Company best-known for its beauty app has found a second life in selling services to photo studios and cosmetics stores

Key Takeaways:

  • Meitu reported its revenue grew 40% last year, driven by 147% growth for its services targeting business customers like photo studios and cosmetics stores
  • Company’s advertising revenue, which accounts for nearly half of its total, grew by just 12% as clients reined in their spending

By Doug Young

Could 2022 be the year that neglected beauty app Meitu Inc. (1357.HK) finally becomes the belle of the ball with its first-ever profit? Perhaps, with a little help from some Ether.

The company that shot to fame with its app that lets people make photos of themselves more beautiful held out the tantalizing possibility that it could finally move into the black this year in its latest annual results released on Tuesday. Those results showed it was still squarely in the red last year, posting a net loss of 77 million yuan ($12 million), a bit bigger than its 60 million yuan a year earlier.

But in reality, the company is actually doing quite well, following its decision more than a year ago to shift its focus from vain but stingy consumers who were used to getting its services for free to businesses like cosmetics shops and photo studios that are much more willing to pay. Such a shift from 2C to 2B services is quite common among internet companies that find they can generate big user numbers from the former group, but have difficulty translating that into revenue.

But we digress. The company’s latest annual report shows that much of last year’s loss was due to a large write-down related to one of its earlier acquisitions. Without that and some other non-cash items, the company reported an adjusted net profit for the year of 85 million yuan, up 40% from 2020. On an adjusted basis, the profit growth actually accelerated to 44% in the second half of the year from 34% in the first half.

What’s more, the company is sitting on a huge gain related to a $100 million bet on the Bitcoin and Ether cryptocurrencies last year that led some – including us – to raise their eyebrows and question whether this was a good strategy. Meitu’s latest report shows it lost about 28.5 million yuan on its Bitcoin bet, which it recorded as a write-down in its 2021 results. But its Ether bet did much better, gaining 426 million yuan in value that has yet to be recorded as a gain.

Thus, assuming it doesn’t have any big new write-offs, the company could quite easily record its first-ever net profit in the first half of this year. If it decides to sell its Ether holdings and realize a big gain from those, the profit could be even larger.

While all that sounds good, and reason to bet on the company, investors didn’t seem to see it that way. Meitu’s shares tumbled 15% on Thursday after the results came out and were flat in early Friday trade. The stock has lost about two-thirds of its value from a peak in February last year, and is down by an even bigger 90% from its 2016 IPO price.

Its price-to-sales (P/S) ratio also looks quite weak if we consider the company as a software as a service (SaaS) provider, which is its fastest-growing business, now accounting for nearly a third of revenue. It currently trades at a P/S of just 2, compared with a 3.4 for e-commerce SaaS provider Weimob (2013.HK) and an 8 for real estate-focused SaaS company Ming Yuan Cloud (0909.HK).

Weak advertising

From our perspective, we really can’t see what’s the major downside to this company that has investors so put off. Perhaps it’s Meitu’s core advertising business, which accounts for nearly half of its revenue, but logged unimpressive 12% growth last year to 766 million yuan. Meitu admitted that part of its business had “reached a point of maturity and stability.”

But honestly speaking, last year was a difficult year for most companies that rely on advertising as many of their clients reined in marketing budgets. Search giant Baidu (BIDU.US; 9888.HK) nicely reflected the broader trend, reporting its online marketing revenue for 2021 grew just 1% from 2020. That means Meitu actually outpaced the broader industry.

Advertising aside, Meitu posted much-better growth of 147% for its VIP subscription services and image SaaS business that sells mostly to other businesses. That part of the business generated 519 million yuan last year, growing to account for 31% of all revenue from just 18% the previous year.

Those two big revenue sources, combined with a few others, gave Meitu 1.7 billion yuan in revenue last year, up 40% from 2020. In a slightly troublesome sign, the revenue growth slowed to 35% in the second half of the year from 45% in the first half, though the company didn’t comment on that trend.

In another sign that some might see as troublesome, the company’s monthly average users fell 11.6% last year to 231 million. But the lion’s share of these are probably the non-paying type of users that Meitu could do better without. Accordingly, Meitu might privately be saying “good riddance” to these freeloaders that ultimately take up its resources without giving it any money.

One other thing that may have some people worried is Meitu’s boosting of its stake in its SaaS subsidiary Meidd Technology to more than 50% at the end of last year. As a result, Meidd’s financials will be consolidated into Meitu’s own reports starting on Jan. 1 this year. At the time of its stake increase, Meitu said that Meidd’s loss narrowed to 1.2 million yuan in 2020 from 14.5 million yuan in 2019. It didn’t provide any 2021 financial data for Meidd in its latest report.

So, we don’t really know how Meidd did last year in terms of profits. Still, considering that this is one of the fast-growing parts of its business, and that Meidd was edging towards breakeven already in 2020, it seems reasonable to assume the company either posted a small loss last year or perhaps even became profitable. Accordingly, the runway really does look clear for Meitu to finally take off in 2022 with its first-ever profit, perhaps providing some good news that could make its stock more attractive to skeptical investors.

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