Xunlei rediscovers its ‘thunder’ with return to video roots

The provider of cloud and video services’ revenue rose 30.6% in the third quarter, boosted by an 86% rise for its livestreaming services

Key Takeaways:

• Xunlei’s stock is up more than fivefold over the last year, including a 96% rise over the last three days, after it reported its revenue rose 31% in the second quarter
• After largely abandoning its original video roots for cloud-based services, the company appears to be finding new success with overseas livestreaming

By Doug Young

Xunlei Ltd. (XNET.US) fell off our radar screen long ago, after the company largely ditched its original video streaming services and made a move into the cloud with a shared-resources business model that looked interesting but failed to generate much excitement. In that process, the company’s market value dipped below the $100 million mark, under which we generally don’t follow listed companies.

But the stock has come roaring back lately, living up to its name that means “thunder” in Chinese, harkening back to its days when it was at the forefront of China’s online video revolution. The shares have risen more than fivefold over the last year, including a 96% jump over the last three days after the company released its latest earnings report for the second quarter, giving it a market value of $550 million.

In a somewhat ironic twist, investors seem to be getting excited as Xunlei inches closer to returning to its roots as an online video company. The company made an important move in that direction in June when it completed its 500 million yuan ($70 million) acquisition of Hupu, a platform providing sports media and data. But unlike its earlier foray into the sensitive Chinese online video market, Xunlei seems to be setting its sights on less regulated foreign markets with its latest online video drive.

Xunlei’s video campaign is part of its livestreaming business, whose revenue grew 85.5% year-on-year in the second quarter to become the largest of the company’s three main income streams.

Investors were also stoked about Xunlei’s big gains on its investment in Arashi Vision Inc. (688775.SH), a maker of 360-degree action cameras, whose June listing raised 1.9 billion yuan, making it the biggest on Shanghai’s Nasdaq-style STAR Market in more than a year. Arashi probably could have raised much more than it did, since the stock is now up more than five times from its IPO price.

In its latest results, Xunlei booked a big gain of $722 million from its Arashi Vision investment, which is now worth about $1.2 billion. Besides the big investment gain, investors are probably hoping that Arashi can help to promote Xunlei’s fast-growing video streaming business. Potential tie-ups could include using Arashi’s popular cameras to encourage creation of more user-generated content for Xunlei’s young livestreaming business.

The huge run-up in Xunlei’s shares could also reflect one other element we’ve written about recently, namely, the search for Chinese “Easter Egg” stocks by U.S. investors. Here, we’re referring to U.S.-listed Chinese stocks that became vastly undervalued over the last four years, and are only now being rediscovered. Other stocks we’ve written about from that group include cosmetic surgery center operator So-Young (SY.US) and athletic wearables maker Zepp (ZEPP.US), whose shares are both up many-fold this year.

Even after its huge share run-up, Xunlei’s shares still trade at a relatively muted price-to-sales (P/S) ratio of just 1.21. And no major research houses cover the company, as evidenced by the lack of analysts on Xunlei’s latest earnings call.

A closer look at a list of the company’s major stakeholders reveals that quite a few big names may see even more potential upside in its stock. Morgan Stanley held 2% of Xunlei’s stock as of June 30, while UBS, Nomura and Barclays all held anywhere from 0.18% to 0.34% of the company’s shares, according to Yahoo Finance.

Return to video roots

As we’ve already noted, Xunlei started out serving the Chinese online video market, where it competed with similar well-funded names like iQiyi (IQ.US), backed by internet major Baidu, and Youku, owned by e-commerce giant Alibaba. Such platforms have generally built up huge audiences over the last decade, mostly by stealing viewers from traditional Chinese TV station operators.

But the market is also fiercely competitive, and the sensitive nature of online content in China has also been problematic for these companies, most of which lost money for years before only recently become profitable. Xunlei started out in that market, but mostly retreated, only to try again by ramping up a new iteration of its livestreaming business. Now, it appears to be abandoning the domestic market, leading to a 54% drop in its livestreaming revenues a year ago in the second quarter of 2024.

But the figure came roaring back this year, rising by our previously mentioned 85.5% to reach $37.6 million in the second quarter. That was enough to overtake the company’s previous biggest revenue source, subscription revenues, which rose 10.5% to $36.4 million. The company’s third major revenue source, from cloud computing services, rose 13.6% to $30 million.

Those three sources combined to boost Xunlei’s second-quarter revenue by 30.6% year-over-year to $104 million. Company officials acknowledged that some of the revenue growth came from the Hupu acquisition, but pointed out the amount was relatively small, equal to $3.2 million in the second quarter. Excluding Hupu’s contribution, the company’s revenue still would have risen about 27% for the quarter, far faster than the 10% growth it recorded in the first quarter.

Xunlei credited the big livestreaming growth to gains for its overseas livestreaming business, as well as advertising and the Hupu acquisition. The company didn’t break out specific figures for overseas revenue, but it’s probably safe to say that more than half of its livestreaming business comes from overseas, and that figure is likely to keep growing.

The company also pointed out that its livestreaming and cloud computing businesses are both still losing money, while its subscription business is the only one that’s profitable. Still, its gross margin is quite enviable at 49.3% for the latest quarter, though that was down from 51.1% a year earlier. Excluding the big gain from its Arashi Vision investment, Xunlei’s non-GAAP net profit rose to $8.3 million in the third quarter from $3.2 million a year earlier.

The bottom line is that this company could have some solid growth potential if it can cultivate its livestreaming business overseas, probably targeting Chinese speakers in other countries. Its cloud business also looks interesting for its business model of using shared resources from other computer owners, rather than owning and operating its own resources. But the growth potential there looks more limited.

Even after the big share run-up, Xunlei’s stock still trades nearly a third below its 2014 IPO price. That fact, combined with the company’s low P/S ratio, suggests there could still be some upside potential left for this company’s stock.

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