will come from a much weaker consumer, leading to declining GMV/Active Buyer, and slowing GMV growth.
  2. MODEL FACING SECULAR PRESSURE: Slowing GMV growth naturally bodes poorly for commissions.  But the bigger issue is Marketing Revenues (~60% of total), which are facing secular pricing pressure as a weaker consumer pressures ad conversions and ROI.  We were already seeing this in BABA’s financials, but the street just took notice this last print, because...
  3. TMALL CAN'T SAVE THE DAY: The one thing that was keeping us on the sidelines was the migration of GMV moving over to BABA's Tmall platform (where BABA collects commissions).  That sputtered out in F3Q15, leading to a sharp slowdown in Commission revenue growth, which exposed the weakness in its Market segment (both reported in its China Retail segment).  Tmall Mix shift can't be trusted a secular growth driver moving forward, so we don't need to worry about getting run over by it longer term.
  4. HEFTY PRICE, WORSE DILUTION: BABA is trading at ~13.7x P/S for 2015, at least 1 full turn ahead of its large cap comps (FB, LNKD, TWTR) despite having the lowest consensus growth expectations of the group.  What's more concerning is the amount of new float set to hit the market, with the potential risk from its pending lock-up expiration in March, and the spin-off of YHOO's BABA stake in 4Q15 (the latter will double BABA's current float).



We have outlined our bearish thesis in a series of notes, which will provide supporting detail behind our analysis.  Below, we highlighted three notes corresponding to the first three Key Points above.  


BABA: What the Street is Missing

11/26/14 08:03 AM EST

[click here]


BABA: Model Facing Secular Pressure

12/04/14 09:17 AM EST

[click here]


BABA: Hammer and Nail (F3Q15)

01/29/15 11:09 AM EST

[click here]




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


Hesham Shaaban, CFA



Retail Callouts (2/11): UA, FL, PIR, RH, AMZN, CHS

Takeaway: UA & FL leveraging Steph Curry into NBA All-Star Weekend. PIR - No read through to RH. AMZN slowing on ChannelAdvisor comps.


Retail Callouts (2/11): UA, FL, PIR, RH, AMZN, CHS - 2 9 chart2





UA/FL - UnderArmour and Foot Locker Go Viral


UA and FL are promoting a series of short videos centered around its basketball footwear business, and more specifically, Stephen Curry -- arguably the brand's most marketable asset in the sport.  The segments pit Curry against a series of opponents in a 3-point competition. As amazed as we are with the talent of 9-year old Jaden Newman, we're a bit surprised UA would put her up against Curry. But truth be told, her killer performance supports what UA stands for -- that the little guy (or gal, in this instance) has the right to compete, and win.


The notable thing from our perspective is that this is extremely cheap advertising for UA, but more important is that they are partnering with Foot Locker.  That said, Foot Locker is not prominently positioned in the ads. And furthermore, when you go to the FL site, you have to click five times to get past all the Nike's to get to UA shoes. Maybe that changes on Friday when UA releases the latest Curry shoe in advance of the All Star Game -- but then again, Nike will probably release 30 shoes on that same day.


One other point we'd note is that any shoe that launches at Foot Locker will ALSO be available at and at UA stores. It looks like FL is buying the right to get the exclusive vs Finish Line, etc...

This is definitely notable in that co-op credits have been trending lower for FL -- that is, the ad expense that have been funded by the footwear brands. This campaign supports our view that vendor support will continue to dwindle, which will pressure the P&L. That's probably the 10th reason out of ten why we are bearish on FL...but it's another small development in the short thesis.

Retail Callouts (2/11): UA, FL, PIR, RH, AMZN, CHS - 2 11 chart1

Retail Callouts (2/11): UA, FL, PIR, RH, AMZN, CHS - 2 11 chart3



PIR - FY 2014 Guided Down, CFO Leaving


Takeaway: The stock was up 22% since the company reported earnings on 12/18 and 15% since the company posted Holiday comps 190bps ahead of the street. And then…the market closed and the bottom fell out after the company guided the top end of the EPS range down 22%. This appears to be completely self inflicted and there is a body count to prove it.

More importantly as it relates to RH (our favorite idea) --

  1. We never liked PIR as a comp, but given the small cadre of names in this industry that trade on the capital markets it's something we have to live with. It's a completely different customer group and the decorative/furniture split is 60/40. It's the inverse at RH.
  2. This isn't endemic to the industry. Simply the case of a management team misunderstanding the business model. We don't expect that the market will beat RH up over this, but if they do it's a name we still like a lot up here. The company is on track to grow revenue by 30% and EPS by 50% in 2015.


