Profit Leaps At 58.com, Loss Soars At Qunar

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 |  About: Qunar Cayman Islands Limited (QUNR), WUBA, Includes: BIDU, CTRP, TOUR
by: Doug Young

A look at the latest earnings from online travel agent Qunar (NASDAQ:QUNR) and online classified ad site 58.com (NYSE:WUBA) made me feel like I was living in a parallel universe where everything was the opposite of what it should be. Qunar, China's second largest online travel agent backed by leading search engine Baidu (NASDAQ:BIDU), saw its loss soar 10-fold as its costs grew far faster than revenue. And yet investors welcomed the results, bidding up the company's stock by 6 percent. Conversely, the profitable 58.com saw its earnings more than double, and yet its stock tanked nearly 8 percent on the report.

Of course everyone knows that this kind of share movement is all about how the results compared with expectation, and company outlook is also often more important than results for the past quarter. In Qunar's case, investors seem to like the company's aggressive spending on its mobile business, even as it forecast a sharp drop in revenue growth in the current quarter. 58.com's results weren't bad, but perhaps investors were expecting more from a company whose shares now trade at nearly triple the level from their IPO last November.

Let's begin with Qunar, which was one of the first companies to list in the recent wave of IPOs by Chinese Internet companies and whose shares now trade about double their offering price. The company's revenue rose a healthy 127 percent, and the figure for its mobile business grew 6-fold, accounting for more than a third of the total.

But Qunar's costs also grew sharply, with product development and sales and marketing costs tripling. Those big jumps reflect the ultra competitive nature of the market, where Qunar competes with industry leader Ctrip (NASDAQ:CTRP), as well as newer players Tuniu (NASDAQ:TOUR) and Tongcheng. As a result, Qunar's quarterly loss soared 10-fold to $68 million. The company's third-quarter forecast didn't look that exciting to me, with revenue growth slowing sharply to around 93 percent.

I always thought Qunar made a mistake by listing so soon at this point in its development, and I still hold that view. Perhaps investors like the company's growth story and aggressive spending, but at some point someone is going to sit back and ask "Where are the profits?" When that happens, look for the company's shares to sink back to their IPO price, perhaps within the next year.

Next let's look at 58.com, sometimes called the Craigslist of China, which I like much more than Qunar because it's the leader in its space and has far fewer competitors of similar scale. That industry-leading position is probably responsible for the company's strong share price performance since its IPO, based on the fact that it's solidly profitable.

58.com's results are fairly straightforward, with revenue rising 84 percent and profit up by an even stronger 126 percent. The company achieved the strong profit growth by controlling costs, which were up by a modest 58 percent. Like Qunar, 58.com also predicted a slowdown in the current quarter, with revenue expected to rise by about 61 percent.

So what's next for these 2 companies, both in terms of actual performance and share price? As I've said above, I do think that Qunar's stock could be due for a relatively big correction in the months ahead unless it comes out with a road map to profitability within the next year or two, which seems unlikely. 58.com's stock looks a little pricey even after the latest sell-off, trading at a price-to-earnings ratio of more than 100 based on this year's profits. Unless it can boost its growth a bit more to justify that lofty valuation, which again seems unlikely, we could also see its shares come down a bit, possibly losing a third of their value over the next year.

Bottom line: Qunar's widening losses and 58.com's slowing growth could both put pressure on their stocks, which are due for a correction over the next year.

Disclosure: None.