Will ChinaCache Join the China Party?

Will ChinaCache Join the China Party?

After one of the biggest IPO gains back in 2010 and comparisons to Akamai Technologies (NASDAQ: AKAM), ChinaCache (NASDAQ: CCIH)has mostly toiled in obscurity the last three years. While the content and application delivery network provider has struggled with sustainable profits, the company continues to generate fast growth having recently regained a 30% growth level again.

With China tech stocks from Qihoo 360 Technology (NYSE: QIHU) to Badiu surging this year as 3G mobile services increase the Internet reach in China, ChinaCache has gotten some market interest, but the stock still trades far below normal multiples for a fast-growing tech stock.

Akamai potential
As with most Internet stocks from China, most US investors like to label the comparative stock on the domestic markets. In the content delivery network (CDN) space, the domestic comparative of ChinaCache has to be Akamai that has universally been the leader in the CDN space.

Even facing a competitive domestic sector led by Level 3 Communications and Limelight Networks among other Internet providers, the company has managed to continually grow revenues and obtain gross margins over 67%. These margins are substantially above the 36% margins generated by ChinaCache and a primary reason why Akamai trades at a revenue multiple of around 6 times that of the Chinese counterpart when the growth in China would typically support the higher multiple.

Qihoo potential
Internet stocks have the potential for huge gains considering the market has become very concerned about China frauds. Up to this point, limited problems have surfaced in the tech sector bringing up the potential for ChinaCache to replicate the recent success of Qihoo. That stock has soared from a 52-week low of $20 to a high of nearly $95.

Naturally it takes a catalyst for a stock to shoot higher and in the Qihoo case it was the market share gains in search and especially mobile. The company reported an incredible 108% growth in revenues in the second quarter due to a substantial increase in search market share.

The key takeaway for investors is that this stock was mostly ignored by the market at one point.

The provider of Internet content and application delivery services in China has seen a huge bump in the stock this year, but it still trades at a multiple of less than 1 times revenue. Based on that, one might expect the company to be going nowhere fast, but the facts offer a contrary view. Not only is the company generating revenue growth greater than 30%, but it also has produced a partnership with Microsoft (NASDAQ: MSFT). While typically difficult to derive the importance of a press release, the partnership appears solid as the company already claims Coca-Cola was the first customer. The plan involves integrating the self-service CDN platform, Webluker, with Windows Azure China while also migrating its hosting to Windows Azure in China.

While China has a vast Internet population, already estimated at nearly 600 million people, up to recently the vast majority has been on slow connections. The recent mobile infrastructure upgrades to 3G networks by all three major carriers and plans for 4G services will help speed up the growth of Internet usage.

Bottom line
ChinaCache is unlikely to repeat the meteoric gains of Qihoo or match the revenue multiple of Akamai, but the stock has substantial potential once reintroduced to investors that have lost track of it these last couple of years. With revenue growth above 30%, investors have the potential to invest in a fast growing China Internet stock before the market rediscovers it. Don't forget that the announced partnership with Microsoft should give it plenty of credibility that shouldn't be ignored by investors concerned about fraud.

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The article Will ChinaCache Join the China Party? originally appeared on Fool.com.

Mark Holder and Stone Fox Capital Advisors, LLC own a position in ChinaCache. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. 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.

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Originally published