Taomee Holdings on a Path to Industry Domination

| About: Taomee Holdings (TAOM)

By Paul Goodwin

For those of us who grew up on books and records, there has always been something a little creepy about television and video being used as babysitters. But there it is. I’m sure that the ready availability of Disney (NYSE:DIS) movies, Bob the Builder videos, and on-screen friends from purple dinosaurs to big yellow birds and beyond has saved many parents’ sanity and lots of family car trips.

In China, one company is on the cutting edge of the online edutainment for children business, and that’s Taomee Holdings (NYSE:TAOM). Taomee was founded in 2007 by veterans of TenCent Holdings (OTCPK:TCEHY) and clearly has its sights set on dominating the market for the attention of Chinese children between the ages of five and 15.

Taomee’s main asset is its website, www.61.com, which offers online worlds for kids to play, interact and meet people. With 27 million in its online user base (online fees produced 94% of 2010 revenue), the company has already shown that it can use characters from 61.com to produce tie-in books, TV shows and toys. Two books based on online characters have already cracked the bestseller list for kids in China.

Taomee is building a platform that can spin off products into many areas, and both revenues and earnings are ramping up quickly. Q1 results featured 150% earnings growth on 90% revenue growth, and both results represent a cooling off from earlier performance. That’s the advantage of a short history. The other genuinely impressive number is the 73.6% after-tax profit margin booked in Q1.

TAOM came public in June, and made headlines mostly because the stock failed to blast off at all. In fact, it slipped slightly from its open at 9 to close its first trading day at 8.2. But since then, TAOM has shown some power, building a short base at 10 for a few weeks, then lifting off a few days ago on heightened volume. It’s now trading at around 13, and will bear watching, especially if the broad market can shake the dust off its shoes.

Right now, the only thing lacking in TAOM is a long enough history to give a clear picture of how investors feel about it. And time will supply that.