Below are our updated thoughts on the Internet and OTA names on our Bench. Our review of TWTR's 2Q results are also below. Let us know if you have any questions or would like to discuss further.
INTERNET
TWTR - SHORT BENCH
- Summary: Today is another reminder why TWTR just isn't worth playing from either the long or short side this year. We learned off the last print that MAUs are all the matter right now since its declining revenues are on the table, and we don't think it's worth it to get into the MAU Roulette game. Regarding the 2Q print, the glaring takeaway from the quarter was the sequential decline in US MAUs, first time in its reported history. DAUs continued to grow in the low-teens (12% y/y), but we loosely estimate that they were only flat to up marginally on a q/q basis in 2Q. TWTR's ad revenue declines moderated slightly into 2Q, but that may be more of a reflection of the comp since we estimate that it was 2Q of last year when its legacy CPC ad revenues started declining. We also estimate that auto-play video ad revenue, which may be TWTR's sole growth driver in its ad business, was flat to down sequentially in 2Q. If so, that would mark another first for the company and cast doubt on the longer term potential from those ad products, which mgmt appears to be putting all its chips on. All in, it seems premature to label TWTR a turnaround story.
YELP - SHORT BENCH
- Summary: Our initial reaction off the 1Q print was that the 2017 short was over given the FY guidance cut. However after teasing out our model, we now suspect mgmt didn't give itself enough breathing in its guide, which we believe is more wishful thinking than tangible target. In order to hit its 2017 rev guide, we estimate that YELP would need a considerable acceleration in new LAA growth, which seems highly unlikely considering that mgmt's 1Q17 self-serve comments all but confirm that it's salesforce-driven new LAA growth has started declining, which is a much bigger deal than whether or not YELP can hit estimates this year. That said, mgmt is 1) oblivious to what's coming, 2) hoping its anciliary lines will able to compensate, or 3) looking to sell. That said, we're on the sidelines trying to reconcile exposure to a pending implosion vs. the remote risk of a take-out proceeding said event, i.e. weighing a naked short against against a Feb-18 put for exposure to the next three prints.
P - SHORT BENCH
- Summary: We bowed out of our long after the last print, now we think it's dead money at best. Mgmt had appeared to shift gears earlier in the year, with an emphasis toward monetization vs. the user. However, the model transition toward the sub market that we were playing for wound up being slower/more volatile than we had initially anticipated. That would have been tolerable if not for mgmt seemingly backing off on its commitment to the model transition after seeing the first signs of resulting pressure in its ad-supported users metrics, which was expected/necessary to make the transition work to begin with. That said, we're not sure P's new CEO would have any more resolve and/or leeway than his predecessors to commit to the model transition, especially following the $480M strategic investment by SIRI given Maffei's public doubts about P's subscription business. That said, if P isn't prioritizing the sub opportunity/monetization in a Web-IV world, than it is effectively the same company we were shorting back in 2015. We'll be keying in on mgmt commentary on the upcoming call.
NFLX - SHORT BENCH
- Summary: We just joined a long list of casualties on the short side of NFLX after getting suckered into playing the sub game and failing miserably. NFLX is now on our Bench, but we're going to take a break from it for the time being. Fundamentally nothing has changed, in fact NFLX basically reiterated the bulk of our analysis of its business model in its Content Accounting Overview published alonside 2Q results. However, NFLX may be just be unshortable for the time being; it's basically a bubble that can’t be popped. Think about it like this. Shorting the outright fundamentals has never worked because that trade is unactionable as long as the Street is subsidizing its model; that will continue indefinitely as long as mgmt can keep the dream alive, and there may not be a better horse whisper on the street than this mgmt team. So that means you have to resort to playing the sub game, which means you're at a disadvantage on the short side since you're not betting against consensus, but mgmt's ability to manage expectations in the outer quarters prior to their respective prints. All that said, it may sound like we're whining after getting clotheslined on the short, but we promise you we're not…we're just explaining the rules of the game to any other fundamental analyst that might get baited into this short trap.
OTA
PCLN - LONG BENCH
- Summary: PCLN remains our preferred OTA from a longer term perspective given both its operating model and geographic footprint. On the former, we believe PCLN is better positioned for what we what we expect to become a more challenging environment for room night growth given its relatively streamlined operation vs.EXPE's varying properties, many of which have competing interests that may ultimately stretch the relative efficiency of EXPE's capital deployment. On the latter, PCLN's stronghold is in the int'l markets, which we expect to be relatively more insulated from the mounting headwinds facing the OTA space (e.g. AirBnb, branded hotels). We are planning to host a call on our longer-term OTA thesis later this quarter. We have yet to wade into the stock given what we had believed to be lofty room-night expectations in the outer quarters against a stock that kept finding new highs. That said, we're still hesitant to jump in here given a relatively lackluster read from our transactional tracker 3QTD. We're still awaiting on update from our APRU tracker.
TRVG - LONG BENCH
- Summary: The last time we published on TRVG was our pre-IPO deck, in which we were highly critical of the of mechanics of TRVG's business model, which can crudely be described as a reseller of internet traffic. However, we're moving TRVG from our Short Bench to our Long Bench since it's becoming clearer that TRVG has a competitive advantage since it gets to play by different rules. The street only cares about TRVG's top-line growth, giving it license to ramp up ad spend as much as it sees fit regardless of the EBITDA implications, while TRIP appears to be trying to balance both revenue and EBITDA. On that note, there's a chance that TRIP may be effectively forfeiting any hopes of reclaiming the meta throne given what appears to be a pivot away from its original 2017 objectives (maximizing revenue growth) for the sake of cowering to near-term EBITDA expectations. We're still trying to assess the magnitude of any such pivot, but if material, TRVG may eventually reach escape velocity. For context, TRVG has not only lapped TRIP in referral revenue, but its ad spend has surpassed TRIP's referral revenue. That said, the gap b/w their respective ad spends could eventually widen to the point where TRIP wouldn't be able to field a competitive ad budget, which would allow TRVG to pare back on its pace of ad spending and actually start producing real EBITDA. Yes we are currently long TRIP, but if it is in fact cowering to n/t EBITDA expectations, then TRVG will become the preferable longer-term meta play. We'll be keying in on mgmt commentary during the TRIP 2Q17 call.
EXPE - SHORT BENCH
- Summary: The street appears to be focused mostly on AWAY and TRVG, both doing well, although AWAY is past the peak of the tailwind from its model transition, and TRVG is really up in the air depending on whether TRIP is getting in the fight (i.e. ramping ad spend as originally planned). What seems to be getting less attention is the slide in EXPE's organic room night growth over the LTM. Mgmt has attributed most of that pressure to internal execution issues, which we do believe is legitimate (at least partially), but the fact that room-night growth has been so slow to recover suggests something bigger may be taking hold, potentially on a secular level. We haven't published on our longer-term OTA thesis since we thought it would be a while before it would actually start to matter, but now we suspect that it is slowly becoming the case (hosting a call later this quarter). However, we're not expecting anything sudden, especially on this upcoming print since EXPE disclosed that its 1Q booked room nights outpaced stayed room nights, which at a minimum would suggest stability, if not the 2Q acceleration that everyone seems to be expecting. If so, we wouldn't necessarily deem that the beginning of any sustained inflection, especially since EXPE's organic room nights (ex AWAY) just reaccelerated in 4Q before decelerating back to 2Q/3Q16 levels in 1Q17.
