prev

TWTR: Thoughts into the Print (1Q15)

Takeaway: We’re staying short, but this is a very tricky setup since this comes down to when mgmt rebases expectations (2Q15 guidance or release?)

KEY POINTS

  1. 1Q15 = MUTED UPSIDE: We’re expecting limited top-line upside on consensus estimates that are above the top end of 1Q15 guidance.  Further, any upside to estimates likely comes from the Data segment, with a limited upside to consensus advertising estimates that we believe are failing to adequately consider the non-recurring tailwinds from last year.  However, the big unknown here is ad pricing (see Point 3).
  2. A VERY TRICK SETUP: We believe TWTR is facing a precipitous slowdown in ad revenue growth with the company struggling to find an answer to comp past the 2Q13 Supply Shock, which had driven much of its recent success.  Mgmt will either have to own up to it, or try to acquire its way through it (or both).  However, we’re not sure if management concedes that point on the 1Q or 2Q print (2Q guidance or earnings).  The setup seems similar to 2Q14/3Q14 when TWTR guided high for 3Q14 revenues, then disappointed with inorganic upside and light advertising revenues. It's a tough setup, but we suspect Noto is more likely to manage expectations (he already tried last quarter).
  3. WHAT WE’RE KEYING IN ON: Ad Pricing (CPE), which is the biggest risk to our Short thesis.  TWTR has historically driven its model off of surging ad load; yielding CPE along the way.  However, CPE just turned positive on a y/y basis in 4Q14 for the first time in TWTR’s reported history (after cumulatively declining by 82% since 1Q12).  There is a lot of moving parts to CPE (ad load, product mix, customer base, geography), so tough to get any edge here.  However, we estimate that CPE needs to not only grow, but accelerate on a y/y basis to hit consensus 1H15 Ad Revenue estimates. 

 

1Q15 = MUTED UPSIDE

We’re expecting limited top-line upside on consensus estimates that are above the top end of 1Q15 guidance.  Further, any upside to estimates likely comes from the Data segment, with a limited upside to consensus advertising estimates that we believe are failing to adequately consider the non-recurring tailwinds from last year. 

 

During the 4Q14 call, TWTR tried to warn the street about the 1H14 benefit from the Olympics and the World Cup, which contributed an incremental 10% and 20%, respectively, to 1Q14 and 2Q14 results.  Excluding these events, consensus is calling for a mild slowdown in advertising revenue growth into 1Q14, with a reacceleration in 2Q14; a tall order for a company already experiencing a sharp decelerating in ad engagements (more detail below).

 

TWTR: Thoughts into the Print (1Q15) - TWTR   Adj Consensus Est 1H15

TWTR: Thoughts into the Print (1Q15) - TWTR   Ad eng vs. Price y y 

 

A VERY TRICK SETUP

We believe TWTR is facing a precipitous slowdown in ad revenue growth with the company struggling to find an answer to comping past the 2Q13 Supply Shock, which was a sudden and sustained surge in ad load that drove much of its revenue growth through 2014.   For supporting detail, see the note below.

 

However, TWTR is now at the point where ad engagements are precipitously decelerating, and we don’t believe the company can risk another surge in ad load since it needs to beat on both revenue and MAU expectations to appease the street, yet those two factors have historically worked against each other. 

 

The question is when mgmt will own up that slowdown, or if it will try to acquire its way through it (or both).  The more important questions may be timing; we’re not sure if management concedes that point on the 1Q or 2Q print (2Q guidance or earnings).  The setup seems similar to 2Q14/3Q14 when TWTR guided high for 3Q14 revenues, then disappointed with inorganic upside and light advertising revenues.  It's a tough setup, but we suspect Noto is more likely to manage expectations; he already tried last quarter by quantifying the non-recurring tailwinds mentioned above.

 

TWTR: Are Acquisitions Enough?

03/17/15 08:50 AM EDT

[click here]

 

TWTR: Thoughts into the Print (1Q15) - TWTR   Ad Engagement vs. Pricing 4Q14

TWTR: Thoughts into the Print (1Q15) - TWTR   Ad engagement vs. MAU

 

WHAT WE’RE KEYING IN ON

Ad Pricing (CPE), which is the biggest risk to our Short thesis.  TWTR has historically driven its model off of surging ad load; yielding CPE along the way.  However, CPE just turned positive on a y/y basis in 4Q14 for the first time in TWTR’s reported history (after cumulatively declining by 82% since 1Q12). 

 

There is a lot of moving parts to CPE (ad load, product mix, customer base, geography), so tough to get any edge here.  However, we estimate that CPE needs to not only grow, but accelerate on a y/y basis to hit consensus 1H15 Ad Revenue estimates.  For context, we have included a scenario analysis flexing ad pricing (CPE) against ad engagements (per MAU), along with a chart showing the recent trajectory between the two factors.

