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BABA: The Mobile Debate

Takeaway: Mobile may be the most misunderstood part of the BABA story. What some see as an opportunity is actually its largest secular headwind.

KEY POINTS

  1. WHAT THE BULLS ARE BANKING ON: BABA will "close the gap" and mobile take-rates (Mobile Revenue as % of Mobile GMV) will rise to comparable desktop levels over time.  That will be largely dependent on its Mobile Marketing revenue, which we believe is the most misunderstood part of the BABA story, and will be the focus of this note.
  2. WHY THAT WON'T HAPPEN: Mobile take-rates will be under pressure from secular pricing pressure in its Marketing segment.  As more lower-income consumers join the BABA platform, vendors will experience worse ad conversion, and bid less for the ads they run on the mobile platforms. Since mobile is the low-cost device to internet access in China, this is where the pressure will occur.  This is already happening today.
  3. THEN WHY ARE MOBILE AD TAKE-RATES RISING? BABA's reported metrics suggests the answer is traffic, specifically mix.  We believe a higher percentage of traffic is moving over to mobile, so ad-click volume is rising there is well.  The corresponding y/y decline in desktop take-rates would suggest as much.
  4. WHAT SHOULD WE EXPECT MOVING FORWARD? Mobile take-rates may plateau within the 1-2 years, and potentially decline thereafter.  Mobile can only grow so much as a percentage of traffic, and mix is likely higher than BABA's reported metrics suggest.  That means the trajectory of takes-rates will be dependent on user growth and ad pricing; two factors that are working against each other (see point 2).   

 

WHAT THE BULLs ARE BANKING ON

BABA will "close the gap" and mobile take-rates (Mobile Revenue as % of Mobile GMV) will rise to comparable desktop levels over time.  However it's important to note that Mobile Revenues are a function of Both Commissions & Marketing Revenue.  We believe the latter is the most misunderstood part of the BABA story, and will be the focus of this note.

 

BABA: The Mobile Debate - BABA   Total Take Rates 

 

WHY THAT WON'T HAPPEN

Mobile take-rates will be under pressure from secular pricing pressure in its Marketing segment due to an influx of weaker consumers on to the BABA platform.  That user growth will likely favor mobile as the low-cost device to internet access in China, so mobile is where we expect this secular pressure to occur.

 

In short, as more lower-income consumers join the BABA platform, vendors will experience progressively worse ad conversion, and bid less for the ads they run on the mobile platform.  This has already happening today.  

 

For more detail, see the note below

 

BABA: Model Facing Secular Pressure

12/04/14 09:17 AM EST

[click here]

 

THEN WHY ARE MOBILE AD TAKE-RATES RISING?

We suspect the answer is traffic, specifically mix.  Roughly 75% of BABA's marketing revenues are P4P (Pay for Performance), which require users to click the ads in order to generate revenue for BABA.  We believe a higher percentage of traffic is moving over to mobile, so ad-click volume is rising there is well.  The corresponding y/y decline in desktop ad take-rates would suggest as much.

 

BABA: The Mobile Debate - BABA   Ad take y y

 

The chart below also illustrates this dynamic, with Mobile MAUs (Monthly Active Users) rising as a percentage of Total Active Buyers (TTM metric).  Naturally, this is an as an apple-to-oranges comparison; however, mobile mix is likely higher than the below metrics suggest.

  

Mobile User Mix (quarterly calculation notes)

  1. Mobile MAUs: only includes mobile shoppers using BABA's app that made a purchase in the last month of the quarter.  This metric doesn't include mobile web shoppers, and may not include any mobile shoppers from the prior two months of the quarter.  So the numerator is likely understated.
  2. Total Active Buyers: BABA only provides active buyers on a TTM basis (not quarterly).  So unless every one of its reported Active buyers made a purchase within the associated quarter, the denominator is likely overstated.

 BABA: The Mobile Debate - BABA   Mobile Mix F3Q15

 

WHAT SHOULD WE EXPECT MOVING FORWARD?

Mobile ad take-rates may plateau within the next 1-2 years, and potentially decline thereafter.  Mobile can only grow so much as a percentage of traffic, and BABA's actual mobile mix is likely much higher the 79% that we calculated above for F3Q15.  There's no way of telling whether that's 80% or 90%, but what we do know is that it can't exceed 100%.

