Seeking Alpha • Aug 30
Xunlei: Recently Profitable And Trading Well Below Cash
Summary
XNET has been growing revenues consistently and recently turned profitable.
Despite this, the company trades at a substantial discount to realizable cash.
I identify several factors that could cause the company to be re-rated and thereby trade at a more reasonable price level in the near term.
Several years back I wrote an article on Xunlei (XNET) in which I explained why I had taken a short position in the stock.
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As the stock has fallen precipitously since then, I'm now reversing my stance; and have taken a small long position in the company. In this article I explain my very straightforward reasoning for this decision.
Bigcharts
The Company
XNET is a Chinese company providing cloud computing, blockchain and live streaming internet services. The most recent quarter's total revenues of $78.3M were split as follows:
Cloud computing $28.3 (36.1%)
Blockchain subscription $25.4M (32.4%)
Live streaming $24.5M (31.3%)
As can be seen from the quarterly revenue chart below, the company has been growing steadily since inception. Thus it is an ongoing business, yet, as I show below, it trades as though it were a proverbial "cigar butt" stock.
XNET Revenue (Quarterly) data by YCharts
Furthermore, the company has guided 3Q revenues in the range of $82M to $87M which would represent record quarterly revenues.
Realizable Cash & Shares Outstanding
Here is the company's latest balance sheet, dated June 30, 2022, as shown in the quarterly earnings release of that same date.
Earnings Release
Strictly speaking, net current assets is calculated by subtracting total current liabilities from total current assets, but since all liabilities eventually must be paid (while some long term assets, like Goodwill, may never be realized), I find it more conservative to consider realizable cash as total current assets less total liabilities. In this case that calculation gives realizable cash of $163M. The company ADRs have a ratio of 5:1 to the ordinary shares, such that currently there are 68.06M ADRs outstanding, so XNET's realizable cash per ADR is equal to $2.40, yet the ADRs currently trade at $1.43 (i.e. a 40% discount!). This is the biggest reason to be bullish on the shares.
The risk with this type of situation is always that the company will lose money over time, and will thereby deplete the net current assets. To investigate this, let's look at:
Profitability and Valuation
As shown in the chart below, the company has recently moved towards profitability, but it doesn't yet have a track record of consistently making money. I think if it can show sustained profitability for a few more quarters then there's a good chance the market will re-rate the stock and give full credit for the net current assets per share.
XNET Net Income (Quarterly) data by YCharts
In terms of valuation, the company looks good across all metrics (note that because of the large cash position, the company's EV is a negative $129M so the EV ratios show as not meaningful).
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Share Buyback
Another catalyst that might help the company begin trading above net current assets is its recent share buyback authorization. Here is the latest update on this from the most recent earnings report:
In March 2022, Xunlei announced that its Board of Directors authorized the repurchase of up to $20 million of its outstanding common stocks over the next 12 months. As of June 30, 2022, the aggregate value of purchased shares was approximately US$1.74 million.