Xunlei Continues To Merit A Strong Buy Rating (NASDAQ:XNET) - Seeking Alpha

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I archetypal started covering Xunlei (NASDAQ:XNET) successful November of 2017 erstwhile the banal was trading astatine $24.05 and I deemed it a abbreviated that would "soon reverse". The banal subsequently fell over 90%, which was a crisp capable plunge that by August of 2022 I felt that it had fallen excessively acold and truthful I rated it a beardown bargain based connected its profitability and currency position. The banal is present up 32% since that call.

Seeking Alpha

Today, astatine the petition of respective readers, I'd similar to rapidly update my stance connected the company. Much of what I said successful the 2nd nonfiction is inactive existent successful general, though the circumstantial numbers request today's refresh.

Company

Xunlei is simply a Chinese institution which is nether followed and nether covered successful the US, successful portion because determination isn't overmuch English connection info disposable to assistance investors recognize the institution and its operations. I judge the champion English statement of the company's operations is fixed successful its yearly 20F SEC filing. To wit (with my accent throughout):

We run a almighty net level successful China based connected unreality exertion to alteration our users to rapidly access, store, manage, and devour integer media contented connected the internet. In caller years, we person expanded our products and services from PC-based devices to mobile devices successful portion done pre-installed acceleration products successful mobile phones to further enlarge our idiosyncratic basal and connection our users a wider scope of entree points. We supply a wide scope of products and services crossed cloud acceleration, blockchain, shared unreality computing and integer entertainment to present an efficient, astute and harmless net environment.

To code deficiencies of integer media transmission implicit the net successful China, specified arsenic debased velocity and precocious transportation nonaccomplishment rates, we supply users with speedy and casual entree to online integer media contented done halfway products and services below:

• Xunlei Accelerator, our astir fashionable and escaped product, which enables users to accelerate integer transmission implicit the net and has astir 48.0 cardinal monthly unsocial visitors successful December 2021, according to our interior record; and
• Cloud acceleration subscription services, which are delivered done our product, Green Channel, and connection users premium services for velocity and reliability.

In summation to our halfway product, Xunlei Accelerator, we person besides developed unreality computing and different net value-added services to velocity up firm improvement and to support gait with the latest manufacture inclination and users’ changing needs. These value-added services and products chiefly see unrecorded streaming services and online crippled services, which supply america with synergies successful our concern operations.

[...]

Our mobile initiatives besides payment from our narration with Xiaomi, 1 of our erstwhile strategical shareholders. Since 2014, we person entered into a pre-installing services statement with a Xiaomi radical institution which manufactures Xiaomi phones, a well-recognized marque of astute phones successful China. Pursuant to the agreement, we hold to supply our Mobile Xunlei acceleration plug-in, and the mobile telephone shaper agrees to instal specified plug-in connected its phones, escaped of charge. Such pre-installment statement provides mobile telephone users with entree to our acceleration services, which we judge enhances our quality to make much idiosyncratic traffic. Our mobile acceleration bundle has been officially adopted by Xiaomi’s operating systems and the bundle has been installed connected Xiaomi phones sold successful China, including some caller phones shipments and strategy upgrades from existing Xiaomi phones.

Another cardinal portion of our strategies is to proceed our innovation successful crowdsourcing of idle bandwidth capableness and imaginable retention from users of our unreality computing hardware devices truthful that we tin continuously present computing resources to 3rd parties, specified arsenic net contented providers, done our CDN services. We started to make gross from selling crowdsourced uplink capableness we collected from users of our unreality computing services to 3rd parties successful the 3rd 4th of 2015. To further make our unreality computing business, we launched our decentralized unreality computing product, OneThing Cloud, successful 2017. OneThing Cloud is fundamentally a cloud-based retention and sharing instrumentality that allows users to stock their idle net bandwidth and retention resources with our contented transportation networks. The 3rd parties that purchased our unreality computing services chiefly see net contented providers specified arsenic iQiyi and Xiaomi. In 2020, we launched our ain reward program, which allows users of OneThing Cloud to stock crowdsources idle uplink capacities and outer retention with america successful speech for a tiny magnitude of currency rewards.

Latest Financial Results

As I mentioned successful my erstwhile article, XNET was charismatic not lone for its currency presumption (which we'll get to below) but due to the fact that its revenues and income were increasing. Recent results carnivore this inclination out.

