Meitu Fires Up Online Services In Bid For Excitement

| About: Meituan-Dianping (MEIT)
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Summary

Data shows Meitu earned some relatively sizable Internet revenue from online sales and advertising in the month of December.

This proved it can make money more directly linked to its core beauty app.

The company is an intriguing buy.

Bottom line: Meitu's new disclosure of rapid growth in its internet services revenue looks encouraging, as it takes advantage of its early arriver status in a beauty products sector with big profit potential. Meitu makes over image with internet revenue growth

A month after its lackluster IPO, beauty app operator Meitu (HKEx: 1357) is trying to shore up its sagging stock by releasing some financial data that proves it's more than just a place for people to doll up selfies to share with friends. The particular data shows that Meitu actually earned some relatively sizable Internet revenue from online sales and advertising in the month of December, proving it can make money more directly linked to its core beauty app.

Before that, the lion's share of the company's revenue had come from sales of smartphones optimized for its app. Critics had argued such a business model wasn't really sustainable, since many such purchases are one-time items that might not be repeated. By comparison, online advertising and sales of products linked to its core app seem more sustainable.

We'll look at the actual figures shortly and try to determine how significant they are, but first let's recap Meitu's rocky road to market that is directly responsible for this new attempt to generate some excitement. Meitu was dogged by skepticism on its entire road to market in Hong Kong last month, due to the factors I've mentioned above.

The company ultimately priced its shares at the bottom of their range, setting a price at HK$8.50. That valued Meitu at HK$35.9 billion ($4.6 billion), or about 10 percent below the $5 billion the company believed it was worth. The shares stumbled out of the gate during their Hong Kong debut, and at one point fell as low as HK$7.50, before rebounding to their latest close of HK$8.19 - about 3.6 percent below the IPO price.

Now Meitu's latest announcement says the company posted revenue of 27.9 million yuan ($4 million) from Internet services in the month of December (company announcement). That figure is nearly 6 times as much as the average monthly figure of 4.8 million yuan it posted from Internet-related services in the first half of last year.

Meitu is crediting 3 factors for the big gains: increased revenue from product sales on its video streaming platform, from brand advertisers and from users for some of its premium services centered on letting users pretty up selfies and other photos. All 3 factors touch on key areas that could be ripe for big revenue growth, which is obviously what Meitu wants us to zero in on.

Advertising Appeal

Video streaming has become an extremely hot area of the internet in China at the moment, and thus, does seem like a good place for selling makeup and other personal care products to Meitu's huge base of 450 million active users. The nature of the company's site also makes it look like a no-brainer for advertisers looking to sell such products, which are always among the top consumer best-sellers in any relatively affluent market.

Premium services is probably the toughest sell, since consumers are traditionally loath to pay for such services on the Internet. But when it comes to beauty and impressing your friends, perhaps there's an exception. One key element that's coming into play these days is also the growing ease of making the kinds of micropayments that Meitu would charge for such services, thanks to the boom in mobile payment services offered by Alibaba's (NYSE:BABA) Alipay affiliate and the payment service in Tencent's (OTCPK:TCEHY) WeChat.

At the end of the day, execution is always key to success. Some classic examples of failure to execute by early arrivals to a new space are e-commerce site Dangdang (NYSE:DANG) and online travel site eLong (NASDAQ:LONG). Both set up shop in their respective areas quite early, but couldn’t take advantage of that status, leading each to become a dinosaur that yielded the space to more aggressive, better-run rivals.

I'm not familiar enough with Meitu to say how well its management can execute. But the company is certainly pushing all the right buttons in its search for sustainable revenue, and it has an enviable user base in an area that's full of marketing potential. The 27.9 million yuan monthly revenue figure isn't all that huge, but the growth is more noteworthy. If the company can even just double the figure in the current year, that would boost the level to an impressive $100 million for the year.

Disclosure: None.

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