VNET Group Stock is a Tax Loss Selling Play

Chinese internet hosting company VNET Group NASDAQ: VNET stock has plunged back towards its 2020 pandemic lows causing tax loss selling for investors. The China effect is also taking its toll on shares of VNET as investors dump shares in Chinese internet companies due to the crackdown by the government and pressure to delist off U.S. exchanges. The tensions between the U.S. and China is further driving investors out of Chinese stocks. Formerly called 21Vianet, the Company changed its name to VNET Group. As one of the three major data center operators in China, VNET has room to grow. With tax loss selling, underperforming stocks tend to get sold off into the end of the year and rebound in the first quarter of the new year. Investors step back in to avoid the wash rule requiring at least a 30-day wait period before buying back the shares. The strategy is to buy into the selling to sell into the January through February rally. Speculators looking for a short-term trading opportunity can watch for opportunistic pullback entries.

Q3 FY 2021 Earnings Release

On Nov. 18, 2021, VNET released its unaudited fiscal third-quarter 2021 results for the quarter ending September 2021. The Company reported net revenues of $242.2 million, up 25.3% year-over-year (YoY). Adjusted cash gross margin was 43.2%, up from 42.2% year ago period. Adjusted EBITDA rose 22.4% to $69.9 million. VNET CEO Samuel Shen commented, “We achieved robust financial and operating results in the quarter thanks to our methodical execution of our dual-core growth engine strategy. Leveraging our combined strengths in retail and wholesale IDC services, we successfully capitalized on growing demand for IT infrastructure across all our business segments to achieve a healthy pace in ramping up our wholesale capacity, grow and diversify our retail client base, and generate growing interest in our cloud business. By maintaining a pinpoint focus on the execution of our dual-core strategy, we are confident in our growth potential as we augment our leadership position in the carrier- and cloud-neutral Internet data center services sector in China.” VNET CFO Tim Chen commented, “We delivered a milestone financial performance this quarter with strong top- and bottom-line growth. Despite regulatory uncertainties, both our net revenues and adjusted EBITDA during the third quarter exceeded the high end of our guidance range, increasing by 25.3% and 22.2% year over year respectively. Our strong growth was derived from our unique mix of wholesale and retail IDC solutions, and increasing demand driven by the ongoing digital transformation. As we continue to execute our growth strategies, prudently leverage our healthy balance sheet, and broaden our sector coverage, we will continue to deliver long-term value for our investors going forward.”

Conference Call Takeaways

CEO Shen set the tone, “Since 2019, we have implemented our dual-core growth engine strategy, utilizing our foresight on market trends and our competitive edge in providing carrier-neutral and cloud-neutral IDC services. By executing the strategy, we have continuously expanded our market reach and diversified our customer base to better position ourselves from managing the regulatory changes spanning across various industry sectors. We successfully expanded capacity while driving significant improvement in utilization rate for our ramp-up and newly-built cabinets. We added 2,388 cabinets on the net basis during the third quarter. Utilization rate for our ramp-up and newly-built cabinets increased by 5.5 percentage points to 34.7% and compound utilization rate remains stable at around 60%. With our track record of success over the last three quarters, we are confident in our ability to continue delivering strong operating results and expect to achieve our full-year target of delivering 25,000 standard cabinets and a compound utilization rate of 60% in 2021.” He continued, Our customer base has become far more diverse, encompassing the cutting edge technology companies as well as companies from traditional industries, such as financial services, consumer goods, automotive manufacturing, home decoration and many more. As we further diversify the customer base and industry verticals we serve, we not only actualize continuous service improvements, but also better insulate ourselves from sector-specific market fluctuations and macro risks. Turning to our Cloud business. We have started to generate additional interest beyond our cooperation with Microsoft. Cegid, a global unified commerce and POS platform for specialty and luxury retailers engaged us to assist with its cloud lending in China initiative. Going forward, we will continue to expand our cloud operations service offerings to attract more customers.”

VNET Opportunistic Pullback Levels

Using the rifle charts on the weekly and daily time frames provides a precision near-term view of the playing field for VNET shares. The weekly rifle charts peaked at the $44.30 Fibonacci (fib) level. Shares proceeded to fall (-75%) from the top to coil off the $7.51 fib. The weekly rifle chart downtrend has a falling 5-period moving average (MA) at $11.83 followed by the 15-period MA at $16.08. The weekly lower Bollinger Bands (BBs) sit at $7.26. The daily rifle chart breakdown after triggering the market structure high (MSH) sell signal under $18.23 is starting to smooth out as the 5-period MA stalls at the $8.56 fib. The 15-period MA continues to fall at $10.60. The daily stochastic is attempting to bounce back to the 20-band. The daily market structure low (MSL) buy triggers above $8.91. Prudent investors can watch for opportunistic pullback levels at the $8.91 fib, $7.51 fib, $6.31 fib, $5.41 fib, and the $4.52 fib level. Upside trajectories range from the $13.74 fib up towards the $20.70 fib level.