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Why iCar Asia Ltd shares tumbled on its quarterly update

Shares in automotive website business iCar Asia Ltd (ASX: ICQ) fell more than 8 per cent this morning after the company revealed softer-than-expected revenue growth for the quarter ending June 30 2016.

Cash collections for the quarter were $1.9 million up 45% on the prior corresponding quarter, however, quarter-on-quarter cash receipts were down around 8 per cent and the cash outflow lifted on the back of a ballooning marketing spend. In its defense the second quarter of the calendar year is a seasonally weak one for iCar Asia and the longer-term growth trend remains positive.

However a quarterly cash outflow a touch above $3 million is a mediocre result for a business that has long carried a premium valuation thanks to the founding team’s track record, digital tailwinds and substantial holding of potential takeover suitor Carsales.com Ltd (ASX: CAR). Ultimately though the stock will sink or swim on management’s ability to grow revenues sufficiently quickly to reach cash flow breakeven within its current cash balance.

The business has just over $13 million cash in hand with a current cash burn of around $3 million per quarter and today’s sharp sell off is a reaction to the rising costs and possibility of management having to ask investors for more funds within the next year.

The company retains a stated aim to reach cash flow breakeven within its current cash balance and has a decent long-term outlook operating as it does in fast-growing Asian e-commerce markets with a respected management team that has a track record of success across South East Asia and Malaysia in particular.

Moreover, at 68 cents the shares now look on a more sensible valuation given the company’s growth rates and outlook. This is a sentiment likely to be shared by the CEO at Carsales.com, which is actively looking to deepen its overseas classifieds footprint.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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