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***UNLOCKED RESEARCH | $YELP: Hiding the Bodies (Update)

Takeaway: See update below on timing of SeatMe reclassification.

This note was originally published by our Internet & Media Sector Head Hesham Shaaban on March 10, 2015 at 11:46. For more information on how you can subscribe to America's fastest-growing independent financial research firm click here.

UPDATE: We originally believed revenues from SeatMe (reservation service) would be reclassified from YELP's Other Services segment into its core Local Advertising segment starting in 1Q15.  However, that likely happened in 1Q14.  We just didn't realize it because the reclassification wasn't explicitly disclosed in any of YELP's filings until its 2014 10-K filed two weeks ago.  Given that its previously-reported 2014 quarterly segment revenues haven't changed within its recently-filed 10-K, we have to assume that the change already occurred in 1Q14.  Details below.  All Key Points remain the same.   

 

KEY POINTS

  1. THE MODEL IS DETERIORATING: YELP’s business model isn't sustainable; we're already seeing signs that its model is breaking down at a progressively worse rate within its reported metrics. 
  2. HIDING THE BODIES: In response, management is now manipulating its reported metrics to mask what's really happening.  In addition, YELP made a very questionable acquisition (Eat24), and potentially understated its expected revenue contribution (link) to make its core business look better.
  3. PENDING IMPLOSION: The overriding theme is that these suspect moves aren't any more sustainable than its current business model.  Management may buy themselves a short-term reprieve on its stock, but are only raising the sell-side bar on a fading buy-side growth story.

 

BROKEN MODEL

YELP’s Local Advertising segment is riddled by an absurd level of attrition, which is becoming increasingly more challenging to overcome as the company presses up against a limited TAM that can’t support its model.  We can already see YELP’s model breaking down in its reported metrics.  So in response, management is now manipulating that very data in order to hide what’s really going on.

 

***UNLOCKED RESEARCH | $YELP: Hiding the Bodies (Update) - YELP   New Acct vs. Sales 4Q14

 

HIDING THE BODIES

Below are series of suspect moves that management has taken to mask its rampant attrition issues, and overstate the fading strength in its core Local Advertising segment. 

  1. **SEATME ALREADY RECLASSIFIED IN 2014**:  We originally believed that its SeatMe (reservation service) would be reclassified into its Local Advertising segment starting in 2015, which would provide an artifical boost to local ad revenues.  However, that boost likley happenned in 2014.  What confused us was that the SeatMe reclassification was never explicitly disclosed in any of YELP's filings until its 2014 10-K filed a couple weeks ago.  Given that its 2014 quarterly segment revenues previously reported haven't changed within its recently-filed 10-K, we have to assume that the change already occurred in 1Q14.  Note that the decision to shift SeatMe into its Local Advertising segment must have happened sometime between 3/14/14 and 4/30/14 (i.e. 2013 10-K filing date and 1Q14 earnings release).  In short, SeatMe already boosted Local Ad revenues in 2014.  
  2. HIDING THE BODIES: Starting in 2015, YELP will no longer provide its legacy Active Local Business Account metric in favor of a new metric called “Local Advertising Accounts”, which only includes accounts contributing to its Local Advertising Revenue.  The implications here is that YELP will buy itself some deniability on our attrition thesis.  YELP’s customer repeat rate is based off the legacy account metric that mgmt will be retiring. This means that we can’t explicitly calculate its customer mix (and attrition) moving forward.  This gives management deniability, but doesn’t change anything.
  3. BUYING GROWTH: YELP has a history of making questionable acquisitions to mask weakness elsewhere in its business.  With its most recent Eat24 acquisition, there's a good chance that management grossly underestimated Eat24's expected revenue contribution given that associated $36M revenue guidance raise is roughly inline with what Eat24 may have been generating back in 2013 (link).
    1. SeatMe: Reservation service acquired into 3Q13.  SeatMe accounts were reclassified into Active Local Business Accounts beginning 2014, and its revenues are being reclassified in Local Advertising starting 2015.
    2. Cityvox SAS/Restaurant-Kritik: International competitors acquired in 4Q14 after YELP couldn’t produce revenue growth off its international Qype acquisition from 4Q12. 
    3. Eat24: Food-ordering service acquired in 1Q15.  We have no idea how YELP will account for the service, but if it can reclassify its SeatMe reservation service as an Advertising business, there is nothing stopping them from doing the same with Eat24.

