Hedgeye Internet & Media analyst Hesham Shaaban offers an update to his bearish thesis on Alibaba (BABA) with CEO Keith McCullough during today’s “The Morning Show” on HedgeyeTV.
Takeaway: Mobile may be the most misunderstood part of the BABA story. What some see as an opportunity is actually its largest secular headwind.
- 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.
- 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.
- 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.
- 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.
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
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.
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)
- 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.
- 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.
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.
Note: We will be hosting a call outlining our Short thesis on BABA tomorrow at 1pm EST.
Hesham Shaaban, CFA
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Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.
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.
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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
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.
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