China Stock Research

About the Author China Stock Research

Several years experience as an analyst in the hedge fund world. Investment knowledge includes long/short equities, credit, macro, arbitrage, distressed debt, and special situations. Previous research publication experience includes Japanese small cap research distributed to institutional investors. Education credentials include BS in Computer Science, MBA in Finance, and CFA Charter. Follow on Twitter @ChinaStockRsrch Follow on StockTwits @ChinaStockResearch Lower After Q4, Now What? (NYSE:WBAI) fell over -6% in today’s trade after reporting stronger than expected revenues but missing earnings on higher costs related to its mobile business. The move lower was supported by volume, which was about 3x as heavy as the daily average over the past several months. Although the fall was undoubtedly painful, a small degree of solace for longs is the stock did close off of the day’s lows; it opened at $16.64 and pushed higher to close at about $18.

The stock has been a relatively strong performer as of late, rising about +27% from early January lows before today’s gap lower. The recent rise seemed to herald the end of a long and painful slide lower which kicked off in September 2014 following a notorious short seller disclosing a short position due to concerns about operational controls and some VIE-related tax accounting.

One of the themes discussed on the Q4 call was the company’s mobile platform as well as trends in its user base. The mix between PC and mobile users has been volatile over recent quarters, and seeing the proportion of mobile user sales falling in Q4 may have reason to rethink the company’s efforts in this area. However, that conclusion itself may be off-base when considering the recent “one-time” effects of the FIFA World Cup on player trends, which was very pronounced in Q2-Q3 FY2014. Based on management’s comments, it seems that most operating metrics were heavily skewed during the time period in question, leading to the conclusion that recent quarters can’t easily be compared on a like-for-like basis. Comparing Q4 FY2014 to Q1, however, suggests that the company is indeed growing its mobile business, up from a 25% share in Q1 to 46% in Q4 FY2014.

Although there may be incremental costs in pushing for that transition, mobile is key for the company’s success over the longer term. Mobile phones and tablets are increasingly the devices of choice for China’s internet users, and the company is positioning itself to meet that need.

With respect to the user base, it was also influenced by the one-time effects of the World Cup, helping to put the significant QoQ drop in context (active accounts fell to 984,000 in Q4 vs. 3,500,000 in Q3). Looking at the data from a different angle than the change in absolute terms, did report about +10% growth YoY in active accounts in Q4. Slicing that data further becomes more tricky because comparing the YoY pace vs. a year ago is heavily influenced by the base effect in FY2012 (the year the company voluntarily suspended some sales due to regulatory uncertainty).

Another operating metric which may add color to understanding how the company is doing is average user purchase amount. Based on company data, players purchased about 1,786 RMB during Q4, representing growth of about +64% YoY. One conclusion from that data point is that generally speaking, is seeing stronger response from its customers; active accounts grew by +10% YoY but the average purchase amount grew over 6x faster.

The net takeaway is that despite improvements in some operating metrics, those gains won’t come without a cost, which could lead to more margin pressure. The combination of thinner margins while operating metrics settle down could result in more selling pressure on the stock while investors take a “wait and see” approach. For investors with a longer-term horizon, however, near-term pullbacks could represent an opportunity to initiate a position.

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