One in five people on the planet are a resident of China, and according to the United Nations, by 2030 its population will be over 1.5 billion. Coupled with this explosion comes the inevitable explosion of the internet in China, thanks to Chinese authorities who allow individuals and businesses to have internet accounts. Since then, the Chinese have been captivated by the ‘net, and all of the opportunities it represents. Unsurprisingly, numerous internet companies such as Baidu.com, Inc. (ADR) (NASDAQ:BIDU), China’s premier web search engine; SINA Corp (NASDAQ:SINA), an online media and news company; and Alibaba, an private auction website on the verge of an IPO, emerged at rapid pace several years ago.
Today, Chinese consumers’ insatiable appetite for all things related to the internet, including e-commerce has attracted the attention of investors, and “Chinese internet companies” has been a theme that has captivated nearly anyone interested in enormous profit. Today, Baidu and SINA Corp (NASDAQ:SINA) are highly volatile stocks. But at this juncture, is there any opportunity?
Baidu: Don’t rush in just yet
Due to the gradual-yet-volatile investor disappointment with how the Chinese internet companies have performed since the sector’s peak in early late 2010/early 2011, Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s P/E ratio has dropped from approximately 100 to 19.7. When the company reported its first quarter of earning this year, margins experienced significant declines, as management announced that aggressive spending on sales and marketing for mobile products and other investments in research and development would hamper margin growth for the rest of the year.
The rate at which overall revenue figures grow has slowed, granted that revenue is still growing quarter-over-quarter. At the end of 2011, the company’s revenues grew 83.2% year-over-year (from $1.3 billion to $2.4 billion). Investors had expected this unabashed growth to continue. At the end of 2012, the company’s revenues had increased from $2.4 billion to $3.6 billion, or 53.8% year-over-year. For any company, these figures are impressive – but in technology, it represented the slowing of the brazen growth the company had experienced over the last several years. Unfortunately, this trend doesn’t look like it’s going to reverse in the next few quarters, so for now, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) should remain on the sidelines as a do-nothing stock.
In addition, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) recently acquired PPS, an online video platform, for $370 million, and plans on merging it with iQiyi, it’s own video platform. The integration process will take time and not be beneficial to expense lines. On a positive note for the Chinese internet companies, this event leads to further potential consolidation of the China internet industry as a whole, as evidenced by the additional M&A activity that has been happening in the space, which means that there’s an opportunity for Baidu, Sina, and Alibaba to become massive global technology giants. However, that time hasn’t quite arrived yet.
Sina: China’s other internet titan
Sina’s recent Q1 earnings report was lackluster/mixed, beating EPS but missing on revenue ($126M, or +19% year-over-year, vs. consensus estimates of $118M). Advertising revenues, which comprise nearly 75% of total revenues, increased by 20% year-over-year to $94.3 million. A primary factor in SINA Corp (NASDAQ:SINA)’s stock price improvement is the revenue accretion of Weibo, the company’s microblogging website (similar to Twitter). Today, according to iResearch, Weibo accounts for 57% of all microblogging in China.
