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Baozun and Momo Display Rare Weakness in Chinese Internet Industry

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Second-quarter earnings season has, for the most part, proven that China’s internet space remains strong. However, the latest reports from Baozun (BZUN - Free Report) and Momo (MOMO - Free Report) have sent both of these stocks crashing on Tuesday morning, signaling a rare moment of investor hesitation in this booming Chinese market.

Earnings Results

For Baozun, a provider of e-commerce and web design solutions, it was an earnings miss that sent shares tumbling today. Baozun reported adjusted profits of 8 cents per share, falling short of the 10 cents forecasted by Street analysts. The company said quarterly revenues were $131 million, just slightly ahead of the $130.7 million analysts expected.

These revenue results marked impressive growth of nearly 27% from the year-ago period, but investors seem to also be reacting to Baozun’s third-quarter forecast, which calls for this growth rate to slow significantly. Indeed, the company said that it expects Q3 revenues to be between $130.63 million and $136.64 million—representing year-over-year growth of roughly 16% to 21%.

It’s also worth noting that Baozun is calling for a 50% growth rate in its rapidly-expanding services unit next quarter, down from the 59% expansion posted in today’s report. Investors may also be weary that the company has burned through about 9% of its cash pile so far this year, primarily due to investments in logistics space. Shares of Baozun were down more than 15.4% through early morning trading hours.

Results were even stronger for Momo, but investors were equally unimpressed. The mobile gaming company reported earnings of 29 cents per share, beating the Zacks Consensus Estimate of 28 cents. Revenues were $312 million in the quarter, ahead of our consensus estimate of $291 million and up more than 215% from the year-ago period.

This growth came at a steep price, of course. Momo said that cost and expenses climbed a staggering 189% to $246 million, which is perhaps helping fuel today’s slump. The company now expects third-quarter revenues to be between $337.0 million and $342.0 million, well beyond our current consensus estimate of $318 million but representing slower growth than displayed in the latest quarter.

Despite these relatively strong results, shares of Momo slumped more than 17% in morning trading hours Monday. The stock had gained more than 23% in the two months prior to the report, so it could be that investors were simply looking for a stronger earnings beat than Momo was able to post today.

Industry Trends

Today’s movement from Baozun and Momo comes in stark contrast to the most recent trends in the Chinese internet industry. Thanks to strong beats from industry leaders like Alibaba (BABA - Free Report) , Tencent (TCEHY - Free Report) , and Baidu (BIDU - Free Report) , among others, this space has been soaring recently.

In fact, the KraneShares CSI China Internet ETF (KWEB - Free Report) , which tracks China-based companies whose primary business or businesses are in the Internet and Internet-related sectors, has moved more than 7% higher in the past month.

For more on the current state of the Chinese internet industry, including some analysis on how the country’s strict regulatory environment affects stocks, check out this recent episode of the Tech Talk Tuesday podcast, featuring an exclusive interview with KraneShares:

Want more stock market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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