Alibaba Group Holding Ltd (BABA)

[DiscoverGold]

Why China’s Tech Darlings Are Losing Their Fangs
By: Bloomberg | August 31, 2018

Tencent and Alibaba have started underperforming the likes of Apple and Amazon, and the gap may be here to stay.

Not all tech stars are equal. While U.S. giants from Apple Inc. to Amazon.com Inc. march to or through the $1 trillion valuation mark, China’s darlings are getting dumped.


The groups started to diverge two months ago, and the big American tech stocks have outperformed their Chinese counterparts by 19 percentage points since then. With more than $18 billion of bets now standing against Alibaba Group Holding Ltd., the e-commerce leader is the world’s most shorted stock. Tencent Holdings Ltd. shares dropped as much as 5 percent in early Hong Kong trading Thursday after reports that China plans further curbs on gaming.

A Messy Divorce
The performance of China tech stocks tracked their U.S. peers until a sudden split about two months ago

There are several reasons for the swoon. In June, the U.S. trade war started to undermine the confidence of Chinese consumers, on whom internet companies rely. The latest earnings season was ugly, with second-quarter profit growth slowing to 16.2 percent, from 47 percent a year earlier.

But there are reasons to believe the divergence is structural and here to stay.

Take a look at the valuations of Tencent and Alibaba. Despite weak earnings, the pair are trading within their historical price-earnings range. On a price-to-sales basis, though, they’ve fallen off a cliff.

Deflated Balloon
Alibaba's and Tencent's valuations on a price-to-sales basis tumbled in recent months as investors worried about their spending

In other words, investors no longer believe that a dollar of sales from China tech can trickle down to shareholders the way it did in the past.

China tech’s spending spree is alarming. This year, Alibaba, Tencent and JD.com Inc. have already splashed out more than $37 billion on stakes in startups. You hardly see this kind of venture-capital generosity from Amazon or Apple.

»»» Read More…

• DiscoverGold