Twitter Analyst Comments After Earnings Release

October 28th, 2015

Twitter: Color on Quarter :

Stifel Research notes it has been long-time critics of Twitter, the strategy and the stock, until today. Firm believes the hiring of Jack Dorsey was the first step toward an improved product and repaired franchise. Twitter faces declining expectations and easing comps as it approaches 2016, which should be a perfect backdrop for a product-focused founder to look like a savior. Twitter shares are priced at ~$27 in aftermarket trading for a stock that carries a 12-month bull case into the $40s and a bear case of low-$20s, leaving a quite favorable risk-reward proposition for investors. Firm upgrades Twitter shares to Buy from Hold and establish a $34 Price Target.

Axiom Capital notes revenue was 1% ahead of estimate while Adj. EBITDA was 20% ahead of estimate, although management stated that certain costs in 3Q were pushed into 4Q. Core MAUs of 307M were in-line with estimate, as were the total MAUs of 320M, incl. SMS. The mid-point of 4Q revenue guidance was 5% below consensus (reasons were vague, although firm suspects slower O&O growth) while Adj. EBITDA at the mid-point was 17% below consensus, reflective of the lower revenue guide, cost shifts from 3Q and increased marketing spend. Believes tools are now in place that should support share price appreciation over the coming year. An investment in TWTR today is a bet that management can execute. Firm’s early October upgrade to Buy from Hold at the share price lows was predicated on this belief, which it continues to hold.

RBC Capital notes TWTR reported better than expected Q3 results but materially lowered its Q4 guidance. Organic revenue growth is clearly decelerating and all-important User metrics are showing almost NO growth. Firm is more cautious. Maintaining Sector Perform but lowering estimates and reducing price target to $34 from $41.

Pivotal Research notes Twitter reported solid 3Q15 revenue growth and margin expansion, reflecting ongoing commercial traction for the overall enterprise. Invstors focusing on user growth (or lack thereof) and those who were hoping for implicit 4Q15 guidance to be maintained or expanded would have been disappointed. However, guidance was close to prior expectations, which firm thinks represents positive ongoing traction. In the long-run, it believes the existing platform remains sufficiently valuable to a sufficiently large group of advertisers such that it remain confident in Twitter’s capacity to continually grow without meaningfully expanding its O&O user base. Continues to rate Twitter Buy with a $43 YE2016 price target.

Stock Market Strategy: Fed Blinks BofA’s Michael Hartnett Explains

September 18th, 2015

The Fed left rates unchanged at 0% to 0.25%. Thoughts…

1. Fed admits China/Wall St threatens to reverse Main St recovery; Fed confirming “deflationary recovery”; risk can rally but sell into strength; upside for risk assets constrained by growth outlook, downside protected by Fed.

2. Stay of execution for “liquidity era”: nonetheless liquidity has peaked (Chart 2). And peak in liquidity = peak of excess returns = trough in volatility: annualized returns between start of QE1 (3/9/2009) & end of QE3 (10/29/2014)…stocks 20%, HY 18%, REITs 31%…(Table 1); since end of QE3, returns much, much lower, volatility higher & flash cashes (oil, UST, CHF, bunds, SPX) more common.

3. No hike, no rally: fragile Wall Street + perilous China = a “tactical delay” in Fed hike according to our economists; but if no risk rally despite ultra-dovish Fed & bearish sentiment = markets hinting “recession” and/or “default” imminent: allocation to risk hindered by growth fear (China, global PMIs), default fear (EM, commodities, Wall St), and liquidity fear (bonds/stocks “untradable” right now). Stronger global growth best antidote to fear: US payroll/retail sales & Chinese exports now key data (nb latter has tough comps next 2 months).

4. Short-term tactics: negative for US$, banks. Stocks>bonds but SPX>2040-2070, GT30>3.2%, DXY>97 needs stronger global growth; EM>DM, resources>banks, gold>US$, REITs>cash, growth>value all good tactical trades.

5. Big picture = deflationary recovery: Fed confirming “deflationary recovery” status quo (Chart 3); no recession/bankruptcy thanks to low rates/oil/unemployment; but expansion remains deflationary thanks to debt, tech disruption, demographics.

Deflationary recovery means “growth”, “yield”, “quality” remain structurally bid. We stay long US$, volatility, real estate & stocks>bond, but upside for risk assets now constrained until unambiguous handoff from liquidity to growth.

6. Bullish risk = reflationary recovery: if the Fed’s failure to hike does not lead investors to completely abandon hope on growth and scurry into gold, cash & volatility, “barbell of 1999” could reemerge: Über-growth & Über-value massive outperformers post-Asia crisis.

