Can 58.com Bounce Back After Last Week's 10% Drop?

By Markets Fool.com

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Last week was a rough one for 58.com (NYSE: WUBA) investors. Shares of the Chinese online marketplace operator plunged 10% following a poorly received financial report and an equally uninspiring analyst downward revision.

58.com's second quarter may not seem so bad at first. Revenue soared 87% to hit $297.8 million for the company that some have likened to the Craigslist of China, and it posted its first profitable quarter since 2014. However, it's important to keep in mind that not all of the top-line growth at 58.com is organic. The namesake platform is growing, sure, but 58.com completed the revenue-padding acquisitions of rival online marketplaces Ganji and Anjuke last year. Analysts were actually holding out for slightly more revenue.

The Chinese dot-com speedster generates most of its business from membership services and online marketing services, accounting for 39% and 58% of the quarter's revenue, respectively. Membership revenue rose 76% to $115.1 million. This is essentially the subscription premiums that local merchants pay to drum up consumer leads through the online trading hubs. There are now 1.17 million premium memberships on 58.com's namesake platform, 49% ahead of where it was a year earlier. Ganji and Anjuke combine for 804,000 paying members that weren't on 58.com's books a year earlier when they combined for roughly 600,000 premium accounts.

Online marketing services revenue soared 93% to $172.2 million, largely through the addition of Ganji and Anjuke. 58.com itself also saw its original platform grow in popularity, something that the company credits to increased traffic and the effectiveness of real-time bidding services.

Out of the red, but still not in fashion

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The return to profitability on a reported basis after five quarterly deficits was relatively smooth. Cost of revenue outpaced the seemingly heady top-line growth, soaring 142%. This resulted in a slight contraction in gross margin. However, most of the other line items played along by growing a lot slower than revenue, helping improve net margin to the point where it squeezed out an operating profit of $35.5 million. 58.com delivered a profit of $0.10 a share or $0.15 a share on an adjusted basis. Analysts were holding out for a deficit.

That may not seem like a bad showing, but then we get to its guidance. 58.com is targeting between $304 million to $311 million in revenue for the current quarter, representing growth of 52% to 56% in Chinese currency. This is where analysts overshot on their expectations. The average top-line target was $343 million. Wall Street pros also expected that the current quarter was the one where 58.com would break into profitability, but the weak top-line growth now finds them forecasting a return to red ink for the third quarter.

Brean Capital analyst Fawne Jiang is concerned. She went on to lower her firm's price target on the stock from $65 to $57 following the problematic guidance. The outlook isn't as bad as it seems. 58.com explains during its call that its cutting loose some of the more problematic agencies that it's dealing with as paying members at the expense of the user experience. Replacing dealerships with direct sales is another strategy that may not pay off right away, but it should fortify its operations. The market clearly didn't like last week's report, but 58.com is still growing fast and doing enough things right to bounce back.

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Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.