KeyBanc: 4 Reasons To Buy Qutoutiao

China-based Qutoutiao Inc QTT is a mobile content aggregator with a stock that began trading for the first time on an American exchange in late September. KeyBanc Capital Markets named four reasons to buy the stock Tuesday.  

The Analyst

Analyst Hans Chung initiated coverage of Qutoutiao with an Overweight rating and $11 price target.

The Thesis

The bullish case for Qutoutiao's stock is fourfold, Chung said in the initiation note. (See his track record here.) 

• The Chinese company is undergoing "hypergrowth" in both user scale and revenue that are sustainable over time, the analyst said. The company can grow its Chinese average daily active users to more than 50 million by the bottom half of 2019 and over 80 million by the bottom half of 2020, according to KeyBanc's projections. 
• The platform offers users rewards that grow with engagement and can be converted to RMBs, Chung said. For example, users who sign in daily receive 579 points, and a viewing time of 60 minutes per day generates 900 points. Users can convert 10,000 points to 1 RMB, or 4 cents. While the reward system isn't large enough to act as a source of income, it does offer a "gamified experience" for users to choose Qutoutiao's platform over the competition, Chung said. 
• Qutoutiao's focus on lower-tier cities overlooked by industry giants like Tencent implies substantial room to grow given a more favorable competitive environment, the analyst said. 
• The company continues to invest in new content, which prompted a drop in gross margin from 87.6 percent in 2016 to an estimated 81.9 percent in 2018, Chung said. Margins should stabilize near the 82 percent level through at least 2020, as investments in the platform will help lower acquisition costs on a per unit basis and lower sales and marketing expenses, he said.

Price Action

Qutoutiao shares were down 5.4 percent at $7 at the time of publication Tuesday.

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