7. Bearish risk = deflationary bust: Asia banks indicate in coming weeks markets at early stage of crisis; Q3 EPS shows recessionary global economy. Crowded Discretionary, Banks, Tech & Eurozone (Chart 4) most at risk should peak liquidity coincide with EPS recession, SPX<1870, GT30<2.8%, DXY<93…at least until new extreme policies introduced (Fed QE4, China QE1 or a G7 shift toward  fiscal policy stimulus).

News That Moves: Earnings of Interest INFN, AAOI, MSFT, AMZN

July 27th, 2015

Companies to Watch: INFN, AAOI, MSFT, AMZN

Infinera beats by $0.02, beats on revs
Note, the co usually guides for the next quarter on the call, starts at 5:30pm ET (21.26 -0.44) : Reports Q2 (Jun) earnings of $0.18 per share, excluding non-recurring items, $0.02 better than the Capital IQ Consensus Estimate of $0.16; revenues rose 25.4% year/year to $207.3 mln vs the $201.4 mln consensus.

  • “Our outstanding second quarter results were driven by robust demand across multiple verticals, as customers continued to build next generation networks with Infinera.”
Infinera provides guidance on its earnings call: revenue above consensus, mid-point of EPS guidance is a penny above consensus (21.29 -0.40) : On its earnings call, INFN just guided to Q3 non-GAAP EPS of $0.15-0.19 vs Capital IQ consensus of $0.16; co guides to Q3 revenue of $210-220 mln vs consensus of $206.5 mln. Co did not guide in the press release, only on the call…stock currently at 22.12 (+4%)

Applied Optoelectronics
AAOI raises guidance above consensus on strong demand for CATV and datacenter products (16.91 ) : Co raises guidance for Q2 (Jun):

  • Sees EPS of $0.36-0.38 vs. $0.27 Capital IQ Consensus Estimate and above prior outlook of $0.25-0.30;
  • Sees Q2 (Jun) revs of $49.6 mln vs. $43.15 mln Capital IQ Consensus and above the prior outlook of $43.0 to $45.0 mln.
  • Co cites strong demand for CATV and datacenter products as well as ability to manufacture and ship 40Gbs transceivers ahead of plan
Applied Optoelectronics target raised to $25 at ROTH Capital (19.57 -0.39) : ROTH Capital raises their AAOI tgt to $25 from $20 as they believe that co’s growth in 2015/2016 is likely to be driven by continuing demand for next-gen 40 Gig and 100G optical transceivers and active optical cabling assemblies for high-speed data-centers, new datacenter customers and a recovery in cable components/systems. Firm believes that GAAP gross margins will stay in the 33 to 34% range (versus 33.9% in 2014) driven by newer optical components and subsystems for datacenter along with newer DOCSIS 3.0 cable infrastructure revenues.
Microsoft (MSFT) Color on the Quarter:

  • Wunderlich notes MSFT reported better-than-expected Q4 results with the outperformance driven by Cloud and Hardware. However, the dampened outlook as the company transitions toward more ratable rev recognition likely will disappoint investors as co will continue to experience headwinds related to FX. Co reduced both rev and EPS expectations for 1Q16. The cloud transition with Office 365 and Azure should continue to give investors hope during the transition as well as strong stewards of capital allocation. As a result, they maintained Hold, but lowering PT to $50 from $52.
  • RBC Capital Markets thinks we are 2 quarters away from an important inflection in Sales, EPS and cash flow growth. They recommend buying weakness as a result of Phone/ FX revisions to NT ests. Co remains favorite mega-cap software name and they find valuation compelling at current levels; Outperform, $54 tgt.
  • FBR Capital notes they characterize the June performance as “good enough” in the face of a challenging PC envm’t, ultimately all investor eyes will be on the July 29 launch of Windows 10 as Mr. Nadella & Co. look to make the transformational cloud transition with Windows in the hopes of reinvigorating growth in the core business and achieving similar success to the Office franchise transition. Firm continues to believe co’s core cloud products (e.g., Azure/Office 365) and scalable global architecture represent key differentiating factors that will continue to attract an increasing number of subscribers as enterprises evaluate/embrace cloud providers over the coming quarters/years, while restructuring efforts are clearly making it a “leaner and meaner” technology giant. Overall, they believe F4Q15 results/F1Q16 guidance speaks to a company in a state of transition, but ultimately headed in the right direction as the real focus turns to co’s upcoming potentially massive product cycle; Outperform, $53 tgt.
  • Oppenheimer notes excluding the one-time impairment charge relating to the NOK write-off, MSFT results came in a tad better than consensus. Initial F1Q16 guidance is optically shy of prior ests, but FX is the main culprit. The just reported F4Q15 showed: 1) Continued improvement for the Cloud Services products; 2) Continued cost containment further supporting margins improvement; 3) Positive road-map for WIN10 and 4) MSFT further re-positioning itself for post-PC era. While the stock was slightly off in after-hours (down 3%), firm believes demand trends remain steady and strategically MSFT is making all the right moves; Outperform, $50 tgt.
Amazon: Color on Quarter (482.18 ) :

