It’s certainly been a tough year for Chinese tech stocks. Even the mega-operators have come under lots of selling pressure, such as Alibaba (NYSE:BABA), JD.com (NASDAQ:JD) and Tencent (OTCMKTS:TCEHY).
But this week, the sentiment has improved. A key is that the US and China have agreed to resume negotiations on trade.
Granted, it is far from clear how things will turn out. Let’s face it, trade is extremely complicated.
Yet, the drop in Chinese stocks does look like an opportunity, especially for those investors with a long-term approach. For example, take a look at 58.com (NYSE:WUBA). The company operates the largest online marketplace for local merchants and consumers in China, in terms of MAUs (Monthly Active Users). It is often referred to as the “Craigslist of China.”
As for the company’s fundamentals, they continue to be particularly robust. On the heels of the latest earnings report, WUBA stock spiked 11% to $65.22 million. Then again, the company beat on the top line (about $46 million higher than the consensus) and earnings. There was also strong Q3 guidance.
Some of the key drivers — which have been key for WUBA stock — include the following efforts:
- Ganji Acquisition: Even though this deal was struck several years ago, WUBA continues to see benefits. They not only include improvements in marketshare but also cost synergies.
- App Traffic: WUBA is ranked as the second fastest in terms of app growth in China.
- Tools: The company is seeing improved engagement. Keep in mind that it has been adding tools like 3D imaging and live streaming. There have also been heavier investments in content. They have involved a combination of editorial teams, UGC (user-generated content) and AI (artificial intelligence).
- Marketing: WUBA recently launched its branding campaign for Zhuan Zhuan, which is a marketplace for second hand goods. The focus is on rural areas.
WUBA Stock and the Opportunity
The subscription business has increased by a multiple of 10 over the past five years. Currently, the base is at 12.9 million.
But this is only a small part of the opportunity. According to CEO Jinbo Yao on the earnings call, there are “still tens of millions of SMEs in China.” In other words, there is a long runway for growth.
More importantly, once a platform becomes a leader, it is extremely though to disrupt. This is because of the inherent network effects — that is, the more users there are, the more valuable the service becomes. WUBA has also been focused on investing in AI and Big Data to help increase engagement and conversions.
No doubt, Craigslist is an example of the lasting power of local marketplaces. Even though the platform has been around since 1995, it is still top-of-mind when it comes to digital classifieds.
Bottom Line on WUBA Stock
As the platform gets larger, WUBA has been getting economies of scale. On a year-over-year basis, the head count for sales and marketing actually declined by 4%. This bodes well for profit margins.
What’s more, the valuation on WUBA stock is reasonable, with the forward price-to-earnings ratio sitting at 20. So, for investors, looking for a play on the digital opportunities in China — where there are barriers to entry — then this company definitely remains attractive.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.