 

In essence mobile mix is already topping out, which means the trajectory of mobile ad takes-rates will become increasingly dependent on 1) user growth and 2) ad pricing: two factors that are working against each other.  BABA's next consumer will always be weaker than the one that came before it, and ad conversion/ROI will continue to see growing pressure from a weaker consumer.

 

BABA: The Mobile Debate - BABA   Ad take rate projection

 

 

Note: We will be hosting a call outlining our Short thesis on BABA tomorrow at 1pm EST.  

 

 

Hesham Shaaban, CFA

@HedgeyeInternet


Keith's Macro Notebook 3/4: Yen | Euro | UST 10YR

 

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


REMINDER: MACAU CALL TODAY AT 1PM

The Hedgeye Gaming, Lodging, and Leisure team will host a conference call today at 1PM to discuss the latest Macau data and our overall thoughts on the market and the stocks.  Relevant tickers include:  LVS, WYNN, MGM, MPEL, 0027.HK, 1128.HK, 1928.HK, 2282.HK, 6883.HK, and 0880.HK.

 

 


Discussion Points:

  • The company and market details behind February’s 49% GGR decline
  • The true Mass/VIP split is masked by smoking ban related reclassifications of tables – we’ll get you the right numbers
  • Optically, March should look better than February but…
  • Revised 2015 monthly market projections
  • Hedgeye company EBITDA estimates vs the Street (LVS, WYNN, MGM, MPEL, and Galaxy Entertainment)
  • What if Analysis: Junket volumes go to zero

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Retail Callouts (3/4): W, RH, DKS, UA, NKE, BBY

Takeaway: Wayfair beats, at 2x sales we are adding it to our short bench. DKS Q4 e-commerce was strong, but the stores can't comp.

W - Wayfair Beats -- Adding to our Short Bench

(http://investor.wayfair.com/investor-relations/press-releases/press-releases-details/2015/Wayfair-Announces-Fourth-Quarter-and-Full-Year-2014-Results/default.aspx)

 

In its third 'at bat' after going public, Wayfair finally beats expectations.  That said, the market already knew that one, with the stock trading up 27% in the last three days, and 56% in the last month. Furthermore, the company is still losing money -- a lot of it -- and as best as we can tell, that trend won't reverse itself for many years. The number of transactions were up 45%, which is impressive by any measure. But the average transaction size is only $191 -- a very difficult number for a furniture retailer to generate profits on.  The biggest call out is that the name is now trading at 2x sales -- which is right in line with RH. We can't even begin to list the number of reasons why that shouldn't be. We're putting W on our Short Bench.

 

DKS - e-commerce Saves the Day. But These Store Can't Comp

 

Takeaway: This is not the type of chart you want to be looking at if you sell sporting goods in a 50,000 sq. ft. box and have plans to expand the store base another 33%. And that could in part explain the muted store growth guidance on the DKS banner for the year. Store comps have been negative in 6 of the past 8 quarters while the company has been growing sq. ft. in the mid to high single digits. Guns/ammunition which naturally lend themselves to Brick and Mortar (at least we hope) haven't helped but we think the trend speaks for itself. People are buying more and more of what DKS has to sell online.

We wouldn’t typically beat a company up over outsized DTC growth - but DKS is a different animal. For starters we don't think a 50,000 sq. ft. box lends itself to a showroom, unless we're talking about RH. 2) DKS real estate deals aren't cheap. The company already needs a 9%/10% sales growth number in a given quarter to leverage occupancy. That's egregiously high especially if these stores can't comp without DTC. 3) Shipping costs aren't working in DKS favor. That would be fine if DKS online channel allowed it to reach new customers, but based on the trends we've seen it looks more like cannibalization. So now you have online transactions which used to be completed at the store coming in at a GM 700bps-1000bps below the brick and mortar business. That makes it even harder to hit the occupancy hurdle rates.

Retail Callouts (3/4): W, RH, DKS, UA, NKE, BBY - 3 4 chart1png 

 

UA Takes It's 'Alter Ego' (Superhero concept) From Apparel to Footwear. These things are far more popular with the high school athlete than many people reading this might otherwise think.