  • RBC Capital Mkts raises their AMZN tgt to $650 from $500. AMZN grew Q2 revenue 20% Y/Y (27% ex-FX) to $23.2B, materially ahead of RBC/Street & Guidance. 1st time AMZN has exceeded its Guide in 4 years. The 27% growth marked a material acceleration and was the fastest growth in 3 years. The Revenue upside came from all three segments– NA Retail, International Retail & AWS. Further, GMs reached a record high 35%, driven by AWS sales mix, 3rd party sales mix, scale & shipping efficiencies. And this translated into a higher than expected 4.6% Operating Margin, the highest Q2 margin in five years. Check this out– Operating Income came in 86% above the Street. And the Q3 Guide was well above the Street. Yes, an Inflection Point Quarter.
  • Mizuho raises their AMZN tgt to $645 from $498. Amazon’s 2Q execution was about as flawless as one could hope for. Revenue growth (ex-FX) accelerated to 27% YoY vs. 21% YoY in 1Q, which marked the strongest growth we’ve in about 3 years. Gross Margins reached a record high of ~35%, and CSOI margin was 4.6%; the strongest they’ve seen since 1Q11. While Amazon continues to invest in the biz, the flywheels are kicking in — Prime subscribers are transacting more on Amazon, while investments in FCs, 3P and AWS are helping to drive margins higher.
  • Axiom Capital raises their AMZN tgt to $650 from $500 noting co reported a fundamentally strong quarter, with rev growth of 27% ex-FX, above firm’s ests and led by accelerating growth in all segments, with meaningfully stronger growth at AWS. The CSOI margin was meaningfully above firm’s est, and GAAP EPS was positive vs. their loss est. ROIC improved to 17% from 14% in 1Q15 and 9% in 4Q14. Amazon’ share price reacts positively to improvements in ROIC. The results reinforce firm’s conviction that the model can grow revs at an upper-teens three-year CAGR and drive incremental operating margins, while investing meaningfully to drive growth.
  • Monness Crespi & Hardt raises their AMZN tgt to $615 from $505. As expected Amazon beats, but degree of upside is the surprise. There are few holes, if any, to poke in this quarter. They continue to see a path to an 8% margin in NA and international retail and 30% in AWS. Although NA stands at just 5% today and international at breakeven, high-single-digit incremental margins across the retail channel, growth in higher margin categories such as apparel, and the momentum in global Prime adoption reinforces their positive outlook on profits.
  • Needham notes Amazon delivered 2Q15 upside with revenue growth accelerating across regions and categories. AWS was the standout in Q2, posting accelerating growth of 81% and segment margin of 21%. AWS coupled with acceleration in 3P and overall GMV growth pushed CSOI well above expectations too. They are incrementally more positive on Amazon given the higher levels of profitability and accelerating growth, which they believe are also reflected in the 3Q15 guidance upside. However, they believe the share price spike largely captures the future growth and profitability expectations. Thus, they would wait for a modest pullback before becoming more constructive.
  • B. Riley upgrades to Buy
  • AMZN +20% at new all time high near $577 premarket; market cap ~$269 bln (WMT at $233 bln).

Companies Worth Attention: Biotechs REGN BIIB ISIS

Regeneron Pharma: Color on Friday’s FDA approval of Praluent (541.85 )

  • RBC Capital Mkts raises their REGN tgt to $570 from $560 noting the controversy was whether the label is narrow and firm believes it is broad enough and captures that population segment which is most likely to be acceptable to payers as well. Price was higher than expected so firm’s ests and targets increase. Recent misses by other cos tell us that Eylea performance is important and they continue to view co as a core biotech holding based on its pipeline.
  • Northland notes that except for pricing, the approval and initial launch strategy are in line with expectations; Market Perform.
  • ROTH notes FDA announced the approval of Praluent for treatment of adult patients with heterozygous familial hypercholesterolemia (HeFH) or patients with clinical atherosclerotic cardiovascular diseases in need of LDL-C lowering. They believe this approval is already priced into the stock along with the other major opportunities including product revenue and late-stage pipeline assets; Neutral.
  • Brean Capital notes the Praluent Label and price could leave some wood to chop. Sanofi (SNY) and Regeneron disclosed a U.S. WAC price of $40 per day ($14,600 every year) for both the 75mg and 150mg doses. Although Praluent may be the lowest priced monoclonal antibody therapy on an annualized basis, economic headwinds exist in the form of Repatha competition and the substantially higher cost of antibodies versus generic and branded statins.

