Reasons I’m Not Buying ATHM on the Breakout

Shares of Autohome (ATHM) are breakoing out today. The stock fits the mold and is on my radar — this is normally a buy signal for me. But I think I’m going to pass on buying right now. Here are my reasons why:

1. The company hasn’t been upping Annual Profit Estimates. 2014 estimates are now $1.07, up from $1.03 last quarter and $1.05 two quarters ago. My other Chinese Internet stocks are upping estimates.
2. The company reported earnings on August 7th and today its August 25th as the stock is breaking out. I think the best breakouts are earnings related. This stock has been rising almost every day since the 7th, but if things were THAT good then the stock would have jumped right after the earnings news.
3. The chart pattern is wild. After the company reported the stock made its way from $38 to $50 over the next eight trading sessions. Then over the next two days it buckled to $44. The last two days it has jumped from $46 to $53.
4. ATHM isn’t undervalued. I think its Fair Value is $46. So If I buy a stock with a wild chart pattern, one that’s overvalued to boot, we could get whipsawed on the way down.
5. Margins could be pressured. Right now Autohome is an advertiser. It will have to invest money into making it a site where consumers can click Buy it Now and actually purchase a car. But this will take time — and investment dollars. The company is also strengthening its mobile platform, which also takes time and money. So there’s a chance ATHM could have its margins pressured during the second half of the year. Qihoo 360 (QIHU) reported earnings today and is down $7 to $95 due to margins coming in lighter than expected, so believe me this matters. 

One Year Chart

Here’s the one-year chart of ATHM. Would have been nice to get in around $40, but I didn’t think about it too much has I had a good stake in BitAuto. This chart was done exactly one week ago on August 18th. Now imagine what the chart looks like with the stock at $53. Another quick jump like the stock got in March.

Profits look great. But the P/E is shaded in back because the stock isn’t on sale. Note the P/E of 43 is larger than the Est LTG of 39%.

Fair Value

I think this stock is worth 45 times earnings, mainly because annual estimates aren’t increasing. It is nice that ATHM beat the street by five cents last quarter, coming in with $0.32, but I would like to see estimates jump before I get excited about buying into a stock that’s presently selling for 50 times earnings.

Sharek’s Take

I’m on the fence about buying ATHM here. I just think it’s too high. I don’t think the stock is worth it. When I look at the Earnings Table I don’t see the same quality as I do with YY (YY) and Vipshop (VIPS). I’m going to hold out, and will try to get ATHM below $50, or hopefully in the mid $40s.