NEW YORK (TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.
Among the posts this past week were entries about Twitter's fourth-quarter results and the upside and downside for U.S. bonds.
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Not So Tweet
Under normal conditions, the report would have been an excellent one. The problem is that because of the stock's extraordinary run-up after the initial public offering, Twitter set a high standard that could not be met in this release. (Note: In "How Tweet It Is," I outlined why I liked the IPO and why I would have been a buyer in the low-$30s.)
Twitter's fourth-quarter revenue expanded by 116%, to $243 million. As with most advertising-based companies, Twitter's fourth quarter is seasonally strong -- and the company was content regarding Black Friday and Cyber Monday volumes -- so results cannot be annualized.
Twitter reported $45 million of non-GAAP adjusted earnings before interest, taxes, depreciation and amortization. On an incremental basis, it converted 22% of revenue to EBITDA in the quarter, but only 17% for the year. Still, conversion is moving in the right direction, and that is essential for highly valued Internet stocks.
Twitter's average share float came in at 363 million. Using the after-hours price, Twitter has an equity value of $21 billion, net of cash of $2.2 billion and an enterprise value of $18.8 billion. Trailing EBITDA is $75 million, up from $21 million last year. This represents nearly a 250x multiple on 12-month trailing EBITDA.
Twitter's business, as I previously have referenced, has attractive characteristics:
1. Most users are foreign, and monetization overseas is quite low as compared to that for domestic users. This suggests a huge opportunity.
2. Twitter is capital-intensive and uses leases to hide this. Capital expenditures in 2014 are expected to come in above $300 million -- far in excess of EBITDA -- but this is not a problem, given the company's cash hoard.
3. Twitter's incremental advertising revenue should exceed $400 million for all of 2014, and at least $100 million of this should flow to EBITDA.
4. Twitter uses a lot of stock-based compensation. Over $500 million went through in 2013, and more than $400 million should be charged in 2014. At least some of the 2,700 employees will do very well if the stock is strong from here.
But despite the above, and despite the $14 share drop to $51, I cannot rationalize owning Twitter at the current price. (I previously sold my position in Twitter in the high $40s.)
I continue to love Twitter under $40, and I would buy at those levels.
At the time of original publication, Kass had no positions in the investments mentioned.
The Trade of the Decade: Short U.S. Bonds
Even using my lower 2014 real GDP estimate of only about 2%, bonds appear to be a great short after the yield on the 10-year U.S. note has dropped by 40 basis points over the first five weeks of the year.
I have previously outlined my short bond investment thesis in a lecture at Northwestern's Kellogg School and at a Value Investing Congress presentation in Omaha about two years ago.
Since then, I have suggested that the increase in yields and drop in bond prices might be delayed by one or two years as the domestic economy only slowly recovers.
This has been the case.
In 2014 the yield on the 10-year U.S. note has fallen considerably -- something the consensus failed to project -- providing us (potentially) with a wonderful entry point.
At a 2.6% yield now, bonds are now a short, and I have considerably added to my ProShares UltraShort 20+ Year Treasury (TBT) long in the last 24 hours.
The rule of thumb is that the 10-year U.S. note should yield roughly the nominal rate of U.S. GDP growth (real growth plus inflation). With 2% real GDP growth (my estimate) and about 1.5% inflation, nominal growth should add up to about 3.5% this year, which is well above the current 10-year U.S. note yield of 2.6%.
If my economic forecast is too conservative (which is possible) and there is risk to the upside, the bond short should prove to be even more attractive as an investment short.
While in the initial stage of a rally in bond yields (and drop in bond prices), stocks will likely rally. As the yields rise further, stocks might face considerable competition from bonds.
For this reason and others, I prefer being short bonds over being long equities later this year.
I have characterized a bond short as the "trade of the decade" in the past.
We are now at an attractive entry point for the trade of the decade.
At the time of original publication, Kass was long TBT.