ISIS Pharm reports data from its study of ISIS-TTR Rx, showing reductions in TTR protein of up to 88% (53.15 )

  • Co announced encouraging preliminary results from an investigator-sponsored study in patients with transthyretin amyloid-related cardiomyopathy that was presented yesterday by Dr. Merrill Benson at the 20th World Congress on Heart Disease (WCHD) in Vancouver, Canada.
  • “I am encouraged by the safety, tolerability, TTR lowering and apparent stabilization of cardiac disease progression we have observed in the study to date,” said Merrill Benson, M.D., professor of pathology and medical genetics at Indiana University.
  • “In this open-label study, measures of TTR amyloid cardiac disease, including echocardiographic and strain imaging evaluation, indicated little to no cardiac disease progression after six months of dosing with ISIS-TTRRx. These data compare favorably to our previously published work, which showed that patients with TTR-related cardiomyopathy exhibit disease progression at six months using similar echocardiographic measurements.”
  • In a presentation titled, “Transthyretin Amyloid Cardiomyopathy Treatment with an Antisense Oligonucleotide Inhibitor of TTR (ISIS-TTRRx)”, Dr. Benson reported on preliminary results from his investigator-sponsored open-label study in patients with TTR-related cardiomyopathy. In patients who completed nine months of weekly dosing (n=3) with 300 mg of ISIS-TTRRx, reductions in TTR protein of up to 88% were observed with a mean reduction of 78%.

Biogen beats by $0.12, misses on revs; lowers FY15 guidance (385.05 ) :

  • Reports Q2 (Jun) adj. earnings of $4.22 per share, $0.12 better than the Capital IQ Consensus of $4.10; revenues rose 7.0% year/year to $2.59 bln vs the $2.71 bln consensus.
    • TECFIDERA revenues were $883 million compared to $700 million in the same quarter last year. These results consisted of $721 million in U.S. sales and $163 million in sales outside the U.S. compared to $585 million and $115 million, respectively, in 2Q14.
  • Co issues downside guidance for FY15, lowers EPS to $15.50-15.95, excluding non-recurring items, from $16.60-17.00 vs. $16.75 Capital IQ Consensus; lowers FY15 revs to +6-8% to ~$10.29-10.48 bln (from +14-16%) vs. $11 bln Capital IQ Consensus.
  • “TECFIDERA, which is now the most prescribed oral MS therapy globally, is experiencing moderated patient growth following rapid initial uptake. The launch of PLEGRIDY is expanding into new markets, and TYSABRI continues to add new patients requiring higher efficacy. Additionally, our hemophilia products are being adopted by an increasing number of patients, and we are working toward the anticipated launches of our first two biosimilar candidates in Europe next year.”

Precious Metals Outlook: Complete Capitulation is Now Occurring in Precious Metals Stocks

July 21st, 2015

Record short selling of gold/silver futures contracts on the COMEX

In our experience very emotional periods of extreme capitulation are often relatively brief (7-10 days) and typically mark the bottoming phase of a long term decline. It is very difficult to maintain any precious metal holdings in such an environment but you may want to spend a few moments digesting the facts below as they clearly explain the short term nature of selloffs generated by shorting excessive amounts of highly leveraged futures contracts.
We suspect the lows may occur prior to the close of next Tuesday (7/21) as short sellers of highly leveraged gold/silver futures contracts are unlikely to carry the risk of showing excessively higher levels of outstanding contracts for the week ending July 21, which will be released on Friday July 24th.
….”The bottom line is American futures speculators’ gold and silver shorts just surged to record levels.  It was almost exclusively this marginal supply that recently forced the precious metals down near major secular lows.  But borrowed futures are temporary artificial supply that must soon reverse into guaranteed proportional buying as they are covered.  Thus excessive shorting is an exceedingly-bullish omen”.
 
…..”Even in recent years with gold and silver facing howling headwinds from the Fed-distorted stock and currency markets, the futures-short-covering episodes fueled large double-digit gains unfolding over a few months or less.  And given today’s record levels of shorts, the next short-covering frenzy is likely to drive considerably-larger rallies.  They will greatly improve sentiment, getting even investors interested again.”
 
…. “Radically-greater upside exists in the beaten-down gold and silver miners!  Just this week, their leading index slumped to an astounding 12.1-year low.  The last time gold and silver stocks were trading at these dismal price levels, gold and silver were trading near $350 and $5!  These miners are truly priced at fundamentally-absurd levels today with gold and silver 3.3x and 3.0x higher.  They will greatly leverage the metals’ gains.”