AMZN, EBAY - 2year Slowdown for AMZN, Acceleration for EBAY


Takeaway: Amazon sales in January were +27%, but against an easy comp the 2 year continued the downward trend from the August peak. These comp numbers are composed of a large sample of 3rd party AMZN and EBAY sellers. One thing we can't ignore is AMZN's decision to incorporate items sold by 3rd party sellers into its free shipping minimums. Our guess is that the company is looking at the same chart we are.

Retail Callouts (2/11): UA, FL, PIR, RH, AMZN, CHS - 2 11 chart4





CHS - Private Equity Firm in Advanced Talks to Buy Chico’s FAS



DKS - DICK'S Sporting Goods And The U.S. Olympic Committee Announce Partnership



RAD - Rite Aid to Acquire Leading Independent Pharmacy Benefit Manager EnvisionRx for $2 Billion



HD - The Home Depot Preps for Spring with 80,000 New Hires (Same Number as Last Year)



Closeout Retailer Ollie's Selects Banks for IPO



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 80.47%
  • SHORT SIGNALS 78.68%

LEISURE LETTER (02/11/2015)




  • Feb 12: 
    • MPEL 4Q CC 8:30am
      • (1866) ; pw: MPEL
    • PNK 4Q CC 10:00am
      • ; pw: 68847867
    • BYD 4Q CC 5:00pm
      • ; pw: 5378350
  • Feb 17: MGM 4Q CC 11:00am
    • ; pw: 8870181
  • Feb 18: 
    • NCLH 4Q CC 11:00am
    • HYATT 4Q CC 11:30am
      • ; PW: 62845475
    • MAR 4Q release 5pm
  • Feb 19:
    • HST 4Q CC 9:00am
    • MAR 4Q CC 10:00am
      • ; pw: 41025602
  • Feb 25: Prestige analyst day  


HLT- closes sale of the Waldorf Astoria New York and uses proceeds to acquire five landmark hotels for $1.76B. The five hotels are:  

  • Hilton Orlando Bonnet Creek in Orlando, FL (1,001 rooms)
  • Waldorf Astoria Orlando in Orlando, FL (498 rooms)
  • The Reach, A Waldorf Astoria Resort in Key West, FL (150 rooms)
  • Casa Marina, A Waldorf Astoria Resort in Key West, FL (311 rooms)
  • Parc 55 in San Francisco, CA (1,024 rooms)

Purchase price of these five hotels of $1.76 billion represents ~13x the midpoint of the five properties’ combined full-year forecasted 2015 Adjusted EBITDA of between $132 million to $138 million.


Hilton Worldwide expects that these hotels will not require meaningful incremental capital expense in the near term, and will expand the footprint of Hilton Worldwide’s portfolio of iconic owned hotels in Florida resort markets and San Francisco, a key growth market.


Expects to close transaction in February 2015 and use the balance of the proceeds of the sale of the Waldorf Astoria New York net of prorations, adjustments and transaction expenses, estimated to be approximately $100 million, to purchase additional assets within the next six months.

Article HERE

Takeaway:  Quality assets bought with Waldorf Astoria money in a tax efficient manner. Good arbitrage of multiples while avoiding the inevitable cash outlay for the Waldorf renovation/expansion. Hedgeye believe HLT could spin off all of its real estate into a REIT, possibly announce the deal in 2H 2015.


IGT  - Shareholders approve merger with GTECH. Declared 11 cent/share dividend payable March 20.


IGT  - won 100% slot floor share (100 slots) and system installations at Grey Rock Entertainment & Casino, slated to open this month

Article HERE


MSC-  will expand its capacity on the German market by basing a second Fantasia-Class vessel in a German port for the 2016 season. MSC Fantasia is to operate seven-day cruises from Kiel, April to September next year, replacing the smaller MSC Orchestra.The Fantasia-class MSC Splendida, which is going to operate from Germany for the first time this year, will be based in Hamburg again in 2016.  The fleet reshuffle responds to strong demand for cruises in Northern Europe, according to Michael Zengerle, md of MSC Kreuzfahrten in Munich.

Article HERE

Takeaway:  The Germany market getting crowded.


RCL - Royal Caribbean International has partnered with hospitality technology provider Eleven to provide unlimited onboard Internet access based on a per day rate.

Article HERE


Slump has cost 1,000 VIP gaming jobs, union says. The trade union Forefront of Macau Gaming estimates that at least 1,000 staff of VIP gaming rooms have been laid off since July. Union vice-director Lei Kuok Keong says about one-third of Macau’s VIP rooms have closed temporarily or permanently because of the slump in gaming, which is due to the mainland’s credit squeeze and campaign against corruption deterring rich mainlanders from gambling.


Lei says the employees laid off include cashiers, accountants, public relations staff, customer service staff and drivers.

Article HERE

Takeaway: If true, these are the 1st meaningful job cuts in a while in Macau although no dealers have been laid off.


