ANALYSIS: Qutoutiao: Selling Pressure Invades Valuation - So What Now?

Much of the pain of being long QTT will be over soon, and portfolio managers will begin to scour companies with data available to review.

Steve Kanaval
    Apr 03, 2019 11:07 AM  PT
ANALYSIS: Qutoutiao: Selling Pressure Invades Valuation - So What Now?
author: Steve Kanaval   

Shares of Qutoutiao Inc. (Nasdaq: QTT) debuted in the U.S. in September 2018 as the company raised $84 million in an IPO. And if the first day of trading was an indicator what life would be like (see chart below) for the company whose name means "Fun headlines" in Chinese, investors knew they were in for a rough couple of quarters. Shares bottomed into year-end in the U.S. markets, but have had a solid rally since.

Real buying showed up into Chinese New Year completing a rally finishing at the launch price around $15 per share.

In the past couple weeks, the scheduled release of shares into the market, which were restricted (held in lock-up), came to market as tradable currency for those who were issued this stock as payment for services or other investments keeps pressure on the share price and its overall valuation.

Analysts noted this also and adjusted their respective recommendations keeping pressure on shares. The question now after a few quarters of up and down price movement - ranging from $4 to $15 - is will they hold the $10 level, and will the investment they made in acquiring followers pay off for the long term? The chart below shows the price movement since inception (before the hit it took this week after announcing it would sell an additional 8.5 million ADSs into the market).



The answer lies (for us) in the global investing environment as U.S. and Chinese relations normalize now that the Mueller report is in the hands of a divided America. We think the investments the company made will pay off for Qutoutiao, and resolution/normalization of relations in China will lift many Chinese U.S. listed shares. In fact, we think the election cycle will bring many "funny headlines" and interesting content that will drive valuation higher.

The world of content is growing rapidly, and this is more about technology than content. Simply said, this is a tech company that should have a tech valuation, and the company knows the analysts' perception of its shares wins or loses based on the company being valued with a technology multiple versus a media multiple. It will take a bit for analysts to come around to this, but it will be worth the wait.

Selling pressure from shares that were previously restricted always causes a sell-off in the short term, but this cannot be a short-term play.

If you are investing in technology with a media bias, these are expensive undertakings (acquiring eyes/users), and few have perfected it. It is our observation the marketplace has plenty of room for multiple players, and buying into these sell-offs gives shareholders a good entry point for 2019.

Much of the pain of being long QTT will be over soon, and portfolio managers will begin to scour companies with data available to review. It allows the quants to establish a risk profile so they can do time horizon analysis as macro viewpoints adjust. 

Global markets and cross-border investments will be important as we exit Q1 2019, and de-leveraging the portfolio will end. This allows a new risk profile to emerge and risk managers who double as portfolio managers will begin to take chances.

This creates momentum, and companies like Qutoutiao have already set the groundwork through real investment in users, partnerships, and acquisitions. Viva la funny headlines.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)