The house rules are simple in this weekly column.
- I bash a stock that I think is heading lower.
- I offset the sting by recommending three stocks as portfolio replacements.
Who gets tossed out this week? Come on down, Rediff.com (Nasdaq: REDF ) .
Almost done with the 10th chapter
India is no China -- and that isn't necessarily a bad thing. There are still investing opportunities to be found in the world's second-most-populous nation. Unfortunately for Rediff shareholders, their company is no CNN or India Times, either.
Shares of Rediff have nearly tripled over the past month, and the reasons have little to do with the company's actual fundamentals.
Online companies have been rallying in a wave of consolidation this month, breathing new life into many forgotten dot-coms. Last month's successful debut of MakeMyTrip (Nasdaq: MMYT ) -- the hottest IPO since 2007 -- has stirred up interest in India-based Internet companies. Sify (Nasdaq: SIFY ) , an Internet provider with profitability issues, has also more than doubled over the past month.
The rub here is that Rediff is still a dud. It's never been more than a fringe player, either through its India Online portal or its content for expatriates living abroad. Just because it's the only stand-alone India-centric portal doesn't mean it's the one worth buying.
Revenue fell 26% in fiscal 2010 to $18.8 million, posting back-to-back years of losses. Yes, Rediff is that small, lethargic, and iffy red.
Its latest quarter -- kicking off fiscal 2011 -- talks a big game.
- Its registered user base grew by 15% over the past year to 92 million.
- Rediff claims that its pricing power in online advertising in India has grown by 26% over the past year.
- Telecom companies bid $22 billion on India's 3G and wireless broadband spectrum, a welcome sign on the future of Web-based connectivity in the country.
Unfortunately, at the end of the day Rediff's revenue inched just 4% higher off last year's depressed showing. Naturally, we're also staring at yet another quarterly net loss. It wouldn't be Rediff without the red ink.
Rediff isn't worthless, but it's worth less. With $41 million in cash -- and shrinking with every passing quarter -- the shares may have had limited downside during its summertime low. It was fetching barely more than its cash balance. However, this also means that as the stock has gone on to more than triple, the enterprise value has skyrocketed even higher.
Until Rediff can grow -- profitably -- and not just off recessionary-depressed levels, it's just a small extra cast member in a Bollywood dance sequence that it never had a hand in choreographing.
Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.
- MakeMyTrip: I may have trashed the leading Indian travel portal's valuation last month, but at least it's the undisputed champ and growing. I do have valuation concerns, but at least I'm confident that MakeMyTrip will grow into its valuation -- and then some -- over time. It is the Ctrip.com (Nasdaq: CTRP ) of India, commanding 48% of India's online travel market. That's a savory chunk, and MakeMyTrip's 22% revenue spurt in fiscal 2010 will only pick up speed with the global economy and India's improving wealth as a nation.
- Tata Motors (NYSE: TTM ) : I singled out Tata as a replacement for MakeMyTrip as a more attractively priced play on India's boom several weeks ago, and it bears repeating. Tata is the country's leading truckmaker, and one of the largest players in consumer cars. In a country of 1.2 billion people, where median incomes are meager, it helps that Tata's the company behind Nano, which at $2,500 is the world's cheapest car.
- Sohu.com (Nasdaq: SOHU ) : If a growing -- and highly profitable -- overseas portal is a better fit in your portfolio, check out China's Sohu. The company ran an established news portal before that status was cemented when it was named the official Internet company of the 2008 Olympics in Beijing. It also has some skin in search with its Sogou engine, and it owns a majority stake in online gaming site Changyou.com (Nasdaq: CYOU ) . Sohu trades for 18 times this year's projected earnings and 14 times next year's target, so the valuation is attractive and the growth is there.
I'm sorry, Rediff. I just can't green-light you. Please log your vote in our Motley Poll then scroll down to give us your opinion in the comments box.
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