The stock market’s selloff has disproportionately hit social media stocks.
Turmoil over Facebook’s data usage practices triggered a steep selloff in shares of Twitter (TWTR) and Snapchat (SNAP). Facebook, Twitter and Snap shares are down -20%, -25% and -40% from their year-to-date highs.
This drawdown has created opportunities for investors.
“Everything that’s going on with Facebook is starting to hit Twitter, even though they’re two completely different animals,” explains Hedgeye Internet & Media analyst Hesham Shaaban.
In this special webcast, Shaaban discussed, with CEO Keith McCullough, what most investors are missing about social media stocks, how they make money and what developments investors should keep a close eye on.
Stocks covered included Netflix (NFLX), Twitter (TWTR), Snapchat (SNAP), Pandora (P) and Yelp (Yelp) among others.
Below is a brief excerpt transcribed from this conversation. Also below is the entire 38-minute discussion.
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Keith McCullough: We’re going to talk about some stocks that are getting absolutely pounded today, the social media and internet stocks. I’m here with Hesham Shaaban, who’s our Internet & Media analyst. He’s known as a bear, so he’s definitely got some short ideas for you. But he does like Twitter right now.
Hesham Shaaban: That’s actually a good place to start. Twitter is a name that’s getting pounded on a lot of conjecture right now. Everything that’s going on with Facebook is starting to hit Twitter, even though they’re two completely different animals.
KM: Just so everyone knows. Hesham used to be ‘The Bear’ on Twitter. Hated it with a passion but now you like it.
HS: Twitter disappointed a lot of investors dating back to the IPO all the way through call it mid-2016. Because of that it’s taking a long time for the Street to wake up to the fact that Twitter self corrected.
What we saw off the last print is Twitter ripped off 4Q 2017 earnings. It was essentially a short squeeze because the entire Street was positioned long Facebook, short Snap, short Twitter.
That being said when you looked at what happened to Twitter versus where they are today it’s two completely different stories.
KM: Your short call used to be very straightforward. You said they’re not going to hit revenue or top line metrics. It was a big top-line short. Now it’s based on revenue acceleration.
HS: Well, there’s obviously a difference between a good product and a good business model. That was the whole premise of our short from 2015 through 2016. Since then, they’ve been right sizing the model that is 1) easier to monetize and 2) revenue per thousand impression (so how much revenue they get per unit of ad load).
Come 2018, they’re now in a position where their previously core product is now less of a focus so it’s less of a drag on their model. Meanwhile, their newer product this autoplay video product is growing like a weed and allowing Twitter to return to revenue growth, which we saw in the most recent print.
KM: So the bad news is getting less bad.
HS: Exactly. That’s what we saw off this last print, where revenue not only turned positive but it accelerated by 14 percentage points in their core advertising segment.
Ultimately, what we see when you get into 2018 is the legacy cost-per click model not mattering as much because it’s a smaller percentage of the pie. And they don’t need that much autoplay growth to return to double-digit total ad revenue growth in 2018. That’s why we think they can get into the +20% range pretty easily.
KM: Let’s talk Snapchat. It just broke bearish trend in our quantitative risk range model. Now, I like it when you don’t like a stock and it breaks bearish trend. That means the market agrees with both of us.
HS: The thing with Snap is that it is a purely sentiment driven stock. We actually covered it ahead of the last print before we had that big short squeeze.
KM: Just so you know, Hesham came out bearish on Snapchat right out of the box on the IPO when the whole world was bullish. So you watched it collapse and you were on the right side of that. You covered and waited. Now you’re doing what?
HS: One very big thing in this space, that’s true of story stocks or stocks driven off sentiment, is being able to line up your catalysts. Ultimately, we covered our short call because we knew we were out of catalysts into the last print.
KM: Because estimates had gone so low.
HS: Yes. Estimates had gone so low, the entire sell side was jumping in on the bear side of the trade. What we realized is the sell side had overcorrected for a discreet headwind on the 3Q 2017 print that Snap didn’t have to do much to beat estimates. It didn’t take much to print a rate of change acceleration in those numbers. So we didn’t want to be anywhere near the short side of that.
KM: That’s a good point for those of you who are doing short selling at home. And I encourage all of you to ‘Make Short Selling Great Again.’ This is a very important time.
This is key. Just because you don’t like something, doesn’t mean you have to be short it all the time. If you know the numbers are going to be better than what the Street is expecting, you don’t short it into the number. There’s no such thing as short and hold, especially with stocks like this.
But now it’s safer to get back into the water.
HS: At the same time we have to be mindful of the events that benefited Snap in 2016, like the Olympics. That’s probably going to be a tailwind.
We’re trying to figure out when we’re going to come back to this on the short side.
KM: Why don’t you walk us through some slides on Snap.
HS: Sure. Now the thing with Snap is that there are two sides to the story. There’s the user growth story and the monetization story.
What we were able to identify pre-IPO is they were already able to capture the low hanging fruit for users in their core market being sub-30 year olds in the U.S. They had high 50% penetration back then. What that meant was the majority of the remaining total addressable market would be a lot harder group to penetrate.