Stock Market Strategy: MKM Reports Positive Infinera Checks Ahead of Earnings

July 21st, 2015

Infinera Reports Earning on July 22nd After Market Close

Eric Jhonsa, SA News Editor
  • MKM’s Michael Genovese, ahead of Infinera’s (NASDAQ:INFN) July 22 Q2 report: “According to our checks, 2Q15 was a good quarter overall for new [optical network] footprint builds in Europe and in the U.S. wholesale market. Additionally, there was strong capacity demand from CenturyLink and from Infinera’s top Web 2.0 and Cable MSO customers.”
  • He also estimates Infinera’s Cloud Xpress metro point-to-point interconnect solution (only recently began shipping) saw Q2 revenue of $10M-$12M, thus yielding 1H15 sales of ~$15M. On its Q1 CC (transcript), Infinera reported having seven invoice customers for Cloud Xpress, and talked up the long-term potential of the data center interconnect market, which is benefiting from cloud traffic growth. “It’s a relatively young market today, few hindered million dollars and it’s forecasted to grow to a few billion dollars over the next several years.”
  • Both Genovese and Jefferies’ George Notter see Infinera topping its $200M Q2 revenue guidance midpoint – consensus is already at $201.4M. Notter adds he likes how Infinera’s bid for Swedish optical transport hardware vendor Trasmode (provided it succeeds) expands its metro product line, and thinks the company could roll out a 1.2Tbps photonic integrated circuit (PIC) in October. Infinera’s most powerful PIC currently tops out at 500Gbps.

 

Precious Metals Outlook: Implications of Shanghai Gold Exchanges and Gold Withdrawals

April 16th, 2015
SGE,SGEI,China,India

Earlier this month India’s largest manufacturer of jewelry, Rajesh Exports, announced that it is taking an unusual step to secure a long term gold supply for its operations. The company has hired investment bankers to identify assets that could “ensure a reliable and permanent gold supply-line to our company”.  It may spend up to $700 million to acquire “equity or loan” interests in gold mining projects.

Why does the largest jewelry manufacturer in India feel it necessary to acquire direct interests in gold mines to insure a long term gold supply for its operations?  What does the management see occurring in the industry that may possibly threaten its long term ability to continue as a going concern?  We do not know the answers but we have done sufficient work on the industry to venture a pretty good guess. First, please examine the chart below

KWN Leeb III 4:1:2015

The weekly withdrawals of gold from the Shanghai Gold Exchange (SGE) vaults represents gold directly imported into the Chinese domestic economy. The Peoples Bank Of China (central bank) does not use the SGE to acquire gold. Since 2009 China’s domestic imports have steadily grown and have now reached about 70% of the world’s annual gold production. According to the SGE’s records only 5000 people and 8000 institutions withdrew gold from its vaults which accounted for 100% of gold imported last year.

Let’s pause for a moment and reason why Rajest Exports may fear its ability to acquire an adequate supply of gold in the future.  If only 5000 people and 8000 institutions in China can absorb 70% of the world’s annual gold production what would happen in a few years if these numbers increased by 20%, 30% or more? It’s easy to conclude that over the next few years India’s entire gold jewelry demand (the world’s largest)  may be manufactured in China, not India. The same dynamics can be applied to all manufacturers around the world who use gold as a raw material.  Rajest Exports may be the first user to see the hand writing on the wall but it will certainly not be the last, in our opinion. We believe many other global gold users will soon move to directly secure long term gold supply.  Because the availability of politically secure gold in the ground is relatively limited we would not be surprised to witness an acquisition buying panic in Canada this year. For this reason we have positioned the lion’s share of Fortunes Favor Precious Metals’ (FFPM) portfolio in the shares of the highest grade Canadian gold producers with substantial reserves and exploration potential.

Two very important events have occurred in the last six months. First, the Shanghai Gold Exchange International (SGEI) became operational last September and represents China’s end game to gain control of global (physical) gold prices and accelerate the internationalization of her currency, the renminbi.  Trading volume on the SGEI has steadily grown and now exceeds trading volume on the domestic only SGE.  It is important to note that both exchanges trade physical gold only and require physical settlement. We believe that the combination of the SGE and the SGEI will ultimately become the dominant center for setting global gold prices and render the fraudulent paper gold prices (where physical settlement is not required) on the New York Commodity Exchange (COMEX) irrelevant. We have provided two links below to help you understand the SGE, SGEI and China’s ambitions for the gold market.

The second event occurred on March 20th. On that date the time honored twice daily London gold fix as determined collusively by six bullion banks was terminated. A fully regulated electronic exchange with a growing list of global participants has now taken its place. Without exclusive gold demand/supply information we believe this change may sharply reduce if not completely eliminate the six bullion banks’ ability to easily profit from and manipulate the gold market. Over the long term we believe gold trading in London may evolve into an arbitrage satellite destination for participants on the SGEI.

The implications of the above revelations suggest the relentless bear market of the last 3+ years for precious metals may be coming to a close and perseverance will be rewarded.

Stock Market Strategy: QSEP Rules of Engagement – The 75% vs. 25% Reality

April 10th, 2015

QSEP Art of War – Principles For Successful Investing

Markets trend 75% of the time and chop 25% so while chop is the order of the day patience and discipline are the most important tools.

