Richard Driehaus, a momentum investing guru that has been hailed as one of the key investment influencers of the last century, founded Driehaus Capital Management on back of equity investment philosophies and strategies. This hedge fund trader in his latest SEC filing is indicating lack of confidence for the Chinese tech-verse, with his most recent plays revealing downsized positions in three stocks: Baozun Inc (ADR) (NASDAQ:BZUN), Momo Inc (ADR) (NASDAQ:MOMO), and Alibaba Group Holding Ltd (NYSE:BABA).
Momentum investing savvy hinges upon buying stocks tearing up the Street with excitement- not the value bargain-bin deals that only get such attractive valuation from investors turning their nose in disdain. Some would say momentum lies on the side of Chinese Internet stocks- but not Driehaus. China boasts the biggest Internet market across the globe, but two of these three players (Baozun and Momo) this week took massive stumbles, moving the needle starkly down on the charts. While Alibaba has been ramping up, it appears that in general, Driehaus is choosing to hedge his bets when it comes to Chinese trading.
Let’s take a closer look:
Not Prime Time for Baozun
Driehaus Capital Management is counting its lucky stars for having sold a chunk of Baozun before the big post-earnings bearish scramble hit yesterday, dialing down 220,721 shares to a position cut roughly 61% to shares now worth $3.18 million. Investors likewise are giving the cold shoulder to Baozun after the Chinese retailing consultant/service provider came up short of second-quarter earnings expectations while delivering a disappointing third-quarter revenue guide.
BZUN shares subsequently plummeted headlong 24% yesterday in the aftermath. Consider that when Baozun shares have doubled in price from the close of April to now, and almost have tripled throughout the course of the year, to dive so dramatically is a bitter pill for investors to swallow.
The Shanghai-based tech company has established revenue guidance for the third quarter between $130.65 and $136 million, translating to a midpoint of $133.3 million- underwhelming analyst estimates calling for $135.4 million. With adjusted net income handing over $0.08 in EPS, Baozun’s earnings showcase is a far cry from consensus holding out anticipation for $0.10 in EPS. Though revenue of $131 million did just sail past the Street’s forecast of $130.7 million, it is a small beat compared to a slew of flaws in the print.
The BZUN team expects 50% growth rate in its services unit for the third quarter, a segment skyrocketing at a quick pace- but a step back from the 59% expansion reported in the second-quarter financial results. With the Chinese tech player having exhausted approximately 9% of its cash stack to-date, with logistics space investments blazing through most of that amount, there could be more than one reason investors as well as hedge fund guru Driehaus are stopping in their tracks for now.
Backing Off Momo
Driehaus is fleeing away from Momo shares, backtracking 24,580 shares down to a stake reduced 66% to shares worth $459.08 million. Though this Chinese mobile social networking platform has made a popular name for itself in the eastern part of Asia, with roughly 90 million monthly users, the stock seems to have become a sore Achilles’ heel of the Chinese Internet industry after dropping 20% like a hot potato yesterday.
Interestingly enough, the company beat expectations, with revenue rising 215% year-over-year to earn $312.2 million, and EPS of $0.29 roughly circled back four times over considering this quarter last year with a performance of $0.08. It was a beat by one cent, but a beat nonetheless, with consensus calling for $0.28 in $EPS.
Yetr, turn to the cost of solid growth: cost and expenses. For the Chinese platform, expenses scaled 189% to a whopping $246 million, which could also add gasoline to the fire of bearish sentiment in the wake of what would appear to be a decent second quarter otherwise. While revenue outlook for the third quarter is set between $337 and $342 million, surging far past consensus of $318 million, when glancing to the freshest quarter, this growth is not as robust.
Momo could be just simply a tale of overly inflated expectations, as the stock had made a habit of trouncing expectations in a series of four back-to-back quarters. Momo saw an over 150% hike in the span of a year, so when approaching this second quarter financial serve-up, even a good performance was not going to be quite good enough.
Alibaba Takes a Cut
Driehaus Capital Management has reigned in its holding in Alibaba by 9%, taking the shares down 220,721 shares to a stake worth $156.47 million. Perhaps Driehaus is choosing to play it safe with Chinese trading, as Alibaba shares have almost soared 100% through the course of 2017, zooming 75%.
This far outclasses e-commerce rival Amazon, whose stock has risen 26% this year. With Alibaba stock selling for a cut of Amazon’s share prices, the advantage lies in BABA’s corner. Meanwhile, the Chinese e-commerce giant just pulled in a knock-out performance in its first fiscal quarter of 2018, blowing expectations out of the water. Many analysts have been lifting price targets across the table, looking for the giant to stride past $200, with the FactSet mean target price standing at $192 on back of the strong quarterly print.
The Alibaba management team likewise keeps its eyes peeled to revenue growth momentum, maintaining the outlook for fiscal 2018 between 45% and 49% year-over-year, indicating core e-commerce growth has legs to keep its momentum marching.
However, this giant is not without a risk factor, and perhaps Driehaus is cautious on government regulation throwing BABA’s trajectory off course. Likewise, Alibaba is staring down an arena of viable threats posed in a competitive cloud, digital entertainment, and media backdrop.
Most on the Street veer away from Driehaus’ lackluster support for the giant, as TipRanks analytics demonstrate BABA as a Strong Buy. Out of 17 analysts polled by TipRanks in the last 3 months, all 17 are bullish on Alibaba stock. With a return potential of 5%, the stock’s consensus target price stands at $183.88.