Chinese online fashion company Mogu (NYSE:MOGU) went public on Dec. 5 at $14 per share, but the stock tumbled and remains below its IPO price as of this writing. That was disappointing, since Mogu already priced its IPO at the low end of its $14 to $16 range, but it wasn't surprising -- escalating trade tensions are causing many investors to shun Chinese stocks. Let's discuss six key points about Mogu to see if the stock could rebound when the market recovers.
1. Mogu's business model
Mogu operates a digital fashion magazine with integrated e-commerce and live video features. The platform initially sold most of its products and display ads on a Pinterest-style pinboard, but it gradually pivoted toward live video streams that let merchants and social media influencers directly sell fashion products to viewers.
In fiscal 2018, Mogu's average mobile active users (MAUs) rose 28% to 65.2 million, its active buyers grew 35% to 33 million, and over 48,000 fashion influencers use its platform. Its primary audience consists of females between the ages of 15 and 30.
2. How Mogu makes money
Mogu generates revenue from two main sources: placing display ads across its platform and earning commissions from merchants. It's been reducing its dependence on its ad revenues and increasing its dependence on higher-margin commissions, which range from 5% to 20%.
That's why its marketing revenues -- which accounted for 49% of its top line in 2018 -- fell 36% during the year. Meanwhile, its commission revenues, which accounted for 43% of its top line, climbed 78%. Its "other revenues", which came from financial solutions and other services, jumped 81% but only accounted for 8% of its top line.
3. Slowing growth and a lack of profits
That strategic shift caused Mogu's total revenue to fall 12% in 2018, but it stabilized and rose 2% annually to 489.5 million RMB ($71.2 million) over the past six months. It also allowed the company to significantly reduce its total expenses, which declined 17% in 2018 and dropped another 19% to 797.9 million RMB ($116.2 million) over the past six months.
Mogu remains unprofitable, but its net loss narrowed year-over-year from 427.9 million RMB to 303.3 million RMB ($44.2 million) during the first six months of the year. The decline can be partly attributed to expenses related to Mogu's merger with its chief rival, Meili, in 2016.
Meanwhile, Mogu's cash and equivalents declined 27% to 892.5 million RMB ($130 million) during that period, which explains why Mogu was eager to go public. Its IPO only raised about $67 million, which would only last a few more quarters at its current cash burn rate.
4. Pivoting away from Alibaba toward JD and Tencent
Mogu was founded by Chen Qi, a former engineer at e-commerce giant Alibaba (NYSE:BABA). The first version of the platform mainly promoted products from Alibaba's Taobao, from which it earned referral commissions.
Alibaba tried to invest in Mogu to tighten its control over the platform, but Mogu rejected those advances. Shortly afterwards, Alibaba banned both Mogu and Meili from Taobao, which persuaded the two rivals to merge.
Tencent (OTC:TCEHY), which owned a stake in Meili, then became an investor in Mogu. Over the past six months, 31% of Mogu's sales came from its "mini program" on Tencent's WeChat, the top mobile messaging app in China with 1.08 billion MAUs.
JD.com (NASDAQ:JD), Alibaba's main rival and Tencent's biggest e-commerce partner, agreed to buy 42% of Mogu's shares during its IPO. The combination of Mogu and JD's platforms, along with WeChat's mini programs, could lock in more shoppers and significantly widen the company's moat.
5. Beware the ownership structure
Mogu uses a dual-class ownership structure that makes it practically impossible for major investors to influence its decisions. CEO Chen Qi holds a voting stake of nearly 80% -- which nearly matches JD founder and CEO Richard Liu's stake in his own company.
That's troubling, especially if you recall that Liu's arrest earlier this year paralyzed JD's board, which couldn't make any decisions in his absence. Chen's total control over Mogu represents a "key person risk" for the company.
6. The stock isn't cheap
At its IPO price, Mogu has a market cap of about $1.3 billion -- much lower than the $4 billion valuation it reached as a start-up earlier this year. Yet that still values the stock at 9 times last year's sales.
Alibaba trades at 8 times trailing sales, and JD trades at less than 1 times sales. Alibaba and JD are both generating higher sales growth than Mogu with much larger market shares, so it's tough to justify the latter's premium valuation.
The key takeaway
Mogu has a unique business model, but it seems to be a work in progress instead of a sustainable strategy. Its uneven sales growth, lack of profits, and high valuation all indicate that investors should stick with market leaders like Alibaba and JD instead -- especially in a hostile market for Chinese stocks.