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There May Be No Bottom In Sight For Twitter

Takeaway: There isn't any clear way to fix TWTR's model. There might not be any bottom in sight outside potential take-out value.

This is a brief excerpt from our Internet & Media analyst Hesham Shaaban's note to institutional subscribers on Twitter's (TWTR) lousy earnings report which has sent shares down over -10%. He’s been bearish on TWTR and remains so. Send an email to sales@hedgeye.com for more information on our institutional research.

 

...We’re lucky TWTR isn’t down near LNKD-4Q15 levels off this print, especially considering TWTR's +30% rally since the LNKD-MSFT deal.  So we may get another shot at the short, which we had covered prematurely thinking TWTR may have bottomed out.  But considering that there isn't any clear way to fix TWTR's model, it may just mean there isn't a bottom in sight outside potential take-out value, which we doubt would be anywhere near its $10B EV when both its revenues and users are trending toward decline.  

 

2-minute clip ahead of TWTR's print where Hesham outlines his concerns.

 

Where's the bottom for shares of Twitter? Anyone's guess.

 There May Be No Bottom In Sight For Twitter - Twitter cartoon 5.7.2014


Ouch! Durable Goods: Neither Durable Nor Good

Takeaway: Headline Durable Goods fell -4.6% sequentially in June and declined to -6.4% YoY.

Ouch! Durable Goods: Neither Durable Nor Good - The Cycle cartoon 05.12.2016

 

While aggregate household spending remains relatively healthy, the trend in domestic durable goods orders continues to prove neither durable nor good, according to Hedgeye U.S. Macro analyst Christian Drake.  Headline Durable Goods fell -4.6% sequentially in June and declined to -6.4% YoY. 

 

The -60% decline in private sector aircraft orders weighed on the headline, Durables ex-Defense and Aircraft – which aligns most closely with what actual households buy – remained negative year-over-year (-1.8%) for a 4th consecutive month. 

 

Meanwhile, Core Capital Goods Orders fell -3.7% YoY, extending its epic run of negative capital spending growth to 17 of the last 18 months = the most dismal non-recession/peri-recession streak basically ever.

 

Here's the detailed Durable goods breakdown (as you can see, it's a sea of red):

 

Click image to enlarge

Ouch! Durable Goods: Neither Durable Nor Good - durable goods 7 27


Daily Market Data Dump: Wednesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, rates and bond spreads, key currency crosses, and commodities. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Wednesday - equity markets 7 27

 

Daily Market Data Dump: Wednesday - sector performance 7 27

 

Daily Market Data Dump: Wednesday - volume 7 27

 

Daily Market Data Dump: Wednesday - currencies 7 27

 

Daily Market Data Dump: Wednesday - rates and spreads 7 27

 

Daily Market Data Dump: Wednesday - commodities 7 27


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.

TWTR | Worse than the Guide (2Q16)

Takeaway: We thought it was crazy to think that Legacy O&O could decline in 2Q; now it may not be that crazy to think Total Ad Rev declines in the NTM

KEY POINTS

  1. 2Q16 ≠ SANDBAG: We were expecting upside to 2Q Ad revenue since mgmt’s guidance implied either a y/y decline in its Legacy Owned-&-Operated (O&O) Ad business, or no sequential growth in either Non-O&O or Auto-Play.  We had a hard time believing either scenario was possible, but we actually got a combination of both.  The Non-O&O business sequentially declined into a seasonally stronger 2Q, and we estimate that Legacy O&O declined y/y in the mid-single digit range.  Auto-Play was the sole bright spot, producing an estimated 80% of its total Ad revenue growth in 2Q.  The 3Q guide was pretty dreadful; TWTR’s total revenue guidance was actually below what consensus was assuming for just the Advertising segment.  The 3Q guide is effectively calling for Ad revenue growth somewhere in the single-digit range depending on mgmt's assumptions for its Data segment.  The knee-jerk reaction is to assume 3Q was sandbagged, but the 2Q guide presented the same way.
  2. AUTO-PLAY = LEGACY SIPHON: It’s becoming clearer that Auto-Play is not a stand-alone growth driver, but is rather pulling engagements/budget away from its Legacy O&O ads.  This mix-shift dynamic will likely continue given the lower Auto-Play engagement threshold; especially since the more Auto-Play ads that TWTR introduces into a user’s feed, the less likely they are to directly engage with its Legacy CPC ads, which require user interaction to produce revenue.  So even if advertisers are still allocating and/or increasing budget to Legacy O&O, it doesn’t mean those budgets will actually be fulfilled; especially if TWTR continues to struggle to produce user growth.  Further, as we move through the NTM when TWTR has Auto-Play fully baked into its comps, it's possible that Total Ad revenues decline in the NTM since Auto-Play engagement growth will now be driven almost exclusively by ad load, which could exacerbate the legacy-siphon dynamic further.
  3. WHERE'S THE BOTTOM? It may sound crazy to think that Total Ad revenues may starting declining in the NTM, but the thought of its Legacy O&O business declining sounded crazy before its 2Q results.  For context, the 2Q pressure in Legacy O&O Ad revenue happened before TWTR fully comped past its Auto-Play launch.  We estimate that Auto-Play represents less than 20% of its total O&O Ad revenues, so there is a lot of Legacy O&O budget at risk just from user ad fatigue alone (Point 2).  Further, the sequential decline in Non-O&O points to another potential source of declining revenue against peak comps over the next 2 quarters.  We’re lucky TWTR isn’t down near LNKD-4Q15 levels off this print, especially considering TWTR's +30% rally since the LNKD-MSFT deal.  So we may get another shot at the short, which we had covered prematurely thinking TWTR may have bottomed out.  But considering that there isn't any clear way to fix TWTR's model, it may just mean there isn't a bottom in sight outside potential take-out value, which we doubt would be anywhere near its $10B EV when both its revenues and users are trending toward decline.  

