Overvalued, Third-Tier Social Network Quepasa Should Be Avoided or Sold Short

Feb.28.11 | About: MeetMe, Inc. (MEET)

The Quepasa corporation (QPSA.OB) runs Quepasa.com, a social-networking site aimed at Latinos that's available in English, Spanish, and Portuguese. Shares have soared in the past year as the company has successfully leveraged the enthusiasm driven by its status as the only pure-play publicly-traded social network. While there are numerous other social networks, they are either privately-held or are subsidiares. The publicly-owned include Myspace, which is a subsidiary of News Corporation (NASDAQ:NWS) and Orkut.com, which is owned by Google (NASDAQ:GOOG).

However, while there is obvious appeal of being the only pure-play social network, traders have gotten overly-excited and shares of Quepasa have soared beyond any reasonable valuation.

Two main problems will plague investors who buy Quepasa now. Quepasa is not the leading social network even within its target demographic of Latinos. Also, Quepasa has a miniscule revenue stream, and much of this revenue is derived from questionable low-quality streams from related parties with conflicts of interest.

The big problem for Quepasa is the eyeballs, or rather, the lack of them. While Quepasa's audience has been growing rapidly in recent years, its user base and traffic are still on a much lower level than many other competiting social networks.

I've assembled a table containing the Alexa website traffic ranks (data is current as of Feb. 26) for numerous social-networking sites that are popular within the Latino community. The table is sorted in descending order by the number of Spanish and Portuguese speakers in a country. The table should give you an idea of how each site is doing in important Latino markets. If a site did not get a rank in the "regional traffic" ranking from Alexa, I put a (*) in the table.

Quepasa

Facebook

Myspace

Hi5

Badoo

Sonico

Orkut

Worldwide

1487

2

62

207

130

1079

108

Brazil

397

8

155

1123

37

229

13

Mexico

74

1

60

38

46

134

*

Colombia

372

1

88

119

28

97

*

United States

7669

2

36

1542

2251

7316

1435

Argentina

469

1

134

381

28

133

*

Spain

1315

2

86

478

37

610

*

Peru

239

2

*

11

69

51

*

Venezuela

476

1

*

215

33

68

*

Chile

539

1

*

*

42

277

*

Angola

51

*

*

14

*

31

*

Click to enlarge

Quepasa has the least traffic worldwide of the seven competitors I gathered data for. Furthermore, Quepasa lags the field badly in the largest of important Latino markets. In fact, Quepasa is sixth out of the seven sites in Brazil, fifth in Mexico, sixth in Colombia and dead last in the United States. Quepasa is not a leading social network even among the most coveted Latino markets. The only bright spot in this data for Quepasa is Angola, and that country is not exactly a high-profile advertising market.

Quepasa is less popular than Sonico.com, which is the largest Latino-specific social network. Quepasa trails Sonico in each of the top 10 Latino markets except Mexico, where it has a small lead. Quepasa also lags far behind all the other sites except Sonico in user base, and Quepasa's already-small user base is deceptive; Quepasa seems to count all registered users in their user count, whereas other competitors generally only count recently active users in their userbase.

Quepasa

Facebook

Myspace

Hi5

Badoo

Sonico

Orkut

# of users(millions)

29

600

37

46

100

20

100

Click to enlarge


This discrepency is shown by the number of unique visits Quepasa generates. As the Motley Fool reported, in December 2010, Quepasa's 27.2 million users created only 16.4 million unique visits. Either the Quepasa user base is overinflated or Quepasa is the least-sticky social networking website in recent history.

So Quepasa is clearly not a leading social-networking site. In fact, its not among the top five social networks in most Latin-majority countries. Quepasa can't even claim to be the largest pure-play Latino social network as Sonico.com owns that title.

A shortage of traffic isn't Quepasa's only problem though. Revenues are also in short supply. Quepasa generated just over $6 million in revenues for the full-year 2010. To add to that problem, Quepasa's $6 million in revenue is among the lowest-quality revenue I've ever seen. This note from the company's latest 10-K should set off alarm bells:

$800,000 of DSM revenue for the year ended December 31, 2010 was received from MATT Inc., the Company’s largest shareholder, on behalf of the Municipalities of Acapulco, Cozumel and Ixtapa in Mexico, without commission or fees. $3.7 million of DSM revenue and $1.2 million of Website Development revenue for the year ended December 31, 2010 was received from AHMSA, which owns MATT, Inc.

It appears that more than 90% ($5.7 million) of Quepasa's 2010 revenue was garnered from related parties. And as of December 31, 2010, the $1.2 million in revenue for Website Development from AHMSA remained outstanding as an account receivable. While it is nice that Quepasa's revenue grew sharply in 2010 versus 2009, it is worrying that virtually the entire revenue base came from related parties and that one of the related parties, AHMSA, appears to be slow-paying its bills to Quepasa.

The concerns regarding related-party transactions don't stop there. Quepasa's recent 8-K related to its purchase of a Brazilian social games maker is also alarming:

On February 8, 2011, Quepasa Corporation (the "Company") appointed Lars Batista as a director of the Company. Mr. Batista is a large shareholder of XtFt Games S/S Ltda, a Brazilian company that the Company has signed an agreement to acquire in exchange for shares of the Company's common stock. A corporation controlled by Mr. Batista's brother will receive a $300,000 brokerage fee in connection with the acquisition.

Despite all these problems, to be fair, there is one key bullish argument to consider. Traffic had been growing quickly at Quepasa. As SA contributor Mark Gomes noted, if Quepasa kept growing at the same rate as it was in 2009-10, it would be a top-400 site worldwide by the end of 2011. While Quepasa may be overvalued now, if traffic growth kept surging, the valuation could be justified. However, traffic growth has stopped entirely at Quepasa for at least the past three months as this graphic shows:


Quepasa in no way deserves its current $155 million market cap. It has been making a steady stream of losses. Its revenue is not in the same league as that of larger social networks, and Quepasa's shares sell at a jaw-dropping Price/Sales ratio of 25. Once you discount the fishy related-party revenue, things look even worse. Add to all this that Quepasa is not the leading social network even in Latino-dominant countries, and that formerly rapid traffic growth has stopped, and it's clear that Quepasa shares should be avoided or sold short.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.