MOGU (NYSE: MOGU $12-14) is a deal that feels a little desperate even with bulge bracket bankers like Morgan Stanley and Credit Suisse. The only reason they probably think they can get it done is a commitment from JD.com (JD) to purchase a large chunk of the IPO. Last night they priced the deal at $14 and the shares will begin trading this morning. Our trading comments can be found in our StockTwits “Private Room.” The fundamental view follows.
MOGU is an online fashion retailer in China. Their “unique story” is that they make shopping “fun” for the younger generation who insists on being entertained as part of their shopping “experience.”
The main sticking point is that this company isn’t growing. Even though they are serving the largest market on the planet and they get a huge benefit from being able to funnel traffic from Tencent. This would be like launching a business with Google as a partner where they make all their users and traffic available to you for free and your business still isn’t growing.
Their income statement is summarized below showing their YoY results for the recent fiscal year and also the most recent six months. Although the company isn’t growing revenues they have been working at reducing expenses and trying to become profitable. Also, note total revenues of $141M and gross profits of just under $100M. We’ll come back to that in valuation.
Experienced investors in this space may remember Zulily (ZU) which came public in 2013 at a market cap of over $2B. In 2015 QVC/Liberty Interactive acquired Zulily for $2.4B. QVC/Liberty is now Qurate (NASDAQ: QRTEA). For background on Zulily see our posts: WSJ Calls out the Zulily Business Model and our coverage of their downfall post-IPO as in Zulily is “Happy to be Misunderstood.”
Zulily was/is a different company from MOGU. ZU was basically a marketing engine to put branded products in front of targeted online audiences at discounted prices. Nothing magic but their execution was solid and it got them to a $2.4B exit and today revenues are reported to be $1.6B/year.
But the wheels were wobbling on ZU when QVC stepped in. Their stock had tanked and investors started to question the value of the marketing alone without owning the brands or related infrastructure. As part of a broader enterprise, ZU did indeed make more sense which sparked the acquisition.
Some Positive Factors
Given the proposed $1.4B valuation there have to be at least a few things to support it. Here are some of the interesting aspects of their business and financial model that are appealing.
One unique aspect of their model is that they are creating new content that shapes fashion trends and purchases. This is different than simply marketing existing products that might or might not be in vogue.
They are also leveraging existing influencers and effectively “growing their own” by using their traffic and platform to bring in more audience.
This combination supports a business with fairly high gross margins in the mid-60%’s, is asset-lite and doesn’t require high ongoing costs for R&D or even sales and marketing.
Their “influencer model” is illustrated below. It has elements of YouTube success and promotion schemes that are like the digital version of multi-level marketing. It’s controversial but it can be effective and low cost.
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