Xunlei: Too Cheap To Ignore

Aug. 20, 2019 12:47 PM ETXunlei Limited (XNET)25 Comments
George Kesarios profile picture
George Kesarios
12.02K Followers

Summary

  • Xunlei had a great quarter, with revenue increasing 15.7% sequentially.
  • Cloud computing and other IVAS were up 40.6% sequentially, on the back of new clients such as Baidu Inc.
  • The company has one of the best balance sheets I have ever seen, and its market cap trades for less than its current cash position.

Xunlei's (NASDAQ:XNET) Q2'19 results were much better than I expected. Total revenues for the quarter were $47.8M, a sequential increase of 15.7%.

Net loss for Q2 was $2M vs. $8.6M for the previous quarter, and Non-GAAP net loss was $0.7M, compared to $7.2M for Q1. In EPS terms, the company lost $0.03 per share for the current quarter vs. $0.13 in the previous quarter. The company realized a gain of $6.7M for the quarter after disposing of its LinkToken operations.

Research and development expenses for Q2 were $17.8M, representing 37.3% of total revenues, compared to $18.8M or 45.6% of total revenues sequentially. The interesting thing is that the decrease was mainly attributed to reduced employee compensation costs.

Sales and Marketing Expenses for the current quarter were also lower, registering $6.8M vs. $7.6M for the previous quarter, representing 14.3% vs. 18.4% of total revenues respectively.

General and Administrative Expenses came in a bit higher at $10.2M for the quarter vs $9.4M sequentially, but were down when measuring against total revenue, which was 21.4% vs. 22.6% sequentially.

Investors are being paid to buy XNET shares

If we look at the balance sheet, the company has no debt, with total liabilities (current and long term) of only $117M, and current liabilities of $340M.

If we subtract total liabilities from current assets, the figure comes out to $223M. In other words, each share of the company's shares is equivalent to $3.30 as per the company's net liquidity position. If we do the same calculation for cash and equivalents, each share is worth about $4.40 per share.

In other words, investors are being paid to buy XNET shares, and are getting the business as a bonus.

So why are shares so cheap? My guess is because no one follows the company. There are no analysts following the company and there is no price target for XNET shares. There is one price target for $12 per share on Yahoo, but I have yet to find who the recommending analysts is.

Xunlei's growth potential is unappreciated

Besides getting XNET shares for less than its net liquidity position, the market is ignoring the company's growth potential.

For example, during the quarter, revenue from Cloud computing and IVAS (internet value-added services) reached $22.5M, representing an increase of 40.6% sequentially.

This revenue mainly consists of the company's StellarCloud’s IaaS services, and was due to increased demand for the company's shared cloud computing products and services, as well as new customers during the quarter. New customers included Baidu, NetEase Games (NTES) (a leading provider of software developed PC clients and the mobile games) and Qutoutiao (a Chinese mobile content aggregator).

The company is also a leading expert in providing solutions for blockchain-powered shared cloud computing ecosystems. As such, it has partnered with many different companies to develop blockchain applications for real-world applications.

The company won a Thailand academic blockchain contract to build a blockchain infrastructure for university healthcare institutions to facilitate sharing medical data while ensuring patient privacy. A great description of the project from the conference call:

About the project in Thailand, the project is designed to o facilitate accurate and efficient medical data and information sharing while ensuring patients privacy. Both patients and authorized healthcare providers will be able to access immutable clinical records to streamline diagnostic processes and improve treatment efficiency.

The project will create a generic data access layer for the databases of his medical facilities to support database independent access of patient data and the break down the walls between different facilities to enable information sharing and interconnection.

Healthcare providers in remote areas will be able to obtain patient data from higher level hospitals and to provide accurate analysis of the patient's conditions by leveraging equal access to information. Blockchains as a distributed and a treatable system will also ensure that a patient records not to be tampered with. In the event of a medical incident, this provides a credible chain of custody.

In addition, when the patient record is being requested, the patient may authorize access using ThunderChain’s privacy protection technology to ensure that patient data is made available only to the authorized healthcare providers that is fully protecting data security.

We believe this project may provide references for enhancing interconnection between health information systems in China as well and improving the quality of medical services for there are similar issues facing hospitals in China, especially in remote areas with limited resources. So that is the overview of the project. And thank you again for the question.

Please note this project is not in China, but Thailand. This means the company has international capabilities and does not simply get projects from China.

I also think the company will greatly benefit from 5G in the very near future. Shared cloud computing resources, cloud computing networks, aggregating idle computing resources from business cloud networking devices, and IoT devices that will share all these networks are all a part of 5G in the future.

The company is right in the middle of this revolution, but no one has understood this yet. China currently has 1.4B people, that will need all these services in the future.

And with China being a leader in 5G (as per the trade war that is going on), and leading in blockchain technologies, the company is poised for above-average growth in the future that will likely provide for parabolic returns for inverters. Yet, the stock is trading for less than net liquidity.

I highly recommend investors read the recent conference call transcript, because it will provide a deep understanding about the potential of the company.

Even short sellers are bullish

ChartData by YCharts

As of 07/31/19, shares sold short were 1.21M, a change of -28.2% from the previous period, and represent only about 1.83% of the float, or about 0.9% of total shares outstanding.

In other words, even short sellers are bullish on the name, by virtue of the fact short interest is low. Who would want to short a stock that trades for less than net liquidity?

Bottom line

XNET is a potentially high growth diversified cloud company that is currently trading for less than net liquidity, without even counting the assets. As a bonus, you get the bushiness for free.

When one compares traditional cloud players in the U.S., XNET shares are basically trading for scrap. And this is where the opportunity is, because it gives investors the chance to buy shares for scrap that should be trading at much higher levels.

The company grew almost 16% sequentially, and is poised for high growth in the future with the coming of 5G in China.

The company is guiding Q3 revenue in the range between $45-$51M, which represents about 0.4% revenue growth at the midpoint. However, with the company gaining new clients and business over the past several quarters, I would not be surprised if revenue came in at the upper range of guidance once again.

There are no analysts following the company as of the writing of this article. My guess is that when Wall Street picks up on the discount the market is offering, shares will rally to much higher levels. As such, I think investors who purchase shares today will make like bandits in the future.

Don't ask if there is anything fishy with the market cap. When something quacks like a duck, it's a duck. When the balance sheet shares are trading less than net liquidity (without even counting the assets), then shares are trading for scrap and it's an opportunity.

This article was written by

George Kesarios profile picture
12.02K Followers
I only look at stocks that have the possibility to double over a twelve month period and stocks in which the risk/reward ratio payout is high. In addition I focus on swing trade opportunities. I focus more on valuations and risk/reward metrics as opposed to what make companies tick. I have been a professional investor for over 20 years and during the past several years an economics analyst and financial writer for capital.gr, the biggest economic news portal in Greece. I have managed money from time to time and have also done some seed venture capital projects in the past.

Disclosure: I am/we are long XNET. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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