Understanding The Mogu IPO

I will state things bluntly: I am utterly baffled as to why Mogu has decided to go public now.
F-1/A report contains “highly engaging content” including “live video broadcasts, short-form videos, photographs, and articles covering topics including product reviews, fashion tips, brand fitting room, celebrity on-screen and street runway.” Thanks to its connection with Chinese tech giant Tencent, which owns 18% of Mogu, Mogu boasts hundreds of millions of users every month.

Mogu also operates an online store, and essentially aims to connect fashion influencers, merchants, and consumers in a single app. From there, it takes a cut whether it is consumers buying products or influencers paying Mogu to market their trends and styles.

The potential of such a business should be obvious, especially as a wealthier China gets more into fashion. The problem is that the idea has come nowhere close to the reality as shown by the numbers.

Far from growing, Mogu has been stagnant at best. Revenue rose from 480 million RMB in the six months preceding September 30, 2017 to just 489 million RMB ($71 million) in the same timeframe in 2018, a growth percentage of less than 2%. Even that is an improvement compared to the fact that Mogu’s revenue fell from 1.1 billion RMB in the 12 months preceding March 30, 2017 to 973 million RMB ($141 million) in the same timeframe 12 months later. A revenue decrease of 12.3% is a serious concern for a tech IPO that shares a London office space. This is especially so since Mogu also reported net losses of $44.2 million in the six months ending September 30, 2018.

Mogu states that this revenue decrease “was primarily due to a decrease in revenues from marketing services, which was partially offset by increases in commission revenues and other revenues.” The company has been taking a trend towards relying more on commission revenues done through sales and appears to be changing its marketing services to offer more live video. But unlike similar transitions done by other companies, there is no indication that this new approach is any more profitable. In fact, Mogu concedes that “we cannot reasonably predict the future trends of our marketing service revenues, our commission revenues or our total revenues.”

There are two other trends to point out to show how problematic Mogu’s situation is. The first trend is that Mogu has less than $130 million in cash and reported a negative operating cash flow of $38.5 million over the combined last two quarters. The company is burning through cash, and there is no clear indication that it will turn things around anytime soon.

The second, more positive fact is that Mogu’s $1.7 billion valuation is reasonable, though it represents a dramatic decrease compared to its estimated $3 billion valuation in 2016,. Mogu has an enterprise value of about $1.6 billion, which divided by its 12-month revenue of $141 million creates a P/S ratio of 11.34. By comparison, fellow Chinese ecommerce company Alibaba (NYSE:NYSE:BABA) has a ratio of 8.39 and was at 12 as recently as March.

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Even that last positive fact becomes positive when you remember that Mogu’s stock will likely rise up after its IPO, and so investors will likely have to debate whether it is a worthwhile stock at $18 to $20 instead of $15. Overall, Mogu needs to show that its revenue can grow or that it can become profitable, and it looks nowhere close to accomplishing either of those tasks. Ignore the lure of China and stay away from this stock at its current price.

Written By: Alex Newman