Tech

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Rocket Internet SE's flight path is getting a little clearer, and investors have a Swedish investment fund to thank.

Wrong Way
Rocket Internet's shares are far below their initial public offering price
Source: Bloomberg

On Wednesday, the German start-up factory and Kinnevik AB jointly published results for Global Fashion Group, an online retailer they both own. The earnings were mixed: while the loss narrowed, revenue growth slowed in the third quarter.

Rocket shares fell almost 5 percent. But that shouldn't discourage the company from releasing more financial data on its other holdings. The detailed and regular approach Kinnevik has long advocated should be welcomed by Rocket shareholders who have long struggled to value the incubator's holdings in dozens of startups.

Web of Fashion
Global Fashion Group's sales are growing but remains loss-making because of the costs of building an e-commerce business that spans three continents.
Source: Company reports

The disclosure matters. Global Fashion is one of Rocket's biggest investments after its cluster of food delivery start-ups. It's also been the poster child for investor concerns that Rocket's valuations are too stratospheric.

Rocket only re-values companies when they raise money from outside sources. That has some odd consequences: for a period earlier this year, Rocket's valuation of Global Fashion was three times that of Kinnevik's since the latter updates its valuations every quarter. After Global Fashion completed a fund-raising round that saw the retailer's value decline by two thirds, Rocket finally wrote it down in September. Kinnevik had taken the hit earlier. 

Time Lag
Rocket Internet only updates the valuations of its start-ups when it raises money from an outside investors.
Source: Company reports

That painful markdown at least prompted the companies to start publishing more detailed financial statements for Global Fashion.

Wednesday's release of a further quarter's financials shows the problems at the business were no one-off. They stem from the challenges of developing online commerce in emerging markets where supply chains and delivery logistics often need to be built from scratch.

Ironically, Kinnevik now values Global Fashion at 1.8 billion euros -- more than Rockets's estimate of 1.03 billion euros. So who is right? There are signs of improvement: the loss before interest, taxes and depreciation narrowed to 32.3 million euros from 54 million euros in the year-earlier period. Cash reserves jumped fourfold to 284 million euros, helped by the funding round and the sale of a money-losing division in India.

But Rocket's (unusual) pessimism may be justified. The online retailer is still exposed to the depressed markets of Russia, Saudi Arabia, and Brazil. An IPO will have to wait for results to improve. A trade sale of the whole looks unlikely, although there could be buyers for its operations in some of those markets.

These types of exits are probably the only thing that will really change investors' minds on Rocket. The company has made a start: in April, it sold Lazada, an Amazon clone in Southeast Asia, to Alibaba in April for $1 billion -- more than what Kinnevik had valued it at. 

There are signs that some doubters are coming around: the short interest on Rocket has declined to 24 percent from as much as 40 percent earlier this year. But the stock is still down 58 percent since the IPO. Real improvement would require Rocket to deliver on the promise of an IPO of one of its companies before the middle of next year, or more asset sales. In the meantime, it could do worse than adopting more of Kinnevik's transparency.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net