ChinaCache International Holdings Ltd (NASDAQ:CCIH) just took a close to 20% hit to its market capitalization on what is essentially a news-less start to the week for the company. The decline, however, comes subsequent to a dramatic move that saw ChinaCache run from less than $1 per share at the end of May to close out last week for $1.70 a piece. So we’ve seen a 75% appreciation followed by a close to 20% correction; what’s next?
Let’s have a look.
Many reading likely won’t be familiar with this one. It’s a Chinese (as its name suggests) tech stock that’s based in Beijing and that trades on the NASDAQ through ADRs. The company is what’s called a content delivery service, and it’s the first and largest in China, having been founded in 1998 and subsequently grown to a team of more than 1,500 employees.
Content delivery service companies like this primarily operate through what’s called a Content Delivery Network (CDN). Many of us don’t realize it, but the vast majority of the content we consume on the internet comes from a CDN and not from the host server of the site we’re looking at. To simplify things a bit, the CDN consists of data centers that are strategically located across the network’s target region (in this instance, China). Each of these data centers stores a locally cached version of a website and, when a user that’s located close to the data center requests the site (by typing the domain into his or her URL field and hitting enter) the data center fires across the cached version. This makes it far quicker to load content than would otherwise be the case if the user has to wait until the requests traveled to and from the domestic server where the website is hosted.
So, a company that wants to make sure it’s content is delivered to users quickly, and in this instance, to Chinese users quickly, will go to ChinaCache and pay for access to its CDN. ChinaCache will then store caches of the company’s content in its datacenters and start filling requests from users.
And there are some pretty big companies using this company’s network. Microsoft Corporation (NASDAQ:MSFT), Uber, Intel Corporation (NASDAQ:INTC) and Adobe Systems Incorporated (NASDAQ:ADBE) are all customers.
What’s moving the stock right now then?
The company is having some trouble with its NASDAQ listing (its late in getting its filings out) and this has held it back over the last few months. While this may be weighing on sentiment, however, there’s a strong and very real company underlying the ticker, and we don’t see the issues dragging out too much longer. This isn’t a Chinese pink sheet and a late filing isn’t representative of bigger problems.
The recent rally came on the back of the company receiving a CDN license in China. Basically, there are hundreds of these sorts of CDN companies operating over there but a large portion of them aren’t licensed. In a country that likes to keep as tight a grip on its online content as China, this is a problem for the government. The response is to shut down all of those without a license by January 1, 2018. For any company operating without a license on that date, the government is going to go in and unplug the servers that underpin the CDN. For a company like ChinaCache, this is a good thing. Why? Because now it’s licensed, it’s going to be one of just a handful of CDN companies in China and it’s going to command a far higher portion of the market than currently.
So what’s next?
We think the recent dip is just a correction and that the above-described business environment in China suggests long-term appreciation for this stock. We may see some near-term volatility as the filing issue resolves, but any dips are an opportunity to pick up discounted shares.
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Disclosure: We have no position in CCIH and have not been compensated for this article.