Under the Radar Chinese Internet Stocks to Follow
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Chinese internet stocks have struggled over the last two years. Leading stocks such as internet search giant Baidu have seen losses, while the S&P 500 has seen a meaningful 34% gain. Outside of the major Chinese internet stocks, the losses over the last two years have been closer to 50%. Some of these stocks have seen expectations drop from the outlandish forecasts a few years back, but strong long-term growth remains mostly intact, suggesting that investors should give the sector another look.
Recently, the sector has gotten a small boost due to the rapidly increasing valuation of Alibaba, which is now valued at around $100 billion. Other internet stocks, though, lack investment coverage and could be ripe for snapping up. ChinaCache International (NASDAQ: CCIH), Renren (NYSE: RENN), and SINA Corporation (NASDAQ: SINA) are a few of the stocks beaten down in the last few years even as growth potential remains intact.
As with all Chinese internet stocks, the favorite aspect of the market is to label them with comparative US stocks. In most cases, the basis of the label is valid, but the companies aren’t all identical, and the markets in China and the US aren’t the same.
Akamai of China
As a leading provider of Internet content and application delivery, ChinaCache is often compared to Akamai Technologies in the US. Akamai has a market cap of $7.6 billion and trades at roughly 5.3 times last year's revenue. ChinaCache has a market cap that has slipped below $100 million and trades at less than 1 times revenue. In fact, analysts estimate revenue at $167 million for this year, placing the stock ever closer to trading at half of revenue.
While investors probably expected faster growth when the company went public, ChinaCache still reported 27% revenue growth during Q1 2013. The company, though, reported an adjusted net loss for the quarter as it continues to push growth for the sake of profits in order to expand its footprint in the enterprise market and position itself for the explosive growth in mobile data demand. The company forecast revenue growth to push towards 29% in Q2.
Facebook of China
Renren provides a leading real-name social networking platform that is often compared to Facebook. The company saw revenues surge 45% during Q1 2013, due partly to 100% growth in the group buy site called Nuomi. Renren.com has 184 million activate users with 57 million MAUs during March 2013.
At the present, the company is dwarfed by the 1.1 billion users on Facebook and faces tough competition from the likes of Tencent, which competes with social networks that have larger user bases. Even more importantly, Renren only has an enterprise value of $400 million due to cash and equivalents listed at $850 million.
The Twitter of China
Of the group, SINA is the largest with a $3.8 billion market cap. The company owns the Weibo service, which is seen as the most widely used Twitter-like service in that country. The stock isn’t overly cheap trading at roughly 6 times estimates for 2013 revenues or 5 times excluding cash. The stock also trades at 30 times a forward earnings, even as accelerating revenue growth in 2014 is expected to only reach 26%.
The encouraging part is that Twitter is valued around $10 billion in the US, placing the valuation of SINA at only 40% of the value. The amazing part is that SINA had a Twitter-like valuation back at the start of 2011 when the stock surged to over $140, but it now only trades around $57. The potential exists for this Chinese internet stock to reignite some of that excitement now that the sector has consolidated for nearly two years now.
While some of these internet stocks have had minor bumps recently, the stocks still trade considerably below comparative valuations in the US and the levels seen a few years back. Revenue continues to grow in the 25% range for all of these stocks even during a tough economic period in China and all of Asia. Once the economy rebounds and investors become more comfortable that these larger technology stocks in China don’t carry the same fraud risks as the reverse merger stocks, the sector could see huge gains down the road.
ChinaCache and Renren come with considerable risks, as each company faces competitive pressures from larger firms that could squeeze growth and margins. SINA, on the other hand, offers a compelling valuation, especially compared to the rich valuations of domestic social media networks such as Twitter.
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Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!