Chinese Tech Stocks with Huge Potential
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Technology is a high growth industry, and China is a high growth country, so Chinese Tech stocks offer an outstanding potential for growth in the long term. Going to China and selecting technology leaders may be similar to buying names like Google or Twitter when they were smaller companies in their previous development stages. The strategy is quite risky; but potential for gains is extraordinary.
Investors in Baidu (NASDAQ: BIDU) know how volatile these shares can be. The company reported pretty strong numbers last Wednesday, but the stock was trading down by nearly 10% after hours. The Chinese online search leader reported better than expected earnings per share, but revenues were barely below expectations, it looks like investors are quite demanding when it comes to expected performance from these Chinese growth names.
But the company is doing quite well actually; revenue was increased by a 75% in the quarter and earnings per share showed a 76% growth. The company reported a 17% increase in advertisers and the average sponsor is spending 49% more than in the last year. Revenue guidance was disappointing, but Baidu is still expecting revenue growth between 55% and 60%. That sounds like a great growth rate, even if it’s slowing.
Baidu is sometimes called “the Google of China”, and for a good reason, the Chinese company was benefited when Google got into a fight with the government over censorship issues. The dispute ended with Baidu consolidating its dominant position over Google in the country. According to Analysis International, Baidu has a 78.5% of the Chinese search market versus a much lower 16.6% for Google (NASDAQ: GOOG).
Baidu has tremendous profit margins; gross margin for the last quarter was above 70%, while operating margins were 49% of sales. This profitable company is growing strongly and the valuation doesn´t seem unreasonable for such a special business. Baidu is trading at a forward P/E below 21. If you can handle the volatility, this may be a good time to take a look at this company now that the shares look cheaper than in the past.
Sina (NASDAQ: SINA) operates micro blogging site Weibo which many call “the Twitter of China.” It also provides content, video sharing, games and many other online services. Sina is investing heavily for growth and is also acquiring different companies to consolidate its position in different online Chinese businesses.
Sina is trading at a forward P/E of nearly 40, but valuation is not probably very relevant since forecasting earnings for this company will be quite uncertain for a few years at least. The political and regulatory environment is quite unstable in this industry, and government has been pressing Sina and other companies to comply with censorship rules. So this stock is not for the faint of heart.
Both Sina and Baidu have strong market positions, and that is very important in the Chinese online industry in which things are changing quite rapidly. There will be enormous opportunities in online games and many other businesses, but telling the winners from the losers in such a dynamic environment is no easy task. For this reason a diversified approach may be a smart idea to capitalize on growth while controlling for risks at the same time.
Claymore/AlphaShares China Technology (NYSEMKT: CQQQ) is an ETF which holds 30 names among Chinese tech companies, with Sina and Baidu included among the top positions representing a 6.8% and 9.5% of the fund´s assets respectively. Many of the other companies that make the portfolio of this ETF are more speculative, smaller, enterprises with a high exposure to the booming online games business in China. As a group, these companies have an extraordinary growth potential, although some individual companies will probably fail in the following years.
It won´t be easy to select the best Chinese companies in the online business. There are many players, the rules are changing, and the risks are notorious. On the other hand, there is some clear potential for spectacular returns among these names.
acardenal owns shares of Google. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend Baidu, Google, and SINA . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.