Over the past six months, shares of Quepasa (QPSA.OB) have been on a wild rollercoaster ride. After languishing in the $3 range last summer, the stock came to life, due in part to some bullish articles written by Seeking Alpha contributor Ian Cassel.
His bull case was simple. QPSA is the only publicly-traded social network, and therefore the only way to play the meteoric rise of Facebook. In addition, the company has been experiencing strong registered-user growth. Indeed, it seems feasible that QPSA’s registered-user base could triple from 7.7M at the end of 2009 to 24M by the end of 2010.
Whether or not the stock was prematurely pumped can be debated, but QPSA is a real company with real potential. I picked it as a good speculative stock back in November. My valuation statement was this:
Given the valuation metrics we've seen for Nasza Klasa and Tuenti, it's reasonable to assume that Quepasa should fetch at least $15 per user. That equates to $342M or $18 per diluted share, which again, is nearly triple its current price.
I didn't expect the stock to get so close (15+) in less than three months, but a number of factors contributed to the quick ramp-up (not the least of which were a frothy bull market and speculative excitement spurred by Facebook’s valuation). Regardless of the reason(s), shareholders certainly weren’t complaining.
Fast forward to February and you’ll see that the bears have taken control. Ian Bezek, another SeekingAlpha contributor, has done a good job of leading the charge with responsibly-written rebuttals like this:
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.
Bezek hits the nail on the head here. The key risk versus reward battle remains the same as it was back in November: Can QPSA convert its strong registered-user growth into continued traffic growth?
Based on the most recent traffic stats, the answer appears to be no. That being said, management is flush with a fresh inflow of funding …and a key objective is to improve site-usage. If successful, my original valuation thesis remains intact. Thus, investors need to weigh that upside potential against the lower valuation that will surely come if management’s strategy fails.
When the stock hovered in the mid-teens, the implied odds of success were too high. Similarly, at $2.50 per share (a valuation evoked in Bezek’s latest article, here), the stock would not reflect much, if any, odds of success.
Clearly, reality sits somewhere in between. Accordingly, QPSA’s share price should reflect that. Thus, if you believe QPSA has a 50/50 shot of succeeding in its traffic-growth strategy, you should be willing to pay about 50% of the difference between Bezek’s $2.50 failure value and my previously-mentioned $18 success value, which is roughly $10 per share.
In the meantime, it’s far too early to judge the success or failure of the company’s objective. Thus, the bulls and bears are likely to debate this topic until the outcome becomes crystal clear (and perhaps longer than that).
As for MySpace and QPSA’s Latin American peers, I believe comparisons are unwarranted. QPSA’s status as an up-and-coming player in Latin America varies greatly from MySpace’s status as a fallen angel. Meanwhile, its claim to the title of “fastest growing site in Latin America” stands in contrast to the more-established position of its larger rivals. At the risk of shamelessly drawing comparisons to Facebook, at one point its valuation was lower than that of MySpace. When that changed, many questioned it.
Nobody’s questioning it now.
In short, only time will tell if Quepasa’s management team can shore up its biggest weakness. If so, QPSA shares are still set to triple.
Disclosure: I am long QPSA.OB.