First I started lighting Xunlei (NASDAQ:XNET) in November 2017 when the stock was trading at $24.05 and I figured it was a short trade that would “reverse soon”. The stock subsequently fell. 90% which was a sharp enough drop that by August 2022 I felt it had dropped too low and so I rated it as a strong buy based on its profitability and financial position. The stock is up 32% since that call.
Today, at the request of several readers, I would like to quickly update my position on the company. Much of what I said in the second article is still generally true, although the specific numbers need to be updated today.
Xunlei is a Chinese company that is not followed or covered in the US, in part because there is not much information in English to help investors understand the company and its operations. I believe that the best description of a company’s activities in English is given in its annual report. 20F Filing documents with the SEC. Namely (with my accent):
We operate a powerful cloud-based internet platform in China to enable our users to quickly access, store, manage and consume digital media content online. In recent years, we have expanded our products and services from PC-based devices to mobile devices, partly through pre-installed acceleration products in mobile phones to further expand our user base and offer our users a wider range of hotspots. We provide a wide range of products and services in cloud acceleration, blockchain, general cloud computing and digital entertainment create an efficient, intelligent and secure Internet environment.
In order to address the shortcomings of China’s Internet digital media transmission such as low speed and high delivery failure rate, we provide users with fast and easy access to online digital media content through the main products and services listed below:
- Xunlei Accelerator, our most popular and free productwhich allows users to speed up digital transmission over the Internet and has approximately 48.0 million unique visitors per month in December 2021, according to our internal record; and
- Cloud Acceleration Subscription Servicesthat are delivered through our Green Channel product and offer users premium services that are fast and reliable.
In addition to our core product, Xunlei Accelerator, we have also developed cloud computing and other value-added Internet services to accelerate corporate development and keep up with the latest industry trends and changing user needs. These value-added services and products mainly include streaming services and online gaming services.which provide us with synergy in our business operations.
Our mobile initiatives also benefit from our relationship with Xiaomi., one of our previous strategic shareholders. Since 2014, we have entered into a pre-installation service agreement with a Xiaomi group company that manufactures Xiaomi phones, a well-known smartphone brand in China. Under the agreement, we agree to provide our Mobile Xunlei acceleration plug-in, and the mobile phone manufacturer agrees to install such plug-in on their phones free of charge. This prepaid arrangement provides mobile phone users with access to our acceleration services, which we believe enhances our ability to generate more user traffic. Our mobile acceleration software has been officially adopted by Xiaomi operating systems and the software has been installed on Xiaomi phones sold in China, including both new phone shipments and system upgrades from existing Xiaomi phones..
Another key part of our strategy is to continue our innovation in crowdsourcing bandwidth and potential storage from users of our cloud computing hardware devices so that we can continuously provide computing resources to third parties such as Internet content providers through our CDN services. . In the third quarter of 2015, we began generating revenue from the sale of crowdsourced uplink capacity we received from users of our cloud computing services to third parties. To further develop our cloud computing business, we launched our decentralized cloud computing product OneThing Cloud in 2017. . OneThing Cloud is essentially a cloud storage and sharing device that allows users to share internet bandwidth and idle storage resources with our content delivery networks.. Third parties that have purchased our cloud computing services mainly include Internet content providers such as iQiyi and Xiaomi. In 2020, we launched our own rewards program that allows OneThing Cloud users to share free, crowd-sourced uplink resources and external storage with us in exchange for a small cash reward.
Latest financial results
As I mentioned in my previous article, XNET was attractive not only because of its cash position (which we will discuss below), but also because its revenues and revenues were growing. Recent results confirm this trend.
From the November 2022 earnings report, we learn that third-quarter revenue grew 12.8% sequentially and 47.1% year-on-year. This performance was the result of the following figures in the company’s three reportable segments (with my emphasis):
Cloud computing revenue was $29.1 million, up 2.7% from the previous quarter. The increase in cloud computing revenue was mainly driven by increased demand from our main customers for our cloud computing service…
Subscription revenue was $25.0 million, down 1.7% from the previous quarter. The number of subscribers as of September 30, 2022 was 4.37 million compared to 4.46 million as of June 30, 2022.
Revenues from live broadcasts and other IVAS totaled US$34.2 million. which is 39.4% more than in the previous quarter. Growth in live broadcasts and other IVAS revenues was driven primarily by Growth in paying users of our live streaming products launched in 2021 and our enhanced monetization options.
This increase in revenue (a record for the company) also led to a new record level of net income for the quarter. The diagram below helps visualize this.
In other words, the company is doing very well.
Cash on hand
The company’s performance continued to strengthen its balance sheet, while cash and short-term investments increased again.
With 66.5 million ADSs outstanding, the company has about $3.75 ($251 million/66.5 million) of cash and short-term investments per ADS. With a share price of $2.12, that’s 178% of the share price. This explains why the company still has a notable negative enterprise value ($85.8 million).
Being profitable and having a negative EV is the perfect reason to buy back shares, as each purchase adds to book value and cash. The company understands this, therefore:
Since the approval of the $20 million share repurchase plan in March 2022, the company has used $4.3 million of it as of September 30, 2022. Here is the result:
Given the company’s profitability and extremely strong cash position, I expect it to continue to buy back its shares, eventually using all of the $20 million that was approved, and possibly with another approval after that.
Since XNET has a negative corporate value, it gets a meaningless score on any metric that includes EV, but in fact, all of these metrics are incredibly strong. With that fact in mind, here is a summary of the Seeking Alpha evaluation scores.
I believe the valuation numbers, combined with so much cash and rising earnings, fully justify the “strong buy” rating on XNET. However, Seeking Alpha does not provide a quantitative rating for this particular ticker, possibly because the company does not have an analyst. However, this undercoverage is another contributing factor to XNET being currently undervalued by the market.
XNET trades options, but they are not particularly liquid. However, since my positions were small, I was able to enter stocks through naked puts, and the stock was just called off by covered calls I wrote against my position. I may try to replicate this strategy in the future.
The risks here are twofold: firstly, the company cannot meet its obligations, and secondly, the same risk that I indicated in my previous article:
The biggest risk with XNET, in my opinion, is the same as most Chinese stocks, ie. the company is a VIE and thus the shareholders do not actually own the company. Here is a good link describing this risk.
These risks are, in my view, somewhat mitigated by XNET’s net cash position and its rising earnings and earnings. However, as with all Chinese stocks, I took a much smaller position on that name than if it were based in the US.
Summary and trading plan
I believe that XNET currently provides us with a buying opportunity that arises mainly because the company is not well watched and unknown. There are no analysts on Wall Street, public information (in English) is difficult to gather, and funding is not required. But all this can be an advantage for small investors. My position was recently withdrawn, but I plan to get back into equities, probably buying some at today’s prices, but then trying to get a full position if the stock trades below $1.75 (which is just above short-term resistance).