Beijing’s main representative in Macau Li Gang, director of the Central People's Government Liaison Office in Macau said on Tuesday that the city’s casino industry had entered “an interim development period” that would allow for its stable growth in the future. He added it was “normal” that gross gaming revenue (GGR) had dropped for consecutive months – eight at current count, and heading for a ninth sequential decline in February.

Article HERE


The government expects gross gaming revenue in Macau’s casinos to be lower this month than a year ago. “GGR reached MOP38 billion in February 2014. We estimate that GGR [this month] will not be as high, as MOP38 billion in GGR was the highest that Macau has registered,”

Article HERE


Govt to persist with LRT project. Chief Executive Fernando Chui Sai On has said he and his advisers agree that the Light Rapid Transit elevated railway project should continue.

Article HERE

Takeaway:  This project has been a disappointment and an embarrassment.


Singapore - Singapore reported fewer international visitors last year, the first annual fall since 2009, hurt by a stronger Singapore dollar and a drop in the number of Chinese tourists amid slower regional tourism growth. International visitor arrivals fell 3 percent last year to 15.1 million, missing the Singapore Tourism Board's forecast of an increase of 5 to 8 percent from 2013.


China visitors grew for the 3rd consecutive month in December.

Article HERE


LEISURE LETTER (02/11/2015) - MA


South Korea - Incheon Airport, the gateway to Seoul, is planning a tourism project to emulate Resorts World Sentosa in Singapore that aims to lure Chinese gamblers with a new casino, shopping mall and hotels. The project may cost 5 trillion to 6 trillion won (S$6.3 billion to S$7.6 billion), Mr Lim Byung Kee, an official at Incheon International Airport Corp, said in an interview. The airport is looking to receive proposals to build the facilities and sign deals this year, he added.

Article HERE

Takeaway:  Better hope the Chinese VIPs can get out of China.


Texas - The Texas Lottery set a record last week for scratch-off ticket sales. The lottery said sales of scratch-off games topped out at $75,677,650 last week, beating the previous record set in March 2013 of $75,360,138.

Article HERE

Takeaway:  Powerball is alive today with a $485 million jackpot. All other lottery games are benefiting from it.


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

Correlations and Rates

Client Talking Points


Finally a big move down in Yen vs. the USD yesterday and that’s seeing follow through this morning to $119.71 (4 week low). This is A) good for Japanese stocks, B) bad for oil and C) bad for levered Energy stocks.


The beta on this Correlation Risk between USD and Oil is massive – on a +0.2% move in the USD Index yesterday, Oil and Gas stocks were down 10x that, and some of our least liked MLP stocks were down 7-9%; this is a very different macro trade than the newsier Greek thing – lots to think about on different storytelling vectors.


Then you had an expedited 3-day March higher in rates post the jobs report that finally stopped yesterday (vs. 5AM yesterday, the UST 10YR Yield is actually down a beep to 1.98% now), and Utilities (XLU) front-ran that efficiently – best S&P sector on the day at +2.1% as Utilities are now trading with Tech beta!

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). As our declining rates thesis proved out and picked up steam over the course of the year, we see this trend continuing into Q1.  Short of a Fed rate hike, there’s no force out there with the oomph to reverse this trend, particularly with global growth decelerating and disinflationary trends pushing capital flows into the one remaining unbreakable piggy bank, which is the U.S. Treasury debt market.


As growth and inflation expectations continue to slow, stay with low-volatility Long Bonds (TLT). We believe the TLT has plenty of room to run. We strongly believe the dynamics in the currency market are likely contribute to a “reflexive deflationary spiral” whereby continued global macro asset price deflation and reported disinflation both contribute to rising investor demand for long-term Treasuries, at the margins.


Hologic (HOLX) is a name our Healthcare Sector Head Tom Tobin has been closing monitoring for awhile. In what Tom calls his 3D TOMO Tracker Update (Institutional Research product) of U.S. facilities currently offering 3D Tomosynthesis, month-to-date December placements signaled a break-out quarter after a sharp acceleration in October and slight correction to a still very high rate in November. We believe we are seeing a sustained acceleration in placements that will likely drive upside to Breast Health throughout FY2015. Tom’s estimates are materially ahead of the Street, but importantly this upward trend in Breast Health should lead not only to earnings upside, but also multiple expansion and a significant move in the stock price.

Three for the Road


VIDEO (2mins) 3 Reasons the Russell Looks Better Than S&P 500… $IWM $SPX



In order to be irreplaceable, one must always be different.

-Coco Chanel


On average 196 million roses are purchased for Valentine’s Day. 

CHART OF THE DAY: Fading the Move Within the Trend ($USD vs. $OIL)

CHART OF THE DAY: Fading the Move Within the Trend ($USD vs. $OIL) - 02.11.15 chart

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