Bad Cryptocurrency Investments Take Shine Off Meitu

Key Takeaways:

• Beauty software maker Meitu said its $100 million bet on Bitcoin and Ether cryptocurrencies last year has lost nearly half its value
• Despite the losses, company says it remains “positive on the long-term prospects of the acquired cryptocurrencies”

By Doug Young

We’ve previously written how cryptocurrency companies, both miners and mining equipment makers, are taking a beating right now as the crypto market tanks. But a group of unrelated companies that simply invested their idle cash in currencies like Bitcoin is also taking a hit, following a plunge that has seen cryptocurrencies lose more than half their value since late last year.

That latter group includes beauty app and software as a service (SaaS) company Meitu (1357.HK), which has just told investors its upcoming interim results will be anything but beautiful. More specifically, the company said it expects to record a net loss of between 275 million yuan ($41 million) and 350 million yuan for the first six months of 2022, more than double the 137.7 million yuan loss it reported for the same period a year earlier.

The company blamed crashing crypto prices, which led to a major plunge in value for the $100 million Meitu invested in the Bitcoin and Ether cryptocurrencies in March and April last year.

We wrote about these investments when Meitu first announced them, saying the move looked highly speculative and aimed at making the company profitable more quickly than it could do simply through its core business operations. Companies frequently make such investments using their idle cash, though they typically purchase more traditional products like stocks and bonds.

In fact, Chinese companies are somewhat famous for making this kind of speculative investment in hopes of reaping quick and big returns. In the past the most common form of speculative investment was real estate as China’s property market boomed. Such investments often raised investor eyebrows due to their speculative nature, though nobody complained too loudly when those investments yielded huge profits.

This is one of the subtler risks of investing in Chinese companies, and anyone buying shares of such companies would always be well-advised to check out what kinds of investments they are making with their idle cash.

As with any speculative investment, what goes up often comes down, which is what happened with Meitu. Bitcoin was trading at around $60,000 when the company purchased about 941 units of the currency last March and April. Today it trades at just under $20,000. Similarly, Ether was trading at about $2,000 when Meitu purchased 31,000 units. It now trades at about $1,100.

Meitu said it expects to record impairment losses in the first half of this year of $18.5 million related to its Ether investment and $27.1 million related to Bitcoin. It noted the losses will “have no material impact on the group’s cash flow, operations and adjusted net loss/profits,” and added it could still profit from the investments if Bitcoin and Ether prices rebound in the second half of the year.

“As such, the board sees the recent volatility in Ether and Bitcoin prices as temporary and remains positive on the long-term prospects of the acquired cryptocurrencies,” it said.

Gambler mentality

From our perspective, the fact that Meitu appears committed to longer-term investment in cryptocurrencies is potentially more worrisome than the simple fact that it made a bad bet on them last year. Based on the company’s planned write-downs, that bet will cost Meitu about half of the $100 million it originally invested in Bitcoin and Ether.

Its latest announcement seems to indicate it will continue to make such speculative investments, which isn’t necessarily the best strategy for a company that has been losing money since its inception. Meitu’s shareholders seemed to feel that way, dumping the company’s shares in a sell-off that saw the stock drop 10.6% to close at HK$0.93 on Monday.

The stock is down 40% year to date, and has lost roughly 90% of its value from its HK$8.50 IPO price back in 2016.

The company still trades at a relatively high price-to-sale (P/S) ratio of 2.4. But other SaaS providers trade at far higher levels, including a 4.4 for e-commerce SaaS specialist Weimob (2013.HK), a 9.1 for real estate SaaS firm Ming Yuan Cloud (0909.HK) and a 6 for U.S. customer relations management (CRM) giant Salesforce CRM.

Cryptocurrency bets aside, Meitu actually seems like a good longer-term bet to eventually become profitable. When the crypto market was still booming earlier this year, we said the company could even become profitable this year thanks to gains on those crypto investments. That looks far less likely now, though the company’s core beauty software products are likely to be profitable.

In its latest announcement, Meitu said it expects to report a “modest adjusted net profit” in the first half of the year, though it isn’t more specific. That adjusted profit typically excludes one-time write-downs like the ones it’s taking for the drop in its crypto investments, as well as non-cash items like costs related to employee stock grants.

Meitu was profitable on an adjusted basis last year as well, and reported an adjusted net profit of 33.4 million yuan in the first half of last year. So, in all likelihood, the company will report a similar adjusted net profit in the first half of this year.

Meitu began its life as a beauty app, helping vain men and women pretty up their selfies to share with friends on social media. But it discovered such people don’t like to pay for such services, and more recently has developed a much healthier business model selling its beautification software services to business customers like photo studios and cosmetics stores. That part of the business grew 147% to account for 31% of Meitu’s total revenue last year, and was the main driver behind a 40% increase in the company’s sales for the year.

In all likelihood, Meitu’s finance department is making the decision to keep investing in cryptocurrencies, which is unrelated to and unlikely to have any effect on Meitu’s core beauty business. But such investments can be a red flag for investors, reflecting an oversized appetite for risk. Accordingly, Meitu’s finance department might be better served by focusing on lower-risk, more traditional investments, and letting the company’s core beauty software business become the sole focus of attention for stock buyers.