Bitauto (NYSE:BITA) investors put the pedal to the metal last week, soaring 10.4% after a few Chinese tech darlings made sizable investments in the leading provider of online content and marketing services for the auto industry.
Bitauto announced that $300 million in strategic investments were made in the company last week. Half of that was in the form of convertible bonds, but the more head-turning development came in the names of the buyers of the other half. Search engine leader Baidu (NASDAQ:BIDU), Internet messaging juggernaut Tencent (OTC:TCEHY), and web-based retailer JD.com (NASDAQ:JD) invested $50 million apiece in Bitauto.
They each received 2.47 million new shares at a price of $20.23 per American depositary share. Tack that on to stakes they already had in Bitauto and Baidu, Tencent, and JD.com now own 3.2%, 7.1%, and 23.5% of the online car marketer, respectively.
It's a big deal for a company commanding a market cap of just $1.2 billion when the week began, and naturally the market is digging Chinese tastemakers validating Bitauto as an investment. Even if this doesn't wind up as a bidding war down the line between the minority stakeholders it strengthens the quality of Bitauto's Rolodex.
Street legal cred
Bitauto needed the boost. Even after last week's pop, the stock is trading 77% below its all-time peak set two summers ago. Its fundamentals are still driving in the right direction. Top-line growth may have peaked at 71% in 2014, but it's hard to dismiss the 46% year-over-year revenue growth it posted in this year's first quarter. Analysts see growth slowing to 35% this year, decelerating yet again to 21% come 2017.
The story isn't as kind on the bottom line. Bitauto has fallen short of Wall Street's expectations in three of the past four quarters. The stock also had a lofty valuation when it was a dot-com darling two years ago, and that's the kind of excess that makes investors skittish at a time when the Chinese economy is cooling down. It was seen as a thinking investor's play on the expanding middle class and the migration to automobiles when it was rolling, but now the hype has run out of gas.
Morgan Stanley downgraded the stock last month, slashing its price target from $28 to $20. Analyst Amanda Chen's concerns at the time were its aggressive transaction monetization and an easing of its ad subscriptions. Bitauto makes money setting up car dealer websites, but the lion's share of its business comes from its namesake site for new cars and taoche.com for used vehicles.
Bitauto didn't need the money it raised last week. Its balance sheet was flush with $577.5 million in cash by the end of March. The strategic investments were more about building relationships with Baidu, Tencent, and JD.com than amassing a war chest. That may serve it well in the long run, but investors will want to see improving results in the near term if it wants to justify last week's gains.