Retail Callouts (3/4): W, RH, DKS, UA, NKE, BBY - 3 4 chart2 

 

OTHER NEWS

 

NKE - With 'Made By You,' Converse Lets Wearers' Portraits Sell Chucks

(http://www.forbes.com/sites/jenniferrooney/2015/03/02/with-made-by-you-converse-lets-wearers-portraits-sell-chucks/)

 

BBY - Report: Best Buy services president will leave company

(http://www.chainstoreage.com/article/report-best-buy-services-president-will-leave-company)

 

EBAY - PayPal acquiring mobile payment startup

(http://www.retailingtoday.com/article/paypal-acquiring-mobile-payment-startup)

 

RSH - RadioShack accepting Gift cards until March 6

(http://abc7news.com/shopping/7-on-your-side-radioshack-will-soon-stop-accepting-gift-cards/538137/)

 


BOBE: CLOSING BEST IDEA LONG

We added Bob Evans Farms (BOBE) to our Best Ideas list on 05/02/2014 at $47.21/share, as we believed Sandell had identified feasible opportunities to enhance shareholder value.  Unfortunately, recent developments have fallen well short of our expectations.  With this note we are removing Long BOBE from both our Best Ideas list and Investment Ideas list.

In our view, Bob Evans is in much better shape today than it was when we initially added it as a long idea.  Our thesis, however, was predicated on one or two of several potential catalysts coming to fruition: including: a sale of BEF Foods, a real estate transaction, and substantial SG&A cuts. 

 

Yesterday, we learned that the company has no plans, at this time, to pursue a separation of the BEF Foods business and that it has identified $35 million of potential annual cost savings that will be realized over a three year time frame.  Both of these announcements are, in our view, disappointing.  The company also announced that is currently reviewing the potential for real estate transactions and other changes to its capital structure, but gave us little clarity on the possibility or timing of these events.

 

Given 3Q15 results, it’s clear that the stock has gotten far ahead of the fundamentals of the underlying business and the path to unlocking shareholder value will be more painful than originally anticipated.


The Yen, Euro and UST 10YR

Client Talking Points

YEN

Out of the majors, Japan reported the weakest Services PMI in the world last night at 48.5 for FEB (vs. 51.3 JAN) – that’s got to be good for some more Yen Burning and Weimar Nikkei bubbling. Looking to buy more Japanese stocks on that economic weakness, and the sad thing is that we’re not kidding – still looking for YEN 135 vs. USD intermediate-term.

EURO

Burn baby burn as EUR/USD probes a fresh year-to-date lows at $1.11 this morning now that most of the European PMI data was flat to slower. Italy reported one of the weaker Services PMI’s (50.0 vs 51.2 last month), so of course the Italian stock market is up on that in a down European equity tape! The ECB meeting is tomorrow.

UST 10YR

Unless someone has the jobs report in hand, we don’t know why bond yields are up this week (if we did, we would have told you to sell some Long Bond exposure pre the pullback). The UST 10YR Yield risk range is still wide at 1.88-2.17%; yields up on a good jobs report; down fast on a bad one – stay tuned. 

Asset Allocation

CASH 41% US EQUITIES 10%
INTL EQUITIES 10% COMMODITIES 0%
FIXED INCOME 30% INTL CURRENCIES 9%

Top Long Ideas

Company Ticker Sector Duration
YUM

Our bullish thesis on Yum! Brands is slowly becoming more mainstream, as activist talk has recently heated up. Management implemented a shareholder friendly amendment to the company’s by-laws that will permit a shareholder, or group of shareholders, with 3% or more ownership of common stock (for three years or more), to nominate directors representing up to 20% of the board. This is good news for several reasons: 1) an activist may be involved in the name 2) shareholders are speaking up 3) management is feeling the pressure and 4) management is open to adopting more shareholder friendly policies. We continue to believe there is significant upside here despite the stock’s strong recent outperformance.  This stock is one major announcement away from hitting $95.

PENN

Penn National Gaming is the best way to play improving domestic regional gaming trends due to its superior operational management and unit growth opportunities. Catalysts include positive estimate revisions, the opening of the first Massachusetts casino in June, and industry leading earnings growth in 2015 and 2016.

TLT

Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

Three for the Road

TWEET OF THE DAY

FLASHBACK | The Bear Case on $BABA: What The Street Is Still Missing https://app.hedgeye.com/insights/42722-flashback-baba-what-the-street-is-missing-on-alibaba

@KeithMcCullough

QUOTE OF THE DAY

Nothing is impossible, the word itself says, ‘I’m possible!

-Audrey Hepburn

STAT OF THE DAY

Android operating devices account for about 52% of the devices in the U.S. (compared to iOS at 42%), but only account for 22% of mobile sales.


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