Q1 2015 has come to a close and our QSEP  platform led us to keep a significant portion of our portfolio in cash during the 1st three months of the year as the markets searched for direction.  January saw the S&P500 index drop about 3.5% 3 times during the month and whatever rally occurred during February the markets reversed in March. This market behavior is the very definition of “Chop”.

Our QSEP strategy is designed to outperform during market trends either up or down and maintain stability during market chop. Could we calibrate our platform to show profits during chop instead of carrying large cash positions? Yes without a doubt, but our research shows that this is a fools errand long term. Markets trend about 75% of the time and chop 25% so a system designed to generate “chop” gains will woefully underperform during the majority of market action.

Protection from severe volatility and extreme points of draw would be considered key components of our Alpha generation. Market behavior during these periods of chop can erode confidence in a system and create doubt. This doubt can fester and if it causes one to alter ones’ system then the battle is lost and with it the war.

A golf analogy seems appropriate as I type this on Friday of Masters weekend. An investor must play within his game. You can’t force things to happen in a portfolio during times of market wandering. There are times to press for an eagle or birdie and other times shot selection for a par result is the wisest choice. While markets chop a par is what our QSEP platform is looking for as we gear up to attack the correct setup on the next tee box.

Have a good weekend and enjoy the golf!

Stocks to Watch: Twitter Analysts Worried About Valuation Missing the Big Picture…And Big Stock

March 25th, 2015

Integration With Google Sets Up Twitter For A Strong 2015

(Courtesy of Seeking Alpha)

Summary

  • Twitter-Google collaboration can serve as a catalyst to both increase user base growth and further increase monetization.
  • Strong Q4 results have restored trust in management, easing future sell-offs following potential disappointments.
  • Increased efficiency in monetization provides a cushion if user growth slows, decreasing downside risk.

Two key questions must be answered about Twitter (NYSE:TWTR) in order to properly value it. What is the eventual scope of the company’s influence? In Twitter’s case, analysts focus on MAUs or timeline views. Second, how and to what degree can this influence be monetized? Twitter’s collaboration with Google (NASDAQ:GOOG) (NASDAQ:GOOGL), to be unveiled over the summer, has the potential to both expand the scope of Twitter and increase the ability to monetize its influence.

For investors, it is important to highlight potential catalysts that will lead to the market realizing a company’s true potential. In Twitter’s case, all the good news from the recent annual report should already be accounted for in the stock price. Obvious potential catalysts are future earnings announcements and conference calls that will serve to highlight the company’s value. Other than the standard announcements, the key catalyst for the near term is the expected rollout of Twitter’s now signed collaborative deal with Google about which much has been speculated regarding the nature of the deal and how the integration will work. No matter the nature of the deal, it should have two impacts.

First, the deal will increase Twitter’s exposure to the non-user population. This may result in an increased user base or simply increased viewing of tweets. Users searching for information, which Twitter can provide well, initiate over a trillion Google searches every year. Specifically, Twitter canbetter provide real-time news than most results on Google searches. Often 140 characters, or a group of several tweets containing 140 characters, is enough to give the user the information for which they are searching. Google is hesitant to reveal exactly how many searches are done on its website, only stating the current figure is more than the 1.2 trillion searches in 2012. Exactly how much more is anyone’s guess. The number of Google searches had been growing, but growing at a slower and slower rate through 2012. The more important point is 1.2 trillion-plus searches every year will display several tweets. Compare that with 692.5 billion timeline views Twitter’s 2014 10-K. Non-users in particular will see an unprecedented number of tweets. Even if it’s a few tweets displayed per search instead of an endless list of Tweets a user follows, the uptick in the amount of times tweets are viewed is significant, especially promoted ones potentially displayed on Google searches.

In an ideal scenario, the public will see Twitter’s superior function as a newsfeed for instant updates on the latest events and create an account with the social network. The deal with Google can only serve to expand the user base and improve engagement with both users and non-users. Expanding influence has the potential to serve as a catalyst at a time when investors have been somewhat complacent with less than expected MAU growth, provided monetization stays on track.

Second, the integration should substantially increase Twitter’s advertising revenue. Limited tweets viewed on Google searches about certain results present a new and highly competitive advertising medium for firms. Promoted tweets on Google searches, especially those advertising daily or weekly specials for firms relating to the search, have the potential to be highly profitable. Take for example a common search for “pizza” or restaurant.” Users around the world searched the terms millions, probably billions of times every year. How much is it worth to national pizza chains like Domino’s or local restaurants to have their tweets, possibly advertising nightly or weekly specials, exclusively pop up on related Google searches? It’s worth a lot.

