Tag Archives: Chinese internet stocks

Value Matters

I recently saw an interview with Damian Lewis, the actor who plays hedge fund billionaire Bobby “Axe” Axelrod in the TV show Billions, where he commented on the differences in reaction to the character in the US and the UK. Lewis said that in the US, the character is treated like an inspirational hero, whereas in the UK he’s seen as a villain. We all like to see a big shot hedgie fall flat on their face so us mere mortals can feel less stupid.

The case of David Einhorn is not so clear cut. A somewhat geekie character, the recent run of bad results of his hedge fund, Greenlight Capital, is raising some interesting questions amongst the talking heads of the merits of value stocks over the run away success of growth stocks in recent years. Einhorn’s recent results can be seen in a historical context, based upon published figures, in the graph below.

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Einhorn recently commented that “the reality is that the market is cyclical and given the extreme anomaly, reversion to the mean should happen sooner rather than later” whilst adding that “we just can’t say when“. The under-performance of value stocks is also highlighted by Alliance Bernstein in this article, as per the graph below.

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As an aside, Alliance Bernstein also have another interesting article which shows the percentage of debt to capital of S&P500 firms, as below.

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Einhorn not only invests in value stocks, like BrightHouse Financial (BHF) and General Motors (GM), but he also shorts highly valued so-called growth stocks like Tesla (TSLA), Amazon (AMZN) and Netflix (NFLX), his bubble basket. In fact, Einhorn’s bubble basket has been one of the reasons behind his recent poor performance. He queries AMZN on the basis that just because they “can disrupt somebody else’s profit stream, it doesn’t mean that AMZN earns that profit stream“. He trashes TSLA and its ability to deliver safe mass produced electric cars and points to the growing competition from “old media” firms for NFLX.

A quick look at the 2019 projected forward PE ratios, based off today’s valuations against average analysts estimates for 2018 and 2019 EPS numbers from Yahoo Finance of some of today’s most hyped growth stocks plus their Chinese counterparts plus some more “normal” firms like T and VZ as a counter weight, provides considerable justification to Einhorn’s arguments.

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[As an another aside, I am keeping an eye on Chinese valuations, hit by trade war concerns, for opportunities in case Trump’s trade war turns out to be another “huge” deal where he folds like the penny hustler he is.]

And the graph above shows only the firms with positive earnings to have a PE ratio in 2019 (eh, hello TSLA)!! In fact, the graph makes Einhorn’s rationale seem downright sensible to me.

Now, that’s not something you could say about Axe!

Tech Treks

One lesson from the internet bubble is that big is beautiful in tech. But longevity is another lesson, think Yahoo! So one must be fickle in ones tech affections and one must never ever pay too much. After much patience, I was lucky enough to eventually get into Apple in early 2013 when sentiment was particularly sore. I didn’t manage to heed my own advice on getting into Google at a reasonable price in December 2014 when it was trading around 60% of its current value, as per this post on internet relative valuations (more on that post later). Since 2013, I have watched sentiment gyrate on AAPL as the standard graph I use below illustrates (most recent AAPL posts are here and here). I used the current $135 price high as the most recent data point for the Q12017 valuation.

click to enlargeaapl-forward-12-month-pe-ratios-q1-2017

Investors and analysts seem giddy these days about the impact of Trump tax changes and the iPhone 10 year anniversary on AAPL and have been pointing to Berkshire’s position increase in AAPL as confirmation bias of more upside. I, on the other hand, have been taking some of AAPL off the table recently on valuation concerns and will likely again be a buyer when the inevitable worries return along the “one trick iPhone pony” lines. God bless gyrating sentiment! Even Lex in the FT was saying today that the current TTM PE ex net cash of 13 is reasonable (eh, a TTM PE ex net cash of 7 a year ago was more reasonable)! AAPL still has be a core holding in anybody’s portfolio but prudent risk management requires trimming at this price in my opinion.

In my search for new ideas whilst I await some divine sense to emerge from the Trump & Brexit fog, I thought it would be interesting to revisit the post referred above on internet valuations. First off, I took the graph showing forward PEs to projected EPS growth using analyst estimates from December 2014 and inserted the actual change in share price from then to now. Two notable exceptions, at the extremities, from the graph below are Amazon and Twitter with share price changes of 173% and -56% respectively.

click to enlargeinternet-multiples-dec14-as-at-feb17

Although every company is different and has its own dynamics, my simplistic take from the graph below is that high PE stocks (e.g. > 40) with high EPS projections (e.g. > 35%) can easily run aground if the initial high growth phase hits harsh reality. The sweet spot is decent PEs with EPS growth in the 15% to 35% range (again assuming one can get comfortable that the EPS growth