 

TWTR: Thoughts into the Print (1Q15) - TWTR   1H15 Scenario Analysis

TWTR: Thoughts into the Print (1Q15) - TWTR   Ad eng mau vs. Price y y

 

 

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

 

Hesham Shaaban, CFA

@HedgeyeInternet

 


MACAU WEEKLY ANALYSIS (APRIL 20-26)

Takeaway: CAN APRIL IMPROVE ON MARCH’S AWFUL VISITATION #S?

CALL TO ACTION

Dwarfing the importance of the weekly numbers, March visitation figures were released by the Macau government and they were awful. The sharp decline in visitation to Macau partly explains the disaster that was LVS’s earnings report – base mass revenues declined 21% in Q1.  While not widely analyzed by the Street, base mass revenues and visitation trends are critical to the performance of the Macau stocks, particularly LVS.  Long-term investors own Macau stocks, LVS included, because of the perceived positive growth profile of this high margin segment.  From a sentiment and earnings perspective, these trends are disconcerting.

 

Please see our detailed note: http://docs.hedgeye.com/HE_MACAU_4.27.15.pdf


Pricing in An Easier Fed

Client Talking Points

CHINA

New 7-year high - epic ramp continues with the Shanghai Composite up another +3% overnight = +40% year-to-date and +96% since OCT 2014 as speculation runs rampant about precisely what at this point, we do not know!

EURO

EUR/USD backs off -0.3% this morning after rallying to the top-end of its immediate-term risk range (now 1.06-1.09), the Euro is +1.3% in the last month vs. USD as the world prices in an easier Fed at the Wednesday meeting.

S&P 500

The U.S. stock market (and its volatility) likes the expectation of the Fed being easier, on the margin – at +1.8% for the week with Tech and Consumer Discretionary leading the rally (+3.2-4.0% week-over-week) the obvious question is what is priced in now that we’re back at the all-time highs?

Asset Allocation

CASH 31% US EQUITIES 15%
INTL EQUITIES 17% COMMODITIES 4%
FIXED INCOME 30% INTL CURRENCIES 3%

Top Long Ideas

Company Ticker Sector Duration
MTW

The Dodge Construction Starts Index accelerated at its highest rate since 1982. The index was driven largely by non-building projects, which was 74% higher for the first three months compared to last year. The Architecture Billings Index (ABI), a survey of architects, increased ~3% month-over-month and ~5% year-over-year for March. The ABI Index typically leads nonresidential and residential construction spending by 9-12 months. More importantly, the ABI Index leads Manitowoc Crane Orders by 2 quarters. This suggests MTW’s crane sales should see a pickup in the first half of the year. MTW reports April 29th after the close. Earnings Call will be held at 10:00am eastern time the following day.

ITB

iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call. Housing went 4 for 4 in a data heavy calendar for the sector this week with demand improving across both the new and existing markets and the fledgling acceleration in price growth finding some positive confirmation. The builder stocks had a choppy week of performance as investors held mixed opinions of earnings reports and management commentary out of DHI and PHM but, from a fundamental data perspective, the Trend remains one of discrete improvement.

TLT

Ten-year rates dipped 12bps on the week (forward-looking growth expectations) and the USD got crushed for a 1.5% loss. Growth and inflation expectations get priced in AHEAD of the more dovish policy tone resulting from any sign of deterioration in the labor market. Wednesday’s Fed meeting will be the next catalyst that will steer the market’s expectation on forward-looking growth and inflation. We expect the dots (forward-looking federal fund rate expectations) to be pushed out….again.

Three for the Road

TWEET OF THE DAY

TREASURIES: 1.91% 10yr (after starting the yr at 2.17%) as Lower-For-Longer gets priced into Fed expectations

 @KeithMcCullough

QUOTE OF THE DAY

Treat a person as he is, and he will remain as he is. Treat him as what he could be, and he will become what he should be.

Jimmy Johnson 

STAT OF THE DAY

Branded-drug prices have increased 127% since 2008, compared to an 11% rise in the consumer price index (according to Express Scripts Co.).


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 80.28%
  • SHORT SIGNALS 78.51%

CHART OF THE DAY: To Raise, Or Not To Raise (That Is The Question)

CHART OF THE DAY: To Raise, Or Not To Raise (That Is The Question) - z chart

 

Editor's Note: This is a brief excerpt and chart from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. If you'd like to get ahead of consensus, we encourage you to take a look and subscribe today.

 

Since the last Fed meeting (March 18th) I’ve been fixated on whether or not the Fed is for real on raising interest rates into both #Late-Cycle (see our Q2 Macro Themes deck) employment gains and Global #GrowthSlowing.