 

Let us know if you have any questions, or would like to discuss further.

 

Hesham Shaaban, CFA
Managing Director


@HedgeyeInternet

 

TWTR | Worse than the Guide (2Q16) - TWTR   Non O O 2Q16

TWTR | Worse than the Guide (2Q16) - TWTR   Incremental Ad Revenue by Source 2Q16 


Our bearish bias on the EUR/USD remains..

Client Talking Points

EUR/USD

Our bearish bias on the EUR/USD remains and look to Friday’s announcement on the latest stress tests from 51 banks to put marginally more downside in the cross regardless of the headline “news” from the results. #EuropeImploding.

BOJ

The BoJ heads into its July 28-29 meeting with peak expectations of incremental monetary easing (22 of 28 analysts according to the latest Nikkei survey expect easing). If the policy board sticks with traditional QQE expansion, we would expect a short-lived JPY sell-off and Nikkei pop, but if the #beliefsystem in Japan was still intact then 10Y JGB Yields wouldn’t have come in by -9bps with 5Y5Y Forward Breakeven Rates declining -24bps MoM.

Durable Goods

While aggregate household spending remains relatively healthy, the trend in domestic durable goods orders continues to prove neither durable nor good.  Headline Durable Goods fell -4.6% sequentially in June and declined to -6.4% YoY.  While the -60% decline in private sector aircraft orders weighed on the headline, Durables ex-Defense and Aircraft – which aligns most closely with what actual households buy – remained negative year-over-year (-1.8%) for a 4th consecutive month.  Meanwhile, Core Capital Goods Orders fell -3.7% YoY, extending its epic run of negative capital spending growth to 17 of the last 18 months = the most dismal non-recession/peri-recession streak basically ever.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/26/16 64% 2% 4% 12% 10% 8%
7/27/16 64% 2% 4% 12% 10% 8%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
7/26/16 64% 6% 12% 36% 30% 24%
7/27/16 64% 6% 12% 36% 30% 24%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration
GLD

Gold (GLD) = Protection from global currency devaluation and inflation/down USD – You can travel anywhere on earth and get a quote in local currency.

TLT

Long Bonds (TLT) = #GrowthSlowing, yield curve compression.

TIP

Treasury Inflation-Protected Securities (TIP) = Combination of the above exposures.

Three for the Road

TWEET OF THE DAY

CHART OF THE DAY: Can The BOJ Save Japan From Economic Reality? app.hedgeye.com/insights/52640… via @HedgeyeDDale #BOJ #helicoptermoney

@Hedgeye

QUOTE OF THE DAY

“When your team is winning, be ready to be tough, because winning can make you soft. On the other hand, when your team is losing, stick by them. Keep believing.”

– Bo Schembechler

STAT OF THE DAY

Brian McCann has batted over .300 two times over the course of his 12 year MLB career.


July 27, 2016

Want more from Daily Trading Ranges? CLICK HERE to submit up to 4 tickers you'd like to see on the list. 

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
1.65 1.47 1.57
SPX
S&P 500
2,131 2,178 2,169
RUT
Russell 2000
1,182 1,218 1,216
COMPQ
NASDAQ Composite
5,009 5,130 5,110
NIKK
Nikkei 225 Index
16,105 16,997 16,383
DAX
German DAX Composite
9,925 10,372 10,247
VIX
Volatility Index
11.72 16.63 13.05
USD
U.S. Dollar Index
96.21 97.92 97.18
EURUSD
Euro
1.09 1.11 1.09
USDJPY
Japanese Yen
104.04 107.21 104.64
WTIC
Light Crude Oil Spot Price
42.07 44.98 42.92
NATGAS
Natural Gas Spot Price
2.59 2.80 2.68
GOLD
Gold Spot Price
1,310 1,350 1,320
COPPER
Copper Spot Price
2.16 2.27 2.22
AAPL
Apple Inc.
96.48 104.10 96.67
AMZN
Amazon.com Inc.
729 755 735
NFLX
Netflix Inc.
80.38 95.06 91.41
JPM
J.P. Morgan Chase & Co.
62.03 64.54 64.13
TWTR
Twitter Inc.
16.02 18.55 18.45
LMT
Lockheed Martin Corp.
251 260 254



Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, along with our intermediate-term (TREND) view.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.


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