China internet stocks were once the hottest investment on Wall Street.
The narrative was pretty straightforward. China internet companies found themselves at the heart of one of the hottest trends in recent memory — the birth and expansion of China’s mass consumerism. China is urbanizing at an unprecedented rate. This huge urbanization creates tailwinds for Chinese companies, since China’s working population numbers 770 million, more than five times as big as America’s working population. Those tailwinds translate into more shopping, more internet usage, more social media usage, more digital advertising — essentially, more everything.
In that world, China internet stocks win big.
But that narrative has hit a road-bump recently thanks to trade war talks and foreign exchange pressures. Consequently, China internet stocks have dropped in a big way over the past several weeks.
In plain English, recent weakness is a buying opportunity in a lot of these names. Trade war issues will inevitably fade due to how connected today’s global economy is. Once those issues fade, FX pressures will ease and everything will go back to normal.
With that in mind, here is a list of five China internet stocks that you should consider buying on recent weakness.
China Internet Stocks to Buy on the Dip: Alibaba (BABA)
China e-commerce giant Alibaba (NYSE:BABA) has morphed into the face of the booming China tech revolution. The company has essentially become the Amazon.com (NASDAQ:AMZN) of China. There is the super-charged digital retail business working in tandem with the rapidly growing cloud business. Big growth in these businesses has caused BABA stock to rise from $60 to $200 over the past two-plus years.
But the stock has been stung recently by a plethora of headwinds, none of which have staying power or will materially affect the company’s still-robust long-term growth narrative.
First up, there are the currency headwinds. Those don’t have staying power. As MKM Partners points out, such currency risks always create weakness in shares in the near-term, and never materialize into anything meaningful. As such, present currency headwinds should be viewed as a buying opportunity.
Second, there are also concerns about Alibaba’s profitability. Alibaba has long been a staple for both big revenue growth and healthy margin expansion. But the latter part of that narrative — the margin expansion part — has been lacking recently as big investments into New Retail and cloud have diluted the margin profile of the business.
This isn’t anything to freak out about. Alibaba is investing big for the future. Eventually, big investment businesses will turn into big growth, big margin businesses, and the overall profitability profile of BABA stock will improve dramatically.
Overall, then, the risks presently facing Alibaba stock are over-stated. With the stock now trading at under 30-times forward earnings against the backdrop of 60%-plus revenue growth, Alibaba is a must-buy China internet stock here and now.
China Internet Stocks to Buy on the Dip: Baidu (BIDU)
That is a favorable comparison. Baidu is the leading digital search platform in China. Alphabet is the leading digital search platform elsewhere. Alphabet’s leading digital search status has allowed it to run an digital advertising business that has consistently grown revenues at a 20%-plus rate. Thus, Baidu’s preset revenue growth rate (over 30%) shouldn’t slow by much into the foreseeable future.
That just doesn’t seem baked into the current valuation. BIDU stock trades at just 21 times forward earnings. That seems rather anemic for a 20%-plus revenue grower with healthy long-term margin drivers. As such, if Baidu were just a search giant, the stock would be undervalued here and now.
But like Alphabet, Baidu is much more than just a search giant. Thanks to the company’s robust search data-set, Baidu is the leading AI and self-driving company in China. Right now, these aren’t big revenue generating businesses. But down the road, these businesses could, in sum, be larger than the company’s digital advertising business.
Throw huge growth potential from AI into the mix, and Baidu’s 21 times forward multiple makes no sense. Recent weakness can be attributed to a top executive departure and macroeconomic concerns in China, but neither of those have staying power. Thus, the buy-the-dip thesis makes most sense here and now.
China Internet Stocks to Buy on the Dip: Weibo (WB)
No one has been safe from the slaughter of China internet stocks recently.
Weibo (NASDAQ:WB), often labeled as the Twitter (NYSE:TWTR) of China, saw its stock soar from $10 in 2015 to $140 earlier this year. But WB stock has fallen off a cliff over the past few months. Since peaking above $140 in February, WB stock has fallen more than 35% to below $90.
The drop doesn’t make much sense. It is mostly attributed to fears over macroeconomic weakness in China. But such fears aren’t materializing. And the last batch of numbers we got from Weibo were really, really good. Like 75% revenue growth, 25% user growth and 95% profit growth good.
The stock now trades at a rather paltry 30-times forward earnings. That seems like nothing against nearly triple-digit profit growth. Clearly, investors are pricing in earnings growth erosion over the next several quarters.
But I’m not so sure that will happen. So long as usage trends remain strong, the secular growth narrative will remain strong. Right now, usage trends remain favorable. It appears as though Weibo was one of the most used apps for Chinese tourists to share their World Cup experiences. That is a big positive.
Overall, there isn’t anything wrong with the Weibo growth narrative. And until the numbers start getting worse, this stock is way undervalued at $90.
China Internet Stocks to Buy on the Dip: iQiyi (IQ)
The hottest China internet stock in 2018 has been freshly public iQiyi (NASDAQ:IQ). IQ, which is essentially the Netflix (NASDAQ:NFLX) of China, went public at $18 per share in late March. By mid-June, IQ stock was above $40.
Now, though, the China internet stocks slaughter has brought IQ stock back down to $30 … and it is time to buy the dip.
This is a mega-growth company. Just look at what Netflix has done over the past several years and projects to do over the next several years. They are taking over the entertainment world by building a direct-to-consumer media model that is populated with original content. IQ is doing the same thing. And they are doing it in China, which is a huge potential streaming market with roughly 800 million internet users (the U.S. only has 300 million).
IQ only has 60 million members right now. That means the growth runway to 100 million, 200 million and even 300 million potential users over the next several years has clarity and credibility. With such huge and believable growth prospects ahead of it, IQ stock could very well follow in the explosive footsteps of NFLX.
You can call valuation a problem at current levels. The company isn’t profitable yet. But, if you look out multiple years and believe that this company will follow in the footsteps of Netflix, then IQ stock could head way higher in the long-term.
China Internet Stocks to Buy on the Dip: Momo (MOMO)
Chinese social messaging app Momo (NASDAQ:MOMO) was left for dead in late 2017. Regulatory concerns hung over the stock as the company’s red-hot live video business looked susceptible to being hit hard by Chinese regulators. Consequently, MOMO stock dropped to $20 and a 10-times forward valuation in late 2017.
Since then, MOMO stock has bounced back as sustained robust growth in the company’s live-streaming business has put regulatory concerns to rest. Several consecutive quarters in a row with robust revenue, user, and profit growth powered MOMO stock above $50 by early June.
Macroeconomic concerns coupled with a short report from Spruce Point has weighed on MOMO stock recently. But those macroeconomic concerns don’t have staying power, and the short report doesn’t really bring up anything that derails the fundamental-based secular growth narrative.
Meanwhile, MOMO stock trades at just 18 times forward earnings. That is essentially a market-average multiple for a company that is growing earnings at a far-above market-average rate. Thus, uncertainty surrounding the growth narrative is already sufficiently priced in, and further downside seems limited.
As of this writing, Luke Lango was long BABA, AMZN, BIDU, GOOG, WB, IQ, and MOMO.
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