 

While it may have sounded a little over the top, our “buy everything” call on that March 18th Fed decision to go dovish, since then (from Chinese to Japanese stocks and/or US stocks and bonds), that was the right asset allocation decision to have made...

 

 


Are You Fixated?

“The real issue is not whether you have a mental model, but whether you’re fixated.”

-Gary Klein

 

That’s an excellent risk management #process quote from a conversation Ed Hess had with Dr. Gary Klein (senior scientist with Macro Cognition) in chapter 8 of Learn Or DieUsing Science To Build A Leading-Edge Learning Organization.

 

Klein made an astute point about expectations in reminding me that “so much of decision making is taught and treated as if you can pre-define the options” (pg 90). My experience with markets is that the options are both non-linear and constantly changing.

 

Sometimes expectations change fast; sometimes slow. It isn’t my job to tell the market which catalyst or correlation to fixate on. It’s my job to try my best to accept change.

 

Back to the Global Macro Grind

 

Since the last Fed meeting (March 18th) I’ve been fixated on whether or not the Fed is for real on raising interest rates into both #Late-Cycle (see our Q2 Macro Themes deck) employment gains and Global #GrowthSlowing.

Are You Fixated? - FED cartoon 12.18.2014

While it may have sounded a little over the top, our “buy everything” call on that March 18th Fed decision to go dovish, since then (from Chinese to Japanese stocks and/or US stocks and bonds), that was the right asset allocation decision to have made.

 

Front-running central planning expectations (especially when they are changing, on the margin, from hawkish to dovish – or dovish to uber dovish) will remain a major macro market fixation, until this epic experiment has nothing left to give.

 

In US Dollar devaluation terms, here’s what macro markets saw last week:

 

  1. US Dollar Index down another -0.6% week-over-week, taking its 1-month correction to -1.5% (+7.4% YTD)
  2. Euro (vs. USD) up another +0.6% in kind, taking its 1-month counter-TREND bounce to +1.3% (-10.1% YTD)
  3. Canadian Dollar up +0.5% vs. USD last week, taking its 1-month counter-TREND bounce to +4.1% (-4.6% YTD)

 

In other words, the closer you got to being long anything that looked like a Commodity Correlation trade (for the last month) – from oil itself, to energy stocks and junk bonds, to a resource driven currency – you crushed it.

 

With the Dollar off its highs, Rates #LowerForLonger, and the SP500 closing at her all-time highs on Friday, could all of this dovishness be priced in? I’m not so sure it is, yet. Chinese stocks closed up another +3% overnight to a 7yr high, +40% YTD!

 

With USD Down, the other big obvious last week in Global Equities was the outperformance of inflation oriented markets:

 

  1. Brazil’s Bovespa was +4.9% on the week to +13.2% YTD
  2. MSCI Latin American Equity Index bounced back to break-even YTD with a +4.5% wk-over-wk move
  3. Emerging Markets Equities (MSCI Index) had another big week, +1.7% to +10.9% YTD

 

If you boil all of this down in growth vs. inflation terms (using a 1-2 month duration), this is all one massive macro re-rating of inflation expectations (to the upside) within the context of what was a nasty 6 month #deflation scare.

 

On a reported basis (from governments) #deflation or disinflation (or whatever you want to call it) is going to be reality through the summer time. Government data is reported on a year-over-year basis, don’t forget.

 

But what if the Fed not only backs off on rate hikes, but starts to talk about incremental easing again? I don’t think they’ll do that. But being fixated on what the Fed should do vs. what they will do has proven to be quite costly for the past 6 years.

 

In the meantime (as in this week), this is where US stock and bond investors are at:

 

  1. SP500 was +1.8% week to an all-time closing high of 2117 = +2.9% YTD
  2. Tech Stocks (XLK) led the charge at +4.0% wk-over-wk = +4.3% YTD
  3. Consumer Discretionary (XLY) stocks squeezed the shorts +3.2% last wk = +7.6% YTD

 

Especially when I look at moves in big cap Tech names like Amazon (AMZN) and Microsoft (MSFT) of +14% and +10% (on the day!) on Friday, last week’s beta chasing move in the US stock market tells me that:

 

  1. Hedge funds are getting squeezed again (forced to cover shorts high and get net longer)
  2. Long-Only funds are being forced to chase performance again into month-end
  3. It’s going to be really hard to be bearish into the Fed meeting on Wednesday

 

To accentuate this view, the net SHORT position (CFTC non-commercial futures/options contracts) in SP500 Index (+ E-minis) hit a new monthly high of -45,673 contracts last week. To put that in context (when consensus didn’t respect the risk of #deflation) the trailing 6 month average net LONG position in SP500 futures/options contracts is +32,687.

