When is bad news good news? In Wall Street speak, that's not a trick question at all. A company can have a difficult quarter and still find its shares inching higher, as long as it didn't stumble as badly as the pros were expecting.
We saw that this morning with TOMOnline (NASDAQ:TOMO). At first glance, the Chinese wireless entertainment specialist blew it. Revenue fell by 15% to $39 million and net income tumbled 59% to $0.12 a share. However, the stock opened 6% higher because analysts were only holding out for $0.06 a share in profits on $34 million in revenue.
Despite mustering a healthy 36% increase in online advertising, TOM Online's flagship wireless Internet business suffered a 20% hit. That's more than enough to sink this battleship when the segment accounts for 89% of its revenue mix.
It's just not a good time to be toiling away in wireless offerings. A few years ago, you had NetEase (NASDAQ:NTES), SINA (NASDAQ:SINA), and Sohu (NASDAQ:SOHU) all tearing up the market. They had their hands deep in the wireless cookie jar until the regulatory environment in China began cracking down on the cell-phone entertainment that they were providing. Thankfully, all three companies landed on their feet as they diversified into areas like Internet gaming and beefed up Web portals.
TOM Online is now bearing the wrath of both government policy pressures as well as a fierce competitive environment for the scraps that are still fair game. TOM is all over the map there. Whether it's multimedia messaging services or peddling ringback tones or promoting the Dream China talent show contest, TOM is all over the growing leisure space in China. Yes, that's a great place to be with the resilient Chinese economy, but the company isn't alone.
It is looking for further weakness in the current quarter. That doesn't mean that the stock's not worthy of its status as a Stock Advisor newsletter recommendation. As we have seen with regulatory lulls and cutthroat competition, the pressure eventually passes and the survivors get back into feasting mode.
TOM has the right ingredients to make it. It has struck the right deals, like one brokered two years ago with eBay's (NASDAQ:EBAY) Skype to help introduce the now-ubiquitous voice chat software in China. Now it just needs to bide its time -- hopefully continuing to disappoint less than the market fears -- for its chance to grow again.
TOM Online, eBay, and SINA have all been recommended to Stock Advisor subscribers. NetEase is a Rule Breakers pick.
Longtime Fool contributor Rick Munarriz is a fan of China's growth story but does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
