What happened

VNET Group (VNET -6.06%) reported third-quarter results after the closing bell on Thursday, Nov. 18. The reported numbers were mildly disappointing and investors ran for the exits when management comments implied that future results may be limited by heavy-handed regulation and sprawling competition. VNET shares were trading 16.2% lower at 1:15 p.m. ET.

So what

The China-based provider of value-added data networking services such as content delivery networks, last-mile broadband connections, and website hosting platforms saw third-quarter sales rise 25% year over year to $242 million. The revenue gain was a more generous 32% in light of currency exchange trends over the last year as the Chinese Yuan has strengthened in value against the U.S. dollar.

On the bottom line, adjusted earnings fell from a net profit of $0.07 to a net loss of $0.03 per diluted American depositary share (ADS).

The analyst consensus had called for a net loss of roughly $0.06 per ADS on top-line sales near $241 million.

Two technicians working on servers in a data center cabinet.

Image source: Getty Images.

Now what

Well-respected analyst firm Goldman Sachs didn't do any favors for VNET's falling stock when it reacted to this report with a double downgrade from buy to sell. Goldman analyst Tina Hou lowered the stock's target price from $32.80 to $11.50, pointing out that customer demand is likely to slow down from here as VNET faces more competition and tighter market control by Beijing's regulators.

In particular, Hou is not convinced that the company will be able to meet its stated targets for data center installation growth. On top of the regulatory issues and competition for client contracts, VNET also faces a shortage of the labor, materials, and equipment needed for installing thousands of data center server cabinets.

China is a tricky market in the best of times. VNET may turn out to be a solid turnaround story some day, but I can't say how far the stock might fall before the recovery can begin. For this stock, the sidelines look like a good place to be until further notice.