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Is Mogu a Hidden Gem in China's Crowded Tech Market?

Leo Sun, The Motley Fool

Chinese online fashion company Mogu (NYSE: MOGU), which went public last December, recently posted its first quarterly report as a public company. Mogu's revenue rose 20% annually to 367.2 million RMB ($53.4 million) during the third quarter, which marked a significant acceleration from its 2% sales growth in the first six months of the year.

Mogu's operating loss narrowed year-over-year from 202.5 million RMB to 97.7 million RMB ($14.2 million), while its net loss narrowed from 156.1 million RMB to 42.2 million RMB ($6.1 million) -- or a loss of 4.03 RMB ($0.59) per ADS.

A hidden gem being guarded by ants.

Image source: Getty Images.

Mogu's growth looks solid, but the stock remains just slightly above its IPO price of $14, and is covered by just three analysts -- all of whom rate it a "hold", without clear revenue or earnings forecasts. So is Mogu a hidden gem in the Chinese market?

Understanding Mogu's business

Mogu runs a digital fashion portal on its website and mobile app. The platform used to sell its products through a Pinterest-style pinboard and display ads, but it eventually launched live video streams, which let social media influencers and merchants sell products directly to viewers.

Mogu's primary audience consists of females between the ages of 15 and 30. Tencent (NASDAQOTH: TCEHY) and its e-commerce partner JD.com (NASDAQ: JD) are two of Mogu's biggest investors. Mogu generates nearly a third of its sales from its Mini Program inside Tencent's WeChat, the top mobile messaging app in China with over a billion monthly active users (MAUs). It also uses JD's logistics platform to fulfill orders.

Over the past 12 months, Mogu's active buyers (registered accounts that placed at least one order during the period) rose 2% annually to 34.5 million. Its trailing 12-month GMV (gross merchandise volume), or the value of all goods sold across its platform, rose 22% to 16.98 million RMB ($2.5 million).

Within that total, its GMV from live video broadcasts surged 178%, while its average mobile MAUs who clicked on a live broadcast over the past 12 months climbed 44%. Mogu had 65.2 million mobile MAUs at the end of 2018, but it didn't update that figure during the third quarter.

A young woman broadcasts a live video on her phone.

Image source: Getty Images.

Mogu generates its revenue from two core businesses: traditional display ads and commissions from merchants. The company has been pivoting away from its lower-margin ads toward higher-margin commissions, which range from 5% to 20%. It's using its live video ads to boost its commissions per merchant.

Its smaller "others" business segment generated revenue from direct sales of beauty products, which are currently undergoing a trial launch and could potentially be integrated into its live videos with beauty bloggers. Here's how those three business units fared last quarter.

Metric

YOY revenue growth

Percentage of revenue

Marketing

(9.6%)

35.8%

Commissions

34.7%

47.8%

Other

104.6%

16.4%

Source: Mogu Q3 earnings report.

The decline in Mogu's marketing revenue, which throttled its sales growth in the first half of the year, wasn't surprising due to its reduced dependence on ads. Meanwhile, its higher Commissions and Other revenue offset that decline, and will likely continue to do so over the next few quarters.

Mogu's total costs and expenses only rose 8% annually to 464.9 million RMB ($67.6 million) as it reined in its R&D and marketing expenses. It also received a government grant during the quarter, which boosted its "other net income" from 2.7 million RMB a year ago to 10 million RMB ($1.5 million).

Is Mogu a "hidden gem"?

Mogu's migration toward higher-margin businesses and its tighter cost controls should lead to narrower losses (and possibly even a profit) over the next few quarters. If that happens, Mogu could attract more attention from analysts and institutional investors.

However, the trade tensions between the U.S. and China are still keeping investors away from most Chinese stocks, and Mogu remains a tiny, easily overlooked player in a sea of e-commerce and live video contenders. Therefore, I don't recommend buying a large position in Mogu, but it could be an interesting speculative play that might attract more investors over the long term.

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Leo Sun owns shares of JD.com and Tencent Holdings. The Motley Fool owns shares of and recommends JD.com and Tencent Holdings. The Motley Fool has a disclosure policy.