This is the most targeted advertising possible for companies, because they already know exactly what the user needs,. That’s the purpose of Google. Granted, Google does offer advertising on the tops and sides of the results, but tweets from companies promoting deals don’t feel the same way advertisements do, especially on mobile platforms. They are in a format familiar to many users, and if used properly, advertisements feel just like another user on Twitter communicating with the user. Many brands have been able to successfully promote themselves on Twitter without necessarilypaying directly for advertising, but this could change with the limited amount of tweets displayed on the integrated Google search page. Given the high demand for prime content space, the deal offers substantial upside to the already steadily increasing profitability of Twitter.

All this speculation and prediction about the deal begs the question, how do we know this integration with Google will be a raving success? The fact of the matter is that we won’t know until we see it. However, because of the strength of their recent earnings report, that does not matter very much. Integrating with Google is not what makes Twitter valuable. It is simply potentially valuable icing on the cake.

Twitter missed substantially on Q4 user growth, an event that has caused selloffs and second-guessing in the past. The lack of negative reaction to the miss on expected MAUs in Twitter’s latest earnings report (288 million MAUs vs. about 292 million expected) is telling. Granted, this must be taken with a grain of salt, as perhaps investors are crediting this miss to certain bug issues with the roll out of iOS 8, as Twitter management suggested. However, the most important takeaway is the lack of downside risk for investors based on slowing MAU growth, at least as long as investors trust management to explain it away. If user growth increases faster than expected (e.g. many Google users see the value of Twitter and create an account), it should give TWTR a large boost. If user growth continues to grow slowly for a quarter or two, the stock price will not overreact as long as management can come up with an explanation.

Investors are finally cutting management some slack because of the large uptick in profitability. Twitter’s large increase in monetization drove the stock up to its $48.01 end of week close after the Q4 earnings announcement, after barely touching $40 the week before. Revenues up 111% year-over-year encouraged bullish investors. More important than general revenues were operating revenues from advertising and data licensing were up 111% and 109% from FY2013, respectively. Twitter is generating advertising revenue more and more efficiently as they find better ways to target ads effectively, evidenced by increasing advertising revenue per 1,000 timeline views.

Although the annual growth rate from total advertising revenue slowed modestly, down from 121% growth in 2013, data licensing revenue growth rate more than doubled, up from 48% in 2013. This is partially attributed to a full year worth of revenue. Nevertheless, the value of data licensing should only increase as Twitter users generate more and more data every day and as data scientists devise more useful methods to extract information from this increasing amount of data.

These increasing revenues put Twitter well on its way to earning a GAAP fiscal year profit. Adjusted EPS beat estimates, coming in at $0.12. One important thing to note about profitability and related company structure is the alignment of employee compensation to increasing shareholder value. Stock-based employee compensation was $631.6 million in 2014. In a young, developing company like TWTR, aligning the interests of employees (in addition to management) serves to remind the company’s employees of their fiduciary obligation. Although this can drag down TWTR’s income, investors should view alignment of interests as a beneficial component of company structure in the long run.

Between newly found trust in management and the rapidly-increasing advertising and data licensing revenues, there’s a soft cushion to absorb the blow if the Google integration were to disappoint. The bottom line is that Twitter’s deal with Google is no longer something necessary to save a company not living up to expectations but a chance for Twitter to drastically expand its scope and profitability. At the beginning of 2015, some even cited the potential of Google acquiring Twitter as a reason to be bullish on an otherwise underperforming stock with substantial questions about management. The most recent earnings report has laid these questions to rest, at least for now. The Q4 increase in profitability creates a more stable track record that offers investors a large cushion against stagnating user growth, future issues with profitability and even a disappointment on Twitter’s collaboration with Google when it’s released. At this point, TWTR offers limited downside with great potential to significantly outperform the market during 2015.

 

Stock Market Strategy: IEA Report Suggests Oil Weakness Far From Over

March 13th, 2015

Oil Head Fake: Late Jan. Early Fed Rally Not Sustainable

Highlights (13 March 2015)

  • Crude oil prices stabilised following early-February gains, with ICE Brent rising more than NYMEX WTI which was weighed down by swelling US stockpiles. At the time of writing, Brent was trading at around $58/bbl – up nearly 30% from a six-year low in January. WTI was at around $48/bbl.
  • Having bottomed-out in 2Q14, global oil demand growth has since steadily risen, with year-on-year gains estimated at around 0.9 mb/d for 4Q14 and 1.0 mb/d for 1Q15. The forecast of demand growth for 2015 as a whole has been raised by 75 kb/d to 1.0 mb/d, bringing global demand to an average 93.5 mb/d.
  • Global supply rose by 1.3 mb/d year-on-year to an estimated 94 mb/d in February, led by a 1.4 mb/d gain in non-OPEC. Declines in the US rig count have yet to dent North American output growth. Final December and preliminary 1Q15 data show higher-than-expected US crude supply, raising the 2015 North American outlook.
  • OPEC crude output edged down by 90 kb/d in February to 30.22 mb/d, as losses in Libya and Iraq offset higher supply from Saudi Arabia, Iran and Angola. A slightly higher demand forecast has raised the 2H15 ‘call’ on OPEC crude to 30.3 mb/d, above the group’s official 30 mb/d target.
  • Global crude refinery throughputs estimates have been raised to 77.8 mb/d for 1Q15 and 77.3 mb/d for 2Q15, on sustained high margins and a slightly more robust oil demand outlook. Annual gains are forecast around 1.0 mb/d in 1H15, down from a sharp 2.2 mb/d in 4Q14, and in line with projected oil product demand growth.
  • OECD commercial stocks rose by a weaker-than-average 23.1 mb in January, to 2 733 mb, trimming their surplus to average levels to 60.3 mb. US crude stocks rose to a record 72 mb surplus. Preliminary data show stocks drew by a weak 8.8 mb in February as extended US crude builds offset steep weather-related product draws.