From the November 2022 net release we larn that 3rd 4th revenues grew 12.8% sequentially and 47.1% twelvemonth implicit year. This show was the effect of the pursuing numbers successful the company's 3 reporting segments (with my emphasis):

Revenues from unreality computing were US$29.1 million, representing an summation of 2.7% from the erstwhile quarter. The summation of unreality computing revenues was chiefly owed to the increased request from our large clients for our unreality computing service...

Revenues from subscription were US$25.0 million, representing a alteration of 1.7% from the erstwhile quarter. The fig of subscribers was 4.37 cardinal arsenic of September 30, 2022, compared with 4.46 cardinal arsenic of June 30, 2022...

Revenues from unrecorded streaming and different IVAS were US$34.2 million, representing an summation of 39.4% from the erstwhile quarter. The summation of unrecorded streaming and different IVAS revenues was chiefly driven by the rise successful the fig of paying users of our unrecorded streaming products, which were launched successful 2021, and our enhanced monetization capability.

This accrued gross (which are a grounds for the company) besides resulted successful a caller all-time precocious successful nett income for the quarter. The illustration beneath helps visualize this.

Data by YCharts

In different words, the institution is executing precise well.

Cash connected Hand

The company's show has continued to bolster its equilibrium sheet, with currency and abbreviated word investments erstwhile again increasing.

Earnings release

With 66.5M ADS outstanding, the institution has astir $3.75 ($251M/66.5M) of currency and abbreviated word investments per ADS connected hand. With the banal trading astatine $2.12 that's 178% of the stock price. This explains wherefore the institution inactive sports an appreciable antagonistic endeavor worth of ($85.8M).

Seeking Alpha

Being profitable and having a antagonistic EV is simply a cleanable crushed to prosecute successful banal buybacks arsenic each acquisition is accretive to publication worth and currency connected hand. The institution understands this, hence:

Share Buybacks

Since authorizing a $20M stock repurchase program successful March 2022, arsenic of September 30, 2022 the institution had utilized $4.3M of it. This is the result:

Data by YCharts

Given the company's profitability and highly beardown currency position, I expect it to proceed with its stock repurchases, yet utilizing the afloat $20M that has been authorized and possibly pursuing that with different authorization.

Valuation

Because it has a antagonistic endeavor value, XNET receives a not meaningful standing connected immoderate metric that includes EV, but successful world each of those metrics are incredibly strong. With that information noted, present is Seeking Alpha's summary of the valuation metrics.

Seeking Alpha

I judge that the valuation numbers coupled with truthful overmuch currency connected manus and increasing revenues wholly warrant a "strong buy" standing connected XNET. Nonetheless, Seeking Alpha doesn't supply a quant standing connected this peculiar ticker, perchance due to the fact that determination is nary expert covering the company. This nether coverage, however, is different origin contributing to XNET presently being mispriced by the market.

Options

XNET trades options but they are not peculiarly liquid. Because my positions person been tiny however, I was capable to participate the banal via bare puts and person conscionable had shares called distant by covered calls I'd written against my position. I whitethorn effort to duplicate this strategy going forward.

barchart.com

Risks

The risks present are 2 fold, archetypal that the institution fails to execute, and second, the aforesaid 1 that I identified successful my erstwhile article:

The biggest hazard with XNET, successful my opinion, is the aforesaid 1 that plagues astir Chinese stocks, i.e. the institution is simply a VIE and frankincense shareholders don't really ain the company. Here is simply a bully link describing this risk.

These risks are, successful my opinion, somewhat mitigated by XNET's nett currency presumption and its increasing revenues and income. Nonetheless, arsenic with each Chinese stocks, I person taken a overmuch smaller presumption successful this sanction than I would were it based successful the US.

Summary & Trading Plan

I judge that XNET is presently presenting america with a buying accidental which arises chiefly due to the fact that the institution is truthful nether followed and unknown. There are nary Wall St analysts connected it, nationalist info (in English) is hard to stitchery and it doesn't request financing. But each of that tin beryllium an borderline for tiny investors. I precocious had my presumption called away, but program to beryllium backmost successful the stock, astir apt buying a small astatine today's prices but past trying to get a afloat presumption if the banal trades beneath $1.75 (which is conscionable supra abbreviated word resistance).

bigcharts

I'm a backstage trader funny successful some agelong and abbreviated ideas. My grooming and inheritance are successful engineering including respective decades of consulting engineering practice. I endeavor to use my analytical skills to investing/trading, which I've done for 20+ years and to which I bring a contrarian style. I've besides precocious go funny successful penning and person published editorials astatine Forbes, PJM, and a fewer bequest newspapers.