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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, Quepasa (AMEX: QPSA  ) .

No mas
Things have been looking up for social networking website Quepasa lately. Shares of the fast-growing Latin American social networking website soared 457% last year, and have continued to inch higher through the first few weeks of 2011. Quepasa closed out 2010 with 27.2 million registered users, up 255% year over year.

Facebook is much larger, but it's still private. MySpace is bigger, but it's meandering at the moment. In short, speculators have been bidding up Quepasa as the only stand-alone social network.

Facebook is about to cross 600 million registered users, and recent investments value Mark Zuckerberg's opus at a whopping $50 billion. This kind of math gets bulls in trouble. After all, if Quepasa has 4.5% the number of users as Facebook, why can't it be worth 4.5% of $50 billion -- or $2.25 billion?

Quepasa's closing in on a market cap of $220 million, so there's plenty of room to run, right? Wrong.

Just because Mr. Market's valuing the average Facebook user at roughly $83 a head doesn't mean that every smaller rival merits a similar valuation. On any given day, half of Facebook's users are on the site. They spend a collective 700 billion minutes a month on the site, or well over 1,000 monthly minutes per person.

Quepasa isn't even close. Despite its impressive count of 27.2 million users, the site experienced just 16.4 million unique visits in December. That's visits -- not visitors! The site served up a mere 184 million pages that month. In other words, the average Quepasa user took in less than seven page views for all of December.

Next, consider the financials. Quepasa posted an operating loss of $4.4 million through the first nine months of 2010, compared to the $4.2 million it rang up in revenue. Ouch.

Then there's this little disclosure nugget in the report: "Approximately 96% of the revenues for the nine months ended September 30, 2010 came from two companies of which a director of Quepasa is an officer or director."

If that doesn't send monetization red flags a-waving, I don't know what will.

Quepasa isn't cheap. There were 18.6 million fully diluted weighted shares outstanding by the end of the third quarter, and that's before the sale of another 1.7 million shares six weeks ago, at roughly half of today's price.

That said, at least Quepasa is a survivor. The company seemed on the brink of death early last decade, trading for mere pennies. Now it's actually growing. Even the mighty AOL (NYSE: AOL  ) couldn't handle the heat in Quepasa's native Latin America; it spun off AOL Latin America shortly before the Spanish-language appendage filed for Chapter 11 bankruptcy in 2005.

Quepasa has been inking attractive third-party ad deals lately, and it's also investing in social gaming to attract more users and keep them around longer. The lone major analyst putting out estimates sees a smaller deficit this year, on $17.5 million in revenue.

There's no way that this company is worth anything close to $220 million today, but if it can keep its users hanging around more often, and get more money from folks who aren't already company insiders, we may have something here.

Alas, at this point, the risks are too great. You can do better.

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:

  • MercadoLibre (Nasdaq: MELI  )
    Latin America's leading online marketplace and financial platform isn't cheap, but at least it's consistently profitable. The stock is trading at more than 40 times forward earnings, but you don't want to bet against this company. It's blown past analyst profit targets in each of the past three quarters.
  • Net Servicos de Comunicacao (Nasdaq: NETC  )
    Quepasa claims to be the fastest-growing social network in Brazil on a percentage basis. If you want to buy into the region based on its connectivity potential, why not go with one of the telcos that provide Internet services? In addition to this Sao Paulo-based provider of cable, voice, and Internet, you might also consider Tele Norte (NYSE: TNE  ) and Telecomunicacoes de Sao Paulo (NYSE: TSP  ) . I'm keen on the healthy growth in revenue and cash from operations at Net Servicios over the years, though free cash flow growth has been a sore spot. Wall Street sees revenue and earnings growing 13% and 28%, respectively, this new year.
  • Banco Latinoamericano de Comercio Exterior (NYSE: BLX  )
    If you want to bank on Latin American growth, why not bank on a bank? Panama City's Bladex has a financial presence throughout the region. Things are going so well for Bladex that it jacked up its quarterly dividend last week. Bladex's yield now rests at a compelling 4.6%.

I'm sorry, Quepasa. Yo no se que pasa aqui.

MercadoLibre is a Motley Fool Big Short short-sale pick. MercadoLibre and Net Servicios are Motley Fool Rule Breakers picks. Banco Latinoamericano de Comercio Exterior is a Motley Fool Global Gains selection. Motley Fool Alpha has opened a short position on MercadoLibre. The Fool owns shares of Banco Latinoamericano de Comercio Exterior. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz doesn't mind taking out the garbage every so often. He does not own any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (11) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2011, at 9:39 AM, prginww wrote:

    Your review of QPSA iondicates that you have no idea of the loyalty of the Latino community from here and in the US and South America. The investment community bashed eBay when it came to its IPO. ...and looked how far it has come, and who got the last laugh. The FOOL has missed a lot of ten baggers in the years I"ve been a member , You are too young to remember when AOL first came to market their members numbered as low 17,000,000 users Eventually . A lot of us had the last laugh and made a lot of money in spite of the bashings......I predict that you will eat your own words before this year is over......

    your review witll probably hurt QPSA stock price for a couple of days.. that should give you a high for a week.

  • Report this Comment On February 02, 2011, at 9:56 AM, prginww wrote:

    Wow, this will look like a really dumb post in a very short time. But that's look at a couple of your points (and, by the way, I know you plagiarized most of this column from a short seller named Martin Svanda on the west coast -- nice try).

    First, QPSA is different from facebook, and the gaming acquisition it announced yesterday should be a clue you might want to follow. Check out the Brazilian billionaires with deep internet savvy who now own QPSA shares. Ask yourself why they took stock.

    Second, there are some equally large investors in Europe (try googling the name Roditi for a start) who are apparently accumulating large blocks of QPSA.

    Given the volume in this name, relative to the float, and given the fact that your entire column is stolen from another writer, I will not only ignore your advice, but I will buy more stock.

    Thanks for knocking this stock down; and good luck with stealing your next column.

  • Report this Comment On February 02, 2011, at 10:57 AM, prginww wrote:

    In responsw to the above post.......Thanks for your counterattack against Rick ,the ultimate Fool........if this weren't the Motley Fool web site I would have guessed that Rick the FOOL was on a penny board as a DUMPER addition he is playgerizing (sp?) someone else's stupidity..........which is as bad as Rick the Fool can get .

  • Report this Comment On February 02, 2011, at 11:39 AM, prginww wrote:

    MercadoLibre is a Motley Fool Big Short short-sale pick. MercadoLibre and Net Servicios are Motley Fool Rule Breakers picks. Banco Latinoamericano de Comercio Exterior is a Motley Fool Global Gains selection. Motley Fool Alpha has opened a short position on MercadoLibre. The Fool owns shares of Banco Latinoamericano de Comercio Exterior.

    Appreciate the disclosure...but how can 2 newsletters be short, and one newsletter be long the same stock- I guess you can never be wrong that way!

  • Report this Comment On February 02, 2011, at 11:55 AM, prginww wrote:

    Rick: Plagiarism is a serious accusation. Is it true in this case?

  • Report this Comment On February 02, 2011, at 2:01 PM, prginww wrote:

    We have been in and out of this stock over the years dating back to the IPO. While the author of this hit piece might succeed in scaring the fast money that only recently discovered the deal, he misses the bigger picture. It has been said many times that the eventual survivor in the Latin American market online will be worth well north of >$1 billion. It is an easy comp to arrive at when you draw from other international regions and project pop. growth, spending etc. and obviously there are many potential acquirers who would be glad to own this. QPSA has had moments of great success in the past that were derailed both times the company founder was thrown under the bus by investor groups. The corp history currently being pushed by Brian Garrett and others at the investment community is not entirely accurate--that all company history should be overlooked and all past mgmt. was bad, that nothing significant happened until now, and so forth--in reality, QPSA always did well, minus two bad CEO's, each of which almost destroyed the co: Trujillo in 2000 and Stearns in 2006. Yet when run by competent management, Quepasa has historically been quick to outperform competitors. It is clear to see with Abbott at the helm, QPSA made a significant breakout in key markets and once again, significant personalities are backing the growth just as they did in prior boom years. Given key investors, a case can be made that many of the points raised in the above article are insignificant, short mentality rhetoric. Abbott looks to be the best CEO the co. has seen to date. Each quarter it looks more like QPSA is shaping up to be the lone survivor among the Latin Internet plays. None of the other regionals (Sonico) have the DSM platform or anything even resembling the experience of the current team of execs at QPSA. And if QPSA does end up the lone survivor, what is that worth? At the turn of the century, Goldman made some aggressive projections regarding such an outcome. See: Starmedia. With a Latin deal, you are targeting a massive section of the global population. If it was Brazil or Mexico alone you could justify 4x actual mkt. cap.

  • Report this Comment On February 03, 2011, at 12:16 PM, prginww wrote:

    Given the onverblown rah-rah QPSA got over at SeekingAlpha, and the stock bashing it took above - I will stick to the middle ground and hold. Everytime I thought the stock had peaked, it surprised again. I only wish I had loaded up on it when it was still in the $3 range!

  • Report this Comment On February 03, 2011, at 5:45 PM, prginww wrote:

    Quepasa user loyalty amounts to less than seven page views A MONTH on average. I'm not buying it.

    As for the plagarism accusation, this IS a serious allegation. Do you have a link or is this some print only newsletter that you're accusing me of plagarizing?

  • Report this Comment On February 04, 2011, at 12:56 PM, prginww wrote:

    Is it not logical that Latinos would migrate to a Latino social networking website? A source provided and designed for their cultural and social networking needs and wants???.....if QPSA is able to provide a total facebook experience for the Latino communities world wide you'll wish you had bought it at $3.00 .

  • Report this Comment On February 05, 2011, at 11:09 PM, prginww wrote:

    Teddipoo, the thing is I AM a Latino. I live in Miami. I lived for several years in Puerto Rico when I was young. Two-thirds of my closest friends -- including me -- are fluent in Spanish. I don't know a single one that is active on Quepasa. If they are on social networks, they're on Facebook.

    The numbers bear that out in December. 27 million is a big number, but only a handful must be active if the average registered user is averaging 6-7 page views a month.

    The social gaming initiatives WILL help that, and I pointed that out. However, I wouldn't read too much into a $4 million purchase.

    I hope I'm wrong, because we all know that Facebook is going to come to market at a ridiculous valuation. I'd love to find a play that's under the radar, but this one is more hype than substance AT THIS POINT. Let's see how these marketing deals and gaming initiatives play out in the coming quarters.

    And I'm still waiting on some meat for that plagarism accusation that you and James Samuels alluded to earlier.

  • Report this Comment On February 08, 2011, at 10:58 PM, prginww wrote:

    I speak Spanish and signed up for the site. Not impressed. The highly-touted games appear to be little more than ripoffs of Facebook ones (a farm game, mafia game etc.) I don't know anyone who uses the site either, I was searching for quite awhile.

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