Head fake

The partial rebound in oil prices that occurred in late January and early February seems to have marked a pause. Prices have since become range-bound, with Brent futures trading around $60/bbl and WTI closer to $50/bbl, and at the time of writing slightly below those levels. On the face of it, the oil price appears to be stabilising. What a precarious balance it is, however.

Behind the façade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly. Steep drops in the US rig count have been a key driver of the price rebound. Yet US supply so far shows precious little sign of slowing down. Quite to the contrary, it continues to defy expectations. Output estimates for 4Q14 North American supply have been revised upwards by a steep 300 kb/d. The projection of 1Q15 supply has also been raised. Plunging US crude throughputs – due to seasonal and unplanned refinery outages, as well as weak margins and high gasoline stock builds in December – have seen US crude inventories soar, compounding the impact of robust supply growth. At last count, total US crude stocks stood at 468 mb, an all-time record.

The unwinding of seasonal refinery maintenance may slow US crude stock builds in 2Q15 but will not stop them, and stocks may soon test storage capacity limits. That would inevitably lead to renewed price weakness, which in turn could trigger the supply cuts that have so far remained elusive. While the US supply response to lower prices might take longer to kick in than expected, it might also prove more abrupt.

At the same time, supply disruption risks are on the rise. Producer countries that depend on high oil prices and that do not enjoy large buffers will find it hard to balance their budget and fund social spending programs at current prices. That is not a recipe for social stability. The surging dollar will also make it harder for companies such as cash-strapped Petrobras to pay back dollar debt and overcome financial hurdles. Iraq and Libya continue to experience disruptions amid MENA political turmoil.

Product markets, meanwhile, have proved unexpectedly strong. Not only have product prices lagged those of crude during the selloff – as is common in a downturn — but they have raced ahead of them in the rebound, keeping refining margins remarkably firm, and supporting unexpectedly strong throughputs in once-depressed refining centres such as Europe and OECD Asia. Product demand has shown signs of life, with even European demand emerging from a secular decline to show strong growth of 3.2% in December and 0.9% in January. That demand strength has widened the deficit of OECD product inventories to their seasonal average, a trend largely obscured by surging US crude stocks.

Whether such strength in product demand and refining activity can be sustained is unclear. Both have benefited from one-off factors. Frigid weather in North America has raised heating demand, drawing distillates from across the Atlantic. Refinery outages in North and South America have also helped support margins elsewhere and fuelled long-haul product trade. Distillate cargoes were booked from as far off as Saudi Arabia and the UAE to make up for outages in Brazil and the US East Coast.

Demand may also have been supported by opportunistic buying and growing interest in storage plays. While that would have helped tighten product markets, such demand is less sustainable than that driven by underlying economic growth, and there are still few firm signs at this stage that lower prices are giving the economy a real boost. China, for one, remains in cooling mode. Then again, information about demand lags supply and tends to be sketchier, so it may take time for any pickup in demand to be fully captured in the data. As to refining margins, the ramp up of activity at new Middle East refineries, coinciding with a seasonal downturn in global demand, might soon depress them.

Facing exceptional uncertainty, many market participants remain on the fence. But market forces are not sitting still.

Stock Market Strategy: Twitter Ad Dollars Rolling In

March 12th, 2015

TWTR Twitter: ‘Big pick up’ in ad dollars going to TWTR this quarter; Buy — Axiom Capital (46.27 )

 

Axiom Capital remains at Buy on TWTR shares, noting their checks with co’s marketing partner, Ampush, firm learned that they are seeing a “big pick-up” in advertising dollars going to co in 1Q15. They were unwilling to quantify the level of that “pick-up” but assured us that it was a meaningful increase from what they have seen in the past. Co is now becoming a must-buy for advertisers and Ampush sees potential for ad growth to accelerate on Twitter this year.

See Weekly chart below for a classic example of a weekly pennant pattern. Should the stock break the down trend thing could get interesting.

TWTR Weekly 3/12/15