 

In this game, the real issue is not whether or not you’re “smart”; it’s whether or not you can be mentally flexible enough to fixate on the right things, at the right time.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.85-1.99%
SPX 2103-2124
RUT 1
USD 96.71-99.01
EUR/USD 1.06-1.09

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Are You Fixated? - z chart


Idealistic Innovation

This note was originally published at 8am on April 13, 2015 for Hedgeye subscribers.

“Innovation has nothing to do with how many dollars you have.  When Apple came up with the Mac, IBM was spending at least 100 times more money on R&D.  It’s not about money.  It’s about the people you have, how you’re led, and how much you get it.”

-Steve Jobs

 

Innovation is a tricky concept.  No doubt, we all struggle with it in our businesses.  The key question often is how much to stick with what is tried and trusted versus creating brand new processes in an attempt to meet future and unplanned needs.

 

Harvard Professor Clayton Christensen addressed this very issue in his thoughtful book, “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail.”  His point in the book is that successful companies can put too much emphasis on customer’s current needs, and fail to adopt new technology or models that will meet their customer’s future needs.

 

This weekend I was a judge at Stamford Start-Up Weekend and the role made me consider both Jobs’ quote at the top and Christensen’s book.    Over the weekend, the teams in Stamford had to come up with an idea and then deliver a five minute pitch to the judges. The pitch was followed by five minutes of Q&A from the judges and audience.

 

Interestingly, all four judges picked the same winning company – Slip Share.  The company was “founded” by an avid recreational boater that had determined it was very difficult to find slips to rent or use when he was away from his home marina.  In effect, he was proposing an AirBNB for the boating industry.  

 

Even if Slip Share doesn’t ever become a billion dollar company, or a real company at all, we all liked it for the same reasons – the management team was passionate, there was a defined problem they were trying to solve for consumers, competition was limited and unorganized, and there was an intuitive business model. 

 

Certainly, Slip Share isn’t developing the type of innovation that Christensen is alluding to in his book or that Peter Thiel alludes to in his recent book, “Zero to One”.   But just because it may not be a billion dollar disruptive idea, doesn’t mean Slip Share won’t succeed.  As I noted in a recent critique of Thiel’s book, sometimes the most important part of becoming an entrepreneur is just to get going.

 

Back to the Global Macro Grind . . .

 

Speaking of innovation, or lack thereof, data from the CFTC this weekend shows that hedge funds boosted net-long positions in WTI oil by 30% in the seven days ended April 7th.  In terms of context, this is the biggest jump in net long exposure since October 2010.  It is also the most significant long bet in more than nine months. (Note to reader: CFTC data is often a contrarian indicator.)

 

In as far as we can tell, the bulls are on some level anchored on U.S. rig count and interpreting the precipitous decline in active drilling rigs in the U.S. as sign of future slowdown in U.S. production.  Certainly this thesis may be true to a point, but the reality remains that innovation in the drilling industry means the most productive rigs are still active.

 

In the Chart of the Day below, we highlight a table from a recent note by our commodities analyst Ben Ryan that shows oil production by each major field in the U.S., productivity by the active rigs in that play, and rig count.  In the case of the bears, they are correct that rig count is down, and meaningfully so.  In fact, Baker Hughes rig count in the U.S. in aggregate is down 47% y-o-y.

 

Conversely, oil production in each major field and on a per rig basis is still up dramatically.  Even if on the margin production growth is slowing, and trust us we get that changes on the margin do matter, the more notable challenge, or looming catalyst, is that storage capacity in the U.S. is nearing capacity.  In fact by our math, the hub at Cushing, Oklahoma will be completely full in 6 or 7 weeks.

 

While there is some merit in the oil bulls focusing on U.S. production, that focus shouldn’t be myopic in the context of the global demand picture.  On that note, this morning’s data out of China shows that crude imports into China slowed dramatically in March at 26.1M metric tons. This is down 5.2% month-over-month and the slowest pace since November.

 

The broader context out of China this morning was the trade data, which was in one word: dismal.  Exports were down -15% year-over-year versus the consensus estimates of being up +11.7%.  Imports were also disappointed coming in at -12.9% year-over-year.  

 

Certainly, there were some 1-time impacts in the Chinese trade numbers, but the fact remains it’s hard to be excited about global growth, let alone global oil demand, when the world’s second largest economy is reporting those sorts of trade numbers. 

 

That said, we aren’t bearish on all economies and all asset classes.  In fact, we still are quite favorably disposed to German Equities.  Even as the DAX has had a major run over the past six months, over the past five years it has dramatically underperformed its U.S. counterparts.  Tomorrow at 11am, our European Analyst Matt Hedrick will be presenting a 50-page deck that outlines that continued case to be long of German equities.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.85-1.99

SPX 2079-2116

RUT 1249-1266

DAX 12075-12395

VIX 12.48-16.01
WTI Oil 47.09-53.74

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Idealistic Innovation - zj


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

next