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Why Lizhi Stock Dropped 10% on Tuesday

By Demitri Kalogeropoulos – Updated Aug 31, 2021 at 3:33PM

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Wall Street wasn't thrilled with the Chinese audio specialist's latest earnings update.

What happened

Lizhi (LIZI 8.06%) shareholders lost ground to the market on Tuesday, with the stock dropping 10% by 3:15 p.m. EDT, according to data provided by S&P Global Market Intelligence. The audio platform specialist sank after reporting its latest earnings results.

A woman wearing headphones while interacting with a smartphone.

Image source: Getty Images.

So what

The Chinese tech producer revealed solid sales growth for the period that ended in late June. A 7% uptick in paying users, along with higher average spending, helped push revenue up 59%. Management highlighted other key wins in the second quarter, including a big boost in gross profit margin. "We are very pleased to continue our strong growth momentum," CEO Marco Lai said in a press release.

Yet Wall Street chose to focus instead on some financial concerns about the business. These include net losses due to an aggressive growth strategy, and a rising share count. Lizhi needs cash from these sources to fund major growth initiatives, including a push into higher quality audio content for its platforms.

Now what

CFO Chengfang Lu said that Lizhi is aiming for sustainable long-term growth. Yet it's clear from sharply rising expenses that the company is prioritizing revenue gains over profitability for now.

That's the right strategy for the small-cap business, but one that could spur more stock price swings ahead. Wall Street doesn't have a clear picture into Lizhi's ability to use the funds it is raising through stock offerings to increase shareholder value. Until that big question is answered, shareholders should expect continued volatility for this stock.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Stocks Mentioned

Lizhi Inc. Stock Quote
Lizhi Inc.
LIZI
$0.81 (8.06%) $0.06

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