Shares of BitAuto Holdings (BITA) jumped nearly 12% on June 13 after the online services provider for the Chinese automotive industry posted its first-quarter numbers. Its revenue rose 52% annually to $346.1 million, topping expectations by nearly $38 million.
Its non-GAAP net income fell 76% to $5.9 million, or $0.13 per diluted ADS, but that still beat estimates by $0.21. However, Bitauto remains unprofitable on a GAAP basis, and its losses widened from $8 million to $46 million.
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Investors were likely concerned about those losses, and Bitauto's initial rally quickly faded. The stock ended the day up less than 2%, and remains down 14% for the year. Should investors give Bitauto a chance at these levels, or does it face too many headwinds to make a sustained recovery?
The bull case for Bitauto
Bitauto's top-line growth looks solid. Its transaction values more than doubled to $180 million during the quarter, its advertising and subscription revenues climbed 16% to $123 million, and its digital marketing solutions revenues grew 28% to $33 million.
Bitauto is also backed by Chinese tech giants Tencent (TCEHY 3.23%) and JD.com (JD 2.61%). Tencent owns WeChat, the top mobile messaging app in China, while JD.com is the country's second largest e-commerce player after Alibaba.
Tencent's and JD's investments in Bitauto, which date back over three years, allow the two companies to expand their ecosystems into the online automotive market. By tethering itself to Tencent's WeChat and JD's online marketplace, Bitauto widens its moat against Autohome (ATHM 1.98%), its primary rival.
Bitauto is also posting stronger top-line growth than Autohome. Wall Street expects Bitauto's revenue to rise 24% to $1.7 billion this year, while Autohome's revenue is expected to climb just 13% to $1.1 billion. Yet Bitauto trades at 1.1 times this year's sales, while Autohome has a much higher ratio of 12.2. Bitauto also trades at less than 19 times this year's earnings, while Autohome trades at 33 times forward earnings.
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Bitauto is expanding its ecosystem. Yixin, its transaction services subsidiary, recently partnered with used car transaction provider Yusheng through a strategic investment. It expects that partnership -- along with its integrations with Tencent and JD -- to strengthen its presence across China's used car market.
The bear case against Bitauto
Despite those strengths, Bitauto still faces formidable macro and micro challenges. On a macro level, China's auto sales have been slowing down over the past few years, while new U.S. tariffs could disrupt sales of American vehicles in China.
On a micro level, Bitauto remains at a disadvantage against Autohome, since the latter is more profitable. Autohome's non-GAAP net income rose 42% annually to $81 million last quarter, while analysts anticipate 20% earnings growth for the full year.
Bitauto attributed most of its GAAP loss last quarter to "increased expenses" related to its "marketing efforts and a provision for credit losses." Simply put, Bitauto's expenses will keep climbing as it tries to counter Autohome. Autohome's expansion of a cloud-based SaaS (software as a service) platform for over 35,000 used car dealers could also counter Bitauto's deal with Yusheng.
Lastly, Bitauto's top-line growth is decelerating. It expects just 24%-26% revenue growth during the second quarter on an ASC 606 accounting basis (or 23%-25% growth on a gross basis). That slowdown, combined with tough competition and rising costs, won't bode well for its bottom-line growth.
The verdict: Avoid Bitauto for now
Bitauto has clear strengths, but it remains a risky investment. Its losses could widen as it ramps up its efforts to counter Autohome, and macro concerns about auto sales or trade tensions could easily sink both stocks. For now, I'd stick with better-diversified online players like Tencent and JD instead of smaller players like Bitauto.
