STOCKS: Ads, Acquisitions Lift 58.com Back to Profits

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Bottom line: 58.com’s stock could be set for some upside in the second half of the year, as it returns to profitability after a well-executed acquisition spree that has sharply boosted its revenue growth.

58.com feasts on ads, acquisitions

Classified ads may not sound like the sexiest area of the Internet, but they’ve provided some strong growth for the acquisitive 58.com (NYSE: WUBA), which is fast emerging as a leader in the space and is often called the Craigslist of China. The company’s aggressive acquisition campaign has led to explosive revenue growth, but has also pushed the company into the loss column as it digests its many recent purchases.

That could present a good buying opportunity for investors with a longer term perspective, as 58.com looks set to return to the profit column and continue its strong revenue growth. If all goes according to plan, 58.com could end next year as China’s undisputed leader in the online advertising services realm. The company is already squarely ahead of the older 51job.com (Nasdaq: JOBS) and is on track to surpass current leader Zhaopin (Nasdaq: ZPIN), which both focus on online job recruiting.

Despite their big potential, online classified ads is one area of the Internet that hasn’t attracted much attention from China’s “big 3” names of Tencent (HKEx: 700), Alibaba (NYSE: BABA) and Baidu (NYSE: BIDU). The so-called BAT trio have been on a major acquisition binge over the last 3 years, spending billions of dollars on everything from entertainment to mapping services and e-commerce.

But the threesome have largely avoided online classified ads for some reason, even though such services would complement many of their other existing services. It’s a bit unclear why this is the case, and part of the reason could be unwillingness by owners of these companies to sell. I do suspect it’s just a matter of time before the BAT discover this group, and when that happens 58.com could become one of the most attractive targets.

All that said, let’s look more closely at some of the recent highlights from 58.com, and why it’s become a top pick in this series on my favorite Chinese stocks. The company made its New York IPO in late 2013, at the very beginning of a flood of similar offerings that culminated with Alibaba’s record-breaking $25 billion IPO in September 2014.

Shares Soar, Then Fall

Since then its shares have done quite well, rising more than 4-fold from their $17 IPO price at their height last year. They’ve given some of that back more recently, as the company fell into the loss column under the weight of its money-losing acquisitions. At its current levels the stock still trades at more than 3 times its IPO price, and it does seem like there’s some potential upside if it can return to profitability.

58.com’s acquisition spree dates back over the last couple of years, and culminated with its purchase last year of similar-sized rival Ganji. Other major purchases along the way included real estate listings site Anjuke, and online jobs site ChinaHR. Most of the companies it bought were private, and thus none of their finances were public. But many were probably losing money at the time, sometimes big money.

Those purchases helped 58.com’s revenue to more than triple in its latest reporting quarter, but they also pushed the company to a $3.6 million net loss. The company’s management has proven adept at solving many of the problems that have come with its acquisitions, including a high-profile move that saw Ganji’s former chief finally leave the company last year in a compromise deal that put him in charge of a 58.com-backed used car site called Guazi. (previous post)

With many of its biggest problems quickly fading into the past, 58.com is expected to return to profitability in the second half of this year, and analysts are forecasting a full-year profit of $1.30 per share for 2017. That would give the company a fairly high valuation of about 45 based on its current stock price, which is about twice the current multiples for 51jobs and Zhaopin.

But whereas its rivals are largely growing organically at much slower rates, 58.com is expected to post revenue growth of 40 percent or higher over the next couple of years as it integrates its recent acquisitions. If it can execute well on that plan and continue with some smaller strategic purchases, it could easily keep up the strong growth for the next 3 years, and become one of China’s most valuable Internet companies and an attractive acquisition target.

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