Investors flee the No. 2 news aggregator after its latest earnings show it shifting focus to cost control over money-losing growth

By Doug Young

The latest financials are out from news app aggregator Qutoutiao Inc. (Nasdaq: QTT), and while a few financial disciplinarians may like them, most people were far from pleased with what they saw.

That’s the major takeaway from the company’s quarterly report released Thursday, sparking a massive selloff that saw Qutoutiao’s shares lose a quarter of their value.

We’ll review the numbers shortly to see what exactly is going on at this company that bills itself as China’s number-two news aggregator behind Jinri Toutiao, the ByteDance-owned behemoth. But it’s quite obvious from a quick look at the report what frightened investors to the tune of $200 million, which is how much market value was wiped out when Qutoutiao’s shares tanked.

In a nutshell, the money-losing company is shifting gears and looking for a way to make profits rather than its previous pursuit of growth at any cost. While that may be commendable from a good capitalist’s point of view, it’s clearly not exciting for investors who love to see double- and even triple-digit revenue growth from Chinese tech startups at this stage in their lives.

That said, it may be slightly premature to give up on this company. While its days as a standalone company could be numbered, it might still become an attractive takeover target for a number of profitable internet names due to its relatively strong position in mobile news.

As is often the case with Chinese tech startups, everything will depend on the company’s founder Tan Siliang, who also goes by Eric Tan. We’ll return to that part of the equation later. But first, let’s take a dive into Qutoutiao’s latest financials and see what spooked the market so much.

The most-revealing figure is Qutoutiao’s top-line revenue, which sank by a fairly sizable 21.5% to 1.3 billion yuan ($200 million), according to the report. From there it’s really just more of the same.

The company’s daily average users (DAU) totaled 32.3 million in the fourth quarter, down by almost a third from a year earlier. Much of that drop occurred quite recently, with fourth-quarter DAUs down 19% from the previous quarter. The picture is almost as bleak in terms of monthly active users (MAU), which were down a milder 9.6% year-on-year to 124.7 million.

Cutting Costs

On the more-positive side, the company sharply reduced its R&D and marketing expenses, which dropped 30.6% and 50.3%, respectively, to 200 million yuan and 680 million yuan during the latest quarter. That kind of cost-cutting helped the company sharply reduce its net loss to a relatively modest 78.7 million yuan from a much-larger 562.8 million yuan a year earlier.

Qutoutiao’s money-losing ways haven’t helped its stock too much since its 2018 IPO, though probably the bigger issue has been its distant second-place status to the hugely popular Jinri Toutiao. The company listed on the Nasdaq at $7 per American Depositary Share (ADS) in September 2018 and briefly saw its price nearly double a few months later on high hopes for its future.

But it has been all downhill since then. The company’s stock has languished in the $2-to-$4 doldrums for most of the last year as it becomes increasingly clear it will never catch up with ByteDance, which is famous for the addictive algorithms that power not only Jinri Toutiao but also its hugely popular short-video apps, Douyin and TikTok.

With those kinds of odds against it, it’s not too surprising that Qutoutiao has finally decided to focus on the bottom line rather than trying to catch up to a far superior rival. That may even be an admirable strategy, and one that could benefit shareholders, if the company can ultimately sell itself at a premium.

There should be a number of interested and profitable buyers out there who could easily afford such a purchase, including portal operators Sina and NetEase, or even a telco like China Mobile looking for this kind of mobile news app to complement their existing services. Everything will hinge on Eric Tan, who founded Qutoutiao five years ago and currently holds 36.4% of its shares and a whopping 75% of its voting power, according to its latest annual report.

That kind of arrangement is all too common in Chinese tech startups. It can sometimes be a plus if you get a visionary like Alibaba’s Jack Ma or Tencent’s Pony Ma at the helm of the ship. But more often it can be a major albatross, since Tan and many of his peers often treat their companies like personal fiefdoms and would rather let them die slow and painful deaths than give control to someone else.

That said, Tan’s decision to pursue profits over growth could be a sign for optimism, perhaps representing a white flag of surrender that acknowledges he will never beat ByteDance and is changing course as a result.

If that’s the case, a sale of the company could be his ultimate end game, which would probably come in the next year, if and when he can finally show that Qutoutiao can be profitable. But many Chinese tech startups, such as former e-commerce highflyer Dangdang and web portal Sohu, have ultimately succumbed to their founder’s hubris, and it’s equally possible that Qutoutiao could also follow down that path.

Two key takeaways:

1) Qutoutiao has shifted its focus to controlling costs and seeking profits over growth at any cost.

2) The company’s ownership of China’s No. 2 news app could make it an attractive acquisition target for a larger, more profitable buyer like Sina, NetEase or even a China Mobile      

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