 

PENDING IMPLOSION

The overriding theme is that these suspect moves aren't any more sustainable than its current business model.  Management may buy themselves a short-term reprieve on its stock, but are only raising the sell-side bar on an a fading buy-side growth story. 

 

This is how we see the progression of the YELP's earnings releases as we move through the year.

  1. 1Q15: Let's say YELP knocks the cover off the ball on the 1Q15 release and raises guidance. Consensus then raises estimates even higher as they always have (likely 2H15 weighted, with 2016 even higher).  
  2. 2Q15: the bar is now higher.  YELP could produce 2Q15 upside, but its 3Q15 guidance release is likely less impressive, if not light.  
  3. 3Q15: YELP can't guide 4Q15 estimates above consensus estimates since the sell-side has raised the bar too high throughout the year.  
  4. 4Q15: Consensus expectations for 2016 have steadily risen throughout 2015 with the sell-side trying to justify their price targets.  Now, YELP needs a much bigger acquisition and/or a more egregious accounting maneuver to distract the street...while hoping no one catches on.

In short, the setup for YELP will become progressively more challenging as we move through 2015 into 2016.  Even if the stock pops on the 1Q15 release, it likely ends the year lower than it started once YELP doesn't raise guidance above expectations (likely 2H15).

 

 

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

 

Hesham Shaaban, CFA

203-562-6500

hshaaban@hedgeye.com

@HedgeyeInternet

 

 


USD, Japan and The Russell 2000

Client Talking Points

USD

A generational ramp for #StrongDollar finally signals immediate-term TRADE overbought (within a very bullish TREND) at $99.99 on the U.S. Dollar Index (Gretzky should be proud he got paid in Dollars, not Loonies!) and the EUR/USD bounces at what was our intermediate-term target of $1.05.

JAPAN

The Weimar Nikkei screamed higher overnight +1.4% to +8.9% year-to-date (vs S&P 500 -0.9% year-to-date) on Burning Yens, but that YEN vs USD cross is signaling oversold too – so we should see a short-term bounce in USD traded (Oil, Gold, etc.) and the Nikkei correct some tonight.

RUSSELL 2000

The Russell 2000 is up on the day with the SPY down -0.2%  and we like it on the long side here into the Retail Sales print (which should beat) – being long domestic consumption in the U.S. remains our best relative long idea on the other side of our Global #Deflation call – Russell revs are 80% U.S. domestic.

Asset Allocation

CASH 33% US EQUITIES 17%
INTL EQUITIES 15% COMMODITIES 0%
FIXED INCOME 24% INTL CURRENCIES 11%

Top Long Ideas

Company Ticker Sector Duration
ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Not only did U.S. home prices accelerate (in rate of change terms) in the Core Logic data this week to +5.7%, but the supply/demand data has been improving throughout the last 3 months.

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

GERMANY: whopping -0.2% correction day for the DAX, which is +20.2% YTD vs $SPX -0.9%

@KeithMcCullough

QUOTE OF THE DAY

In the middle of every difficulty lies opportunity.

-Albert Einstein

STAT OF THE DAY

After 6 weeks of inflows, domestic stock funds returned to redemptions losing almost $2 billion in the most recent survey.


CHART OF THE DAY: Hedgeye Asset Allocation Model (UPDATED)

CHART OF THE DAY: Hedgeye Asset Allocation Model (UPDATED) - Slide1

 

Editor's note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here for more information on how you can subscribe.

 

But I’m not kidding in telling you that I have my US equity asset allocation (see our dynamic and daily Hedgeye Asset Allocation model in the bottom of this note for how I’d be allocating capital or raising cash after macro moves) at YTD highs, on red.

 

From this time and price, I like US Consumer Discretionary (XLY), Housing (ITB), and the Russell 2000 (IWM) – in that order. I also like Healthcare (XLV) stocks, but in looking for a beta bounce on accelerating US consumption (US Retail Sales are going to be reported this morning), I think there’s more upside in the aforementioned order.


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Sound Reasoning

“You are right not because others agree with you, but because your facts and reasoning are sound.”

-Benjamin Graham

 

That’s one of the concluding quotes in a great book I’ve been citing for the last few weeks, The Outsiders, by William Thorndike. It comes from the final chapter, “Radical Rationality – The Outsider’s Mindset” (pg 197). I love that mentality.

 

I also love getting big Macro Themes right. After beating myself up daily in this forum throughout February as inflation was having a counter-TREND bounce, I’m happy that March looks a lot more like January – Global #Deflation continues to dominate.

 

Was our early January reasoning on an intermediate-term TREND target for the Euro of $1.05 sound? Yes. In stark contrast to how many are describing US Dollar strength today, we started with the most basic premise of all – that Draghi would burn the Euro at the stake.

Sound Reasoning - bruning euro 08.25.2014

 

Back to the Global Macro Grind…

 

Burn baby burn. And now what? Now that they have centrally planned both their stock and bond markets to all-time highs (German DAX +20.2% YTD; German 10yr Bund Yield 0.21%), what’s next?

 

Our reasoning is mathematical, so bear with me:

 

1. European growth and inflation data will continue to slow well into Q3…

2. Draghi’s growth and inflation targets will be missed… and… drum-roll…

3. Then he’ll need to provide more #Cowbell, burning the Euro further

 

That’s been our intermediate-term TREND call. In the very immediate-term (i.e. this morning) the US Dollar is finally signaling overbought at 99.99 on the US Dollar Index (which is what implies our $1.05 EUR/USD target).

 

Meanwhile, the European “inflation” data remains deflationary:

 

1. Spain’s Consumer Price Index (CPI) for FEB was still -1.1% year-over-year

2. Germany’s CPI bounced to a whopping +0.1% year-over-year

 

That’s right. After the counter-TREND bounce in things like commodities in FEB, that’s all the Germans got out of Draghi in reported economic terms, a 0.1% inflation reading which isn’t in the area code of the 2% “target” most central planners are hoping for.

 

Hope, as we like to say @Hedgeye, is still not a risk management process. And with March’s reversion to the mean of #deflationary forces firmly intact, the Federal Reserve’s hope that #deflation in Oil and Energy markets is “transitory” is going to look wrong (again).

 

Being right with sound reasoning is one thing. Being wrong, over and over again, on both your growth and inflation forecasts – but representing yourself as right (using stock markets as your validation) is entirely another.

 

NEWSFLASH: centrally planned stock markets should not be confused with economic realities

 

That is, of course, how this gigantic and ideological experiment ends. With central planners attempting to bend and twist economic gravity and ending up right where they started – with both Global growth and inflation slowing.

 

“So”, with European equity and sovereign bond prices pinned up here this should be fun to watch.

 

It’s also been a hoot to watch the Weimar Nikkei, which took it’s inverse-correlation queue from Burning Yens and ramped another +1.4% overnight (+8.9% YTD) to a 15 year high. Yep, that’s crushing the SP500 (which is -0.9% YTD).

 

Oh, you don’t like when I contextualize the almighty US stock market that way? You mean you didn’t tell your clients you were buying the living daylights out of failed Abenomics and shorting the US stock market on the other side of that?

 

What is wrong with you? You definitely don’t deserve 2 and 20 unless you had that reasoning! #kidding

 

But I’m not kidding in telling you that I have my US equity asset allocation (see our dynamic and daily Hedgeye Asset Allocation model in the bottom of this note for how I’d be allocating capital or raising cash after macro moves) at YTD highs, on red.

 

From this time and price, I like US Consumer Discretionary (XLY), Housing (ITB), and the Russell 2000 (IWM) – in that order. I also like Healthcare (XLV) stocks, but in looking for a beta bounce on accelerating US consumption (US Retail Sales are going to be reported this morning), I think there’s more upside in the aforementioned order.

 

If everything that punishes those levered to commodity and/or debt #Deflation doesn’t pay the people in America who have been pulverized by US cost of living, my reasoning will prove to be wrong. Oh, and so will any US GDP forecast that doesn’t look recessionary.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.98-2.24%

RUT 1194-1235

Nikkei 189

USD 96.98-99.99

EUR/USD 1.05-1.08

YEN 119.35-121.91

Oil (WTI) 48.01-50.22

 

Best of luck out there today,

KM

 

Keith R. McCullough

Chief Executive Officer

 

Sound Reasoning - Slide1

 


The Laws of Arithmetic

This note was originally published at 8am on February 26, 2015 for Hedgeye subscribers.

“They haven’t repealed the laws of arithmetic, yet, anyway.”

-John Malone

 

Malone wasn’t talking about economic-central-planning authorities, but he could have been. The American grandmaster of debt leverage, EBITDA, and equity value creation would probably be the best overlord of our markets, ever. It’s too bad he’s a libertarian.

 

Yep, the largest land owner in America (2.2M acres) not only founded Liberty Media – but he’s a libertarian. That makes some of the Yale alumni in the economic-gravity-smoothing department cringe. And I like it.

 

Born, raised, and educated in Connecticut, Malone is a Yale man. He’s rightly featured as one of the best CEOs in US history in the book I’ve been citing as of late, The Outsiders, by William Thorndike. If you want to be a hard core capitalist, you have to study John Malone.

 

The Laws of Arithmetic - 48

 

Back to the Global Macro Grind

 

Hard core capitalists who believe in things like arithmetic and second derivative math, meet your makers – these central planning “folks” are going to go to hell’s end until they get reported “inflation” – and guess what? For now they aren’t going to get it!

 

In today’s Chart of The Day we show what the Federal Reserve currently uses as its definition of “inflation” – something academic wonks call “Core PCE”, or the US Personal Consumption Expenditure Core Price Index.

 

Other than this chart going straight down for the foreseeable future (until at least Q3), here’s what this time-series means to me:

 

  1. Instead of using real-world inflation, Bernanke deferred to a made-up calculation that fit his policy narrative
  2. In 2011, the US Dollar hit its lowest-level since 1978 - that’s what perpetuated the highs in this chart
  3. But since, at $1900 Gold, “there was no inflation” (per the Fed); it said it was just about right at 2%

 

I can guarantee you that everyone Paul Krugman influences in the Yale and Princeton econ departments completely disagrees with the context I just provided you. So that means I’m probably onto something…

 

Taking this to a higher-level of an investor’s real-time education, why does this chart matter now?

 

  1. Both the 1 and 3 year “compares” (comps) for reported CPI are very difficult
  2. When the comps are hard, the central tendency of the current data is to the downside
  3. Janet is going to be waiting for Godot if she’s looking for this sucker to hit her +2% “target” again

 

As importantly, the European definition of “inflation” continues to be, well, #deflationary. This morning Belgium reported at -0.4% year-over-year Consumer Price Index (CPI). That’s both in line with other countries in the Eurozone and nowhere near the +2% “target.”

 

If you buy into our Global #Deflation Theme, you have been buying the living daylights out of Long-term Bonds on all pullbacks for the last year, and you’ve been getting paid. Here’s where Big Macro 10yr yields are falling to this morning:

 

  1. Germany Bund 10yr = 0.29% (record low)
  2. Japanese Government Bond (10yr) = 0.33%
  3. Dutch 10yr = 0.37%
  4. French 10yr = 0.60%
  5. US Treasury 10yr = 1.94%

 

Never mind that the Swiss have a 10yr yield of 0.01% for a minute and tell me how, on God’s good earth, that the US 10yr Yield isn’t going to mean revert lower… if I’m right on both Global growth and “inflation” slowing, that is…

 

As many of you who have followed me for a long-time know, I haven’t been a perma bull on the Long Bond. In fact, I was a raging Long Bond bear in 2013 when our modeling was signaling US #GrowthAccelerating.

 

But, newsflash: US growth didn’t accelerate in Q4 of 2014 – alongside Global growth, on both a sequential and year-over-year basis, it slowed. Unless they repeal the laws of arithmetic and change the “growth” definition too, that will be headline news on Friday morning.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.81-2.05%
SPX 2087-2121
DAX 11008-11302

VIX 13.39-16.71
USD 93.73-94.81
EUR/USD 1.12-1.14
YEN 118.16-120.46

Oil (WTI) 48.09-53.66

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Laws of Arithmetic - chareal


March 12, 2015

March 12, 2015 - Slide1

 

BULLISH TRENDS

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March 12, 2015 - Slide5

March 12, 2015 - Slide6

 

BEARISH TRENDS

March 12, 2015 - Slide7

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March 12, 2015 - Slide10

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March 12, 2015 - Slide13


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

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