INTERNET: Spending Hits 58.com, Cost Cuts Dog LightInTheBox

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Bottom line: 58.com’s buying binge and LightInTheBox’s cost-cutting drive are both risky strategies that could boost profits if they succeed, but also stand a sizable chance of backfiring if they become too excessive.

Buying binge pushed 58.com into the red

When the history books are written, “turbulence” and “volatility” are 2 words likely to get liberal usage when describing the second half of 2015 for Chinese companies. Two mid-sized Internet names are in the headlines this week as they face their own separate headwinds, pressuring the profits and stocks of leading online classified site 58.com (NYSE: WUBA) and struggling e-commerce company LightInTheBox (NYSE: LITB).

The first story quotes 58.com’s CEO saying he’s engaged in a buying spree this year that could result in $200 million in losses for his company. The news around LightInTheBox stems from reports saying the company has embarked on a major cost-cutting campaign that has seen numerous employees leave and also suppliers express dissatisfaction over slow bill payments.

Chinese companies in general haven’t fared too well on domestic or international stock markets these days, but 58.com and LightInTheBox appear to be doing worse than most. Shares of 58.com, once an investor darling after its IPO nearly 2 years ago, have lost about 40 percent of their value from a peak in late July, and are down by half from their 52-week high. LightInTheBox  shares have also lost about half their value from a mid-June peak.

Many might argue that big share declines are infecting all Chinese stocks these days, with investors looking for any reason to sell. Such pressure has sparked sell-offs for even premier names like leading search engine Baidu (Nasdaq: BIDU), prompting founder Robin Li to last week say he might consider privatizing his company. (previous post) Still, neither of these latest news bits involving 58.com or LightInTheBox are likely to get investors too excited.

Buying Binge

Let’s start with 58.com, which is often called the Craigslist of China and whose shares soared after its IPO on big hopes due to its market leading position. Now media are quoting CEO Michael Yao saying he’s planning to invest in around 100 companies this year as part of a strategy to boost his company’s presence in online-to-offline (O2O) services. (Chinese article) The company has already invested $1.5 billion so far this year on a wide range of companies, including an online job site and a site engaged in home decorating. (previous post)

That investment strategy isn’t really news, though the magnitude of the campaign and Yao’s latest forecast for a $200 million loss this year may cause some concern among investors who prefer to see growing profits. The company reported a $27 million net loss in its latest quarter, though it also saw revenue more than double amid the acquisition spree.

This kind of growth through acquisitions is generally an acceptable strategy, even if a company has to sacrifice some short-term profits. But in this particular case it does seem like 58.com’s appetite may be a bit too large, and it could find itself with a case of M&A indigestion if it isn’t careful.

Next we’ll look quickly at the reports on turbulence at LightInTheBox, whose latest quarterly results announced last week were decidedly mixed. On the positive side the company said its revenue more than doubled during the 3 month period. But on the negative side it swung to a loss, as a weak euro undermined business in some of its key European markets.

The latest Chinese media reports are a bit vague, saying that large numbers of LightInTheBox’s employees have resigned recently due to low wages, and its suppliers are also complaining of delayed payments. (Chinese article) The company itself has yet to comment on the reports, but an observer could look at the news in 2 different ways.

Optimists might say the news, if true, reflect aggressive cost cutting as part of the company’s bid to return to profitability. But pessimists might say LightInTheBox runs the risk of alienating both its employees and suppliers, which could ultimately undercut its ability to effectively run the business. We’ll probably have to wait another quarter or two for a final verdict, which could hinge on the company’s ability to return to profitability.

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