China Internet Stocks Are Now Dramatically Undervalued

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China internet stocks - China Internet Stocks Are Now Dramatically Undervalued

Source: Maher Najm via Flickr

Thanks, Facebook (NASDAQ:FB).

Ever since the social media giant spooked investors with a down-guide and lost more than $100 billion market value in a single day, the whole tech sector has rolled over. While the FANG stocks have been getting killed, the slaughter has been much worse across the Pacific Ocean, where China internet stocks have been getting pummeled.

Since the Facebook earnings report just a few days ago, Baidu (NASDAQ:BIDU) and JD.com (NASDAQ:JD) are both down about 5%. Tencent (OTCMKTS:TCEHY) is down 6%. Weibo (NASDAQ:WB), Alibaba (NYSE:BABA), and Momo (NASDAQ:MOMO) are all down about 7%. Meanwhile, Baozun (NASDAQ:BZUN) is down 9%.

Those are big sell-offs in a short amount of time. And the sell-offs are only getting more exaggerated. Thanks to a trio of bad earnings reports from China internet stocks Sohu.com (NASDAQ:SOHU), Sogou (NYSE:SOGO), and Changyou.com (NASDAQ:CYOU), the selling pressure on China internet stocks has only picked up recently.

But, recent weakness has plunged some China internet stocks into dramatically undervalued territory. Accumulating now might be like catching a falling knife in the near-term. In the long-term, though, buyers here will be rewarded handsomely.

Here’s a deeper look.

Losers Don’t Mean Anything For Broad China Market

The sell-off in China internet stocks went from mild to extreme after a trio of disappointing earnings reports on Monday.

But the three companies that reported have never been, currently are not, and will never be indicative of the underlying healthy of China’s internet economy. In short, Sohu, Sogou, and Changyou have been the three biggest losers in the China internet sector over the past year.

During that stretch, SOGO stock is down more than 30%, SOHU stock is down nearly 50%, and CYOU stock is off 70%. With respect to the big name China internet stocks, the biggest decline over the past year is JD, and that stock is down just 20%. The only other big name China internet stock that is down over the past year is MOMO (-9%). Between the other China internet stocks (BIDU, BABA, WB, TCEHY, and BZUN), the average gain over the past year is 25%.

In other words, the trio of SOGO, SOHU, and CYOU have been in major sell-off mode for a year now. Meanwhile, during that stretch, the big name China internet stocks have rallied.

That means that recent bad numbers from SOGO, SOHU, and CYOU mean next to nothing when it comes to the likes of BABA, BIDU, WB, and others. Yet, those stocks are selling off. That strongly implies that a near-term buying opportunity is forming.

Long-Term China Internet Bull Thesis Remains Strong

The long-term bull thesis on China internet stocks is that these companies have huge upside potential through China’s red-hot digital economy.

No matter which you way you slice it, at the end of the day, China’s consumer economy is huge and only growing. It is undeniably massive — with a 770.4 million working population, more than five times as large as America’s working population. It also undeniably has a long way to go before it’s mature — it has about $3,600 in household expenditures per capita, less than 20% of America’s household expenditures per capita.

Thus, if you believe that China’s consumer economy continues to look more and more like America’s consumer economy in the long-run, then you also believe that China internet stocks have a bunch of growth potential ahead of them.

I’m in the camp that believes there is still lots of growth left for China internet stocks. Those big long-term growth prospects are presently being dramatically undervalued by the market.

These China Internet Stocks Are Way Undervalued

My favorites right now include JD stock, BABA stock, BIDU stock, and WB stock.

JD stock is being hammered because of unnecessarily short-sighted concerns surrounding margins. But, the company’s margins are compressing because management is significantly expanding the company’s addressable market. Thus, near-term margin compression paves the path for long-term revenue growth. Eventually, near-term investments will peel back, and margins will ramp higher on a big revenue base.

BABA stock is king when it comes to China internet stocks. But, unnecessarily short-sighted margin concerns are also weighing on this stock. Same story as JD. Big investments now pave the path for long-term growth, so buying on recent weakness seems like the smart move.

BIDU stock has been weak ever since some top executive departures led some investors to believe that the company’s artificial intelligence initiatives were slowing. But, that hasn’t been the case. Instead, BIDU has announced numerous partnerships and deals since those departures, the sum of which underscore that BIDU remains China’s leading AI player.

WB stock, meanwhile, has been killed for seemingly no reason. This stock is now 40% off its 2018 high. But, at $80, this is a stock trading at 29X forward earnings that reported 70%-plus revenue growth last quarter and essentially 100% profit growth. That huge discrepancy just doesn’t make sense, and implies exceptionally strong risk-reward asymmetry going forward for bulls.

Bottom Line on China Internet Stocks

Near-term noise has created an opportunity in China internet stocks for long-term investors. At current levels, some of these names are dramatically undervalued, considering how much growth is left in China’s consumer economy.

Word of caution: near-term weakness may persist. Sentiment is weak right now, and momentum is strong going in the sell direction. But, longer-term, fundamentals trump sentiment, and the fundamentals point to material upside for China internet stocks from these levels.

As of this writing, Luke Lango was long FB, BIDU, JD, WB, BABA, and MOMO. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/07/china-internet-stocks-are-now-dramatically-undervalued/.

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