Qutoutiao IPO – Jumped gun

Way too early to go public.

• Most metrics for Qutoutiao are pointing in the wrong direction, leaving only its relatively low penetration of the Chinese market as a positive.
• Qutoutiao is a content aggregator which makes some sense in a world where there is so much content that finding what one likes is increasingly difficult.
• On the plus side, those that use it every day clearly love it as they are spending an average of 56 minutes per day engaged with the service.
• Unfortunately, this engagement is coming at huge cost as users are becoming more and more difficult to recruit which points to cut-throat competition with Bytedance in the race to reach scale.
• Against that backdrop, it is clearly ay to early to go public implying that’s its reasons for doing so may be related to its competitor Bytedance which is also considering a Hong Kong IPO towards the end of this year.
• In my opinion, this is a very bad reason to go public meaning that unless the valuation is very attractive (unlikely), investors may suffer some heavy corrections as reality asserts itself through quarterly reports.
• The numbers are very mixed (see here):
  • First, marketing expenses: in 2017 these were 106% of sales which have climbed to 117% of revenues in H1 2018.
  • This strongly implies that a rapidly diminishing return on investments being made in marketing as user growth is slowing.
  • Second, user metrics: at the end of 2017, 73.1m users had installed the app of which 33% were using it at least once per month and 13% were using it every day.
  • The last six months have seen the metrics weaken with installs growing strongly to 133m but only 24% of users using it once per month and 9% using it every day.
  • July saw some improvement with installs increasing to 154m and 32% of users using it once per month and 11% using it every day.
  • The MaU improvement in July is to be treated with caution as over a one-month period an install is very likely also to be considered a MaU.
  • Third ARPU: During 2017, Qutoutiao had an average MaU of 13.7m users which generated $0.47 per user per month. generated it increased to $0.53 per MaU per month at the end of H1 2018.
• The net result is that Qutoutiao has potential as it has been able to increase the monetisation of its users and is still experiencing rapid user growth.
• The problem is the crippling marketing expenses which are consuming all of the company’s resources and show no sign of abating.
• This is particularly the case as there is clearly a land grab going on between Bytedance and Qutoutiao resulting in the sea of red ink that Qutoutiao is reporting.
• If these expenses could be reduced to normal levels, then Qutoutiao would be a very profitable business with good cash flow.
• However, while both companies remain well financed with big optimistic backers, the bloodletting is likely to continue.
• This clearly makes the timing for an IPO very poor, and I think that there are far better options for investors than to finance a bloody battle for users.
• The valuation will need to be extremely attractive to even consider an investment.

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