INTERNET: Slowdown Lurks In Phoenix, Qihoo, LightInTheBox Results
Bottom line: China’s Internet companies are expecting a slowdown this year as the nation’s economy slows, but their shares could see some upside if the declines are less severe than many are forecasting.
It’s not often that we see any major macroeconomic trends when a diverse group of Internet companies all report results on the same day, since individual company and sector factors often have a big influence. But we’re seeing just such a trend emerge in the new results from the high-tech trio of software security specialist Qihoo 360 (NYSE: QIHU), e-commerce firm LightInTheBox (NYSE: LITB) and online media firm Phoenix New Media (NYSE: FENG), which all are forecasting a sharp slowdown in the first quarter of this year.
The trend isn’t all that surprising, since China’s economy has been slowing for a while now and the impact was almost certain to start affecting these companies. Search leader Baidu (Nasdaq: BIDU), the only one of China’s “Big 3” Internet companies to give first-quarter guidance so far, has also forecast a similar slowdown.
Among the trio of companies that have just reported, Qihoo is the only one that managed to excite investors with its latest results. The company’s shares rose 6 percent after its announcement, though the stock is still down by more than half from its peak about a year ago. As always for Qihoo, the story that’s attracting attention is the company’s efforts to monetize its young but fast-growing search business, which competes with Baidu.
In that regard, Qihoo has cleverly failed to give us any specific search revenue figures. But it did say that online advertising revenue grew 71 percent to $243 million in the fourth quarter, thanks in part to strong growth in search revenue. (company announcement) Overall revenue grew by an even stronger 95 percent to $431 million on solid performance for Qihoo’s older software products, and the company’s profit also rose 4-fold.
But Qihoo led the pack in predicting a sharp slowdown for the current quarter, with a forecast for revenue to rise by a modest 42 percent — about half the rate in the fourth quarter. Last month Baidu also predicted a similar though less dramatic slowdown, forecasting its revenue growth would slow to 35 percent in the current quarter from 48 percent in the fourth quarter.
Investors were far less pleased with the results from LightInTheBox, even though I personally like this company’s growing turnaround story. Unlike most of its Chinese peers, which target mostly Chinese users, LightInTheBox is an e-commerce company that targets mostly US buyers with Chinese-manufactured products. The company is setting up more US-based infrastructure to improve its deliveries, and its reliance on overseas buyers should help to protect it from the Chinese economic slowdown.
But its latest results showed that LightInTheBox continued to lose money, as it reported an $8.8 million net loss in its latest report versus $5.6 million a year earlier. (company announcement) Like Qihoo and Baidu, LightInTheBox also forecast revenue growth would slow to only about 10 percent in the current quarter from 42 percent in the fourth quarter. That unexpected slowdown may have helped to spark the resulting 6 percent drop in its shares, since LightInTheBox should theoretically be more insulated from a slowdown since it doesn’t rely on Chinese buyers for most of its sales.
Last there’s Phoenix New Media, which used to be one of my favorite smaller companies but is increasingly losing my interest as I learn about its internal dysfunction from media friends. Like the others, Phoenix forecast a sharp slowdown for its core advertising revenue in the current quarter, predicting the figure would only grow by 17 percent this quarter versus 28 percent in the fourth quarter. (company announcement)
Like LightInTheBox, Phoenix shares fell 3.7 percent after the report came out. The stock has now lost about half of its value from a year earlier, mirroring a trend for many Chinese Internet stocks over that period. At this point investors seem to be aware of the slowdown, meaning it’s reflected in company stock prices. That means we could see some modest upside for some of these companies if the slowdown isn’t as severe as expected, which looks like a good possibility for LightInTheBox and also perhaps Qihoo.
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