One of China's more obscure but fastest growing companies is getting some financial help from a dot-com giant. Alibaba Group (BABA 4.92%) is providing roughly $171 million to Qutoutiao (QTT 1.07%) in the form of a convertible loan. The transaction is convertible at Alibaba's option into approximately 11.4 million shares of Qutoutiao at a price of $15 per American depositary share (ADS), or a roughly 4% stake in the mobile content aggregator.
It's a win-win deal. Alibaba is able take a position in a niche online player that is growing quickly -- Qutoutiao's revenue soared 426% in its latest quarter. And if Qutoutiao falls out of favor (its shares have nearly doubled in 2019), Alibaba will at least collect the trickle of accrued interest on the loan.
Qutoutiao is an even bigger winner, and it has nothing to do with receiving $171 million in aggregate principal at a mere 3% interest rate. As an Alibaba investment, Qutoutiao just saw its credibility and exposure get a major boost. Merely being associated with Alibaba should open doors, and that's exactly what Qutoutiao needs right now since, frankly, its balance sheet is already pretty clean with $334.9 million in cash and no debt before taking on this loan.
Aggregating the aggregator
Qutoutiao is one of this year's biggest winners, and that was with the shares taking a 20% hit after serving up mixed quarterly results earlier this month. The $193 million it scored in revenue was better than expected, but it also posted a larger loss for the fourth quarter than Wall Street pros were modeling.
The popularity of the mobile platform -- where Qutoutiao uses AI to aggregate articles and short videos in customized feeds -- is unquestionable. Average monthly active users have soared 286% over the past year to hit 93.8 million. Daily active users have also more than tripled, to 30.9 million. The sticky nature of its feeds is even more tantalizing, and the average time spent on the platform has nearly doubled to 63 minutes a day over the past year for its daily active users.
The deficits are a minor concern, and Alibaba's infusion will help pad Qutoutiao's liquidity by nearly 50%. However, this is all about increasing awareness of its platform as well as its ad-supported Midu literature mobile app. Alibaba's presence can help do that, even if it doesn't actively promote Qutoutiao's offerings.
This has been a spectacular year so far for Qutoutiao investors, and that comes after a rough start to its rookie season. The company went public at $7 a little more than six months ago, but closed out 2018 as a broken IPO.
Growth will inevitably slow at Qutoutiao. Its guidance issued earlier this month calls for 149% to 181% top-line growth in 2019. It makes sense for Qutoutiao to strike while its momentum is hot, and giving up a 4% stake if its stock continues to appreciate should be a fair trade for investors, given the limited dilution -- which won't even happen unless the stock is trading nicely higher in the future than it is now.