Fresh off a series of earnings releases for the second quarter of fiscal year 2015, Chinese stocks — in particular, Chinese internet stocks — have brought seemingly bright news to an otherwise bleak environment.
Over the past month-and-a-half, Chinese stocks traded under the Shanghai Stock Exchange fell precipitously, causing many analysts to scream warnings about a bull market implosion.
Unfortunately, fast-moving internet companies will do nothing to stem the bearish tide. Prior to the opening bell on Wall Street, the Shanghai markets collapsed again on July 27, losing nearly 8.5% in the “worst one-day drop since early 2007,” according to USA Today.
No individual name can stop a rabid panic in the markets, and recent earnings results for Chinese stocks reflected this harsh reality. Here’s a rundown of three internet companies that won points on fundamentals, but quickly lost big in the technical markets.
Sohu.com (SOHU)
Sometimes, winning in the markets just means not losing as much as anticipated — the sentiment worked wonders for Sohu.com (SOHU) recently.
For Q2 FY2015, SOHU stock posted a loss of $27 million, or 37 cents per share of SOHU stock. However, Wall Street consensus was exceptionally bearish, expecting an 80-cent loss, thus leading to a positive 53.5% surprise.
The results provided evidence that Sohu’s partnership with Tencent (TCEHY) increased web traffic as intended. Although Q2’s top-line figure of $493 million is 12% higher than the average revenue of the past four quarters (starting from the period ending March 31), the cost of revenue over the same time frame increased 15%.
Essentially, it is becoming more expensive for SOHU stock to attract additional sales, which may be problematic given the present environment of Chinese stocks.
Unfortunately, in the markets, traders had little patience for the narrowing of expected fiscal losses, pummeling SOHU stock more than 4% on July 27. This drop adds on to the pain inflicted last month upon Chinese stocks in general, with SOHU stock now down nearly 20% year-to-date.
The long-revered Chinese bull market is quickly unraveling, and many SOHU stock investors will likely move just as swiftly to cut their losses.
Baidu (BIDU)
Among internet-related Chinese stocks, search engine provider Baidu (BIDU) definitively disappointed. BIDU stock simply fell short of Wall Street expectations. Despite managing to break a dubious trend of four quarters with slowing growth, against a consensus estimate of $1.87 per share for Q2 FY2015, BIDU stock posted down at $1.81.
A significant catalyst of BIDU stock’s financial underperformance is the money spent towards what is known as its online-to-offline (O2O) business — the practice of directing customers to physical retail outlets after initially piquing their interest online.
Sales for O2O-related services surged in Q2, but selling, general and administrative expenses skyrocketed 81% against Q1. The investments made for O2O development weighed down BIDU stock’s operating margins, which dropped to 20.9% from 29.7% a year earlier.
More worrying from a shareholder’s perspective is the reaction from the technical markets. Unlike many other Chinese stocks, there was no benefit associated with the parabolic bubble, with BIDU stock tracing a bearish trend channel since peaking in November of last year. Its current position virtually split the difference of the gains made between July 7 and July 24, and also happens to sit just underneath BIDU stock’s 200-day moving average.
Despite some strong financial data, BIDU stock is under the vice grip of a market panic: hardly the ideal time to consider an investment when there may be much more pain to come.
Changyou.com (CYOU)
Shareholders of online gaming company Changyou.com (CYOU) found out the hard way just how cruel the markets can be. In spite of a history of impressive earnings surprises over the past three quarters, and strong financial results in the Q2 FY 2015 report, CYOU stock was ultimately left in the dust.
Primarily due to the popularity of Changyou.com’s video game Tian Long Ba Bu, as well as the company’s strategy to launch 15 mobile games this year, total revenue in the reporting quarter came out to $202 million, which topped management’s guidance by $12 million. Sales resulting from CYOU stock’s online gaming division was just as impressive, totaling $172 million and beating guidance by $7 million. All told, CYOU stock posted earnings of 95 cents per share, easily exceeding Wall Street consensus of 66 cents.
Outperformance like that usually warrants an increase in equity value. Unfortunately for CYOU stock holders, the markets punished Changyou.com more so than the other Chinese stocks mentioned on this article. Shares immediately went into free-fall after the earnings results were released, with CYOU stock closing the July 27 session down more than 11%.
For any remaining China bulls, CYOU stock’s remarkable earnings results netting nothing but misery in the markets are a cautionary tale. There’s a lot of risk in Chinese stocks right now, and little potential for reward.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
