A prudent investment decision involves buying stocks that have solid prospects and selling those that carry risks. At times, it is rational to hold certain stocks that have enough potential but are weighed down by tough market conditions.
Here we focus on Fang Holdings Limited (SFUN - Free Report) , a business services stock, which is expected to register more than 100% earnings per share growth in 2018. Earnings for 2019 are expected to increase 41.9%.
Also, the company outperformed the industry it belongs to in the past year. Shares of Fang Holdings have gained 12%, which compares favorably with the industry’s 4.5% rise in the said time frame.
We believe the stock has the potential to continue the momentum. The reasons behind our optimism include growing number of paying subscribers and improving operational metrics. The company’s focus on improving marketing services is appreciable as well.
Given this backdrop, let’s delve deeper into Fang Holdings’ growth drivers.
Increasing Number of Paying Subscribers
Fang Holdings has been taking several initiatives to strengthen its client base. Apart from offering free trials for an unlimited time period,the company lures its free trial users with incentives to upgrade their free trial accounts to paid subscriptions to increase their visibility. Also, the company attempts to retain its special listing customer base by updating its customers periodically with industrial developments to help them manage brand management strategically. We believe these efforts have paid-off in terms of the increasing number of paying subscribers. In fiscal fourth-quarter 2017, Fang Holdings added nearly 260– 268,000 paying members, which reflects a year-over-year growth of 18%. The average number of paying subscribers in fiscal 2017 were 265,649 which marks an improvement from 211,280 paying subscribers in fiscal 2016 and 206,791 paying subscribers in fiscal 2015. Further, management is optimistic about witnessing 20-30% growth in the number of paying members in fiscal 2018.
Improvement in Operational Metrics
Improving operational metrics is another major positive. Fang Holdings has been undertaking several initiatives such as closure of the self-owned brokerage stores, effective cost control methods and other similar types, to improve its operational efficiency. We believe this resulted in operating income of $42.2 million in fiscal 2017 against operating loss of $151.4 million in fiscal 2016 and operating loss of $34.5 million in fiscal 2015. Additionally, the company has successfully managed to reduce its total operating expenses by reducing costs associated with advertisements, promotions and sales commission and deduction of staff costs. Notably, total operating expenses declined to $226.9 million in fiscal 2017 from $380.1 million in fiscal 2016 and $362 million in fiscal 2015.
Fang Holdings’ efforts to strengthen its marketing services are appreciable. The company is offering customized marketing and promotional packages with additional features via website advertising to meet the varying customers’ requirements. Meanwhile, traditional advertising media tools such as newspapers, magazines and outdoor advertising are being used to attract customers with featured promotional packages. Almost 65% of the daily active users have accessed Fang Holdings’ contents through its mobile platform (including WAP and mobile apps) in fiscal 2017. With revenues of $149.3 million, marketing services is the second biggest contributor (33.6%) to the company’s total revenues.
Further, the company continues to collaborate (for 1-3 years) with well-known Internet portals to attract additional users to its websites and mobile apps. Presently, it has partnerships with some of the leading Chinese-language portals. Fang Holdings is hopeful of making more profits by delivering innovative marketing services without bearing any significant additional costs.
Although Fang Holdings rides high on significant growth prospects, it is not free from overhangs. The company’s top line experiences seasonality with solid growth in the third quarter and weaker growth in the first quarter. Seasonality causes considerable fluctuations in revenues and profits and makes forecasting difficult. Stringent government regulations and tightening policies of the Chinese market also acts as a major hindrance to Fang Holding’s business. Stiff competition in the online real estate and home-related Internet service market in China remains a concern.
Zacks Rank & Key Picks
Fang Holdings currently has a Zacks Rank #3 (Hold).
Some better-ranked stocks in the broader Business Services sector include Avis Budget Group, Inc. (CAR - Free Report) , Vectrus, Inc. (VEC - Free Report) and First Data Corporation (FDC - Free Report) . While Avis Budget sports a Zacks Rank #1 (Strong Buy), Vectrus and First Data carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
In the trailing four quarters, Avis Budget, Vectrus and First Data delivered a positive earnings surprise of 35.4%, 25.9% and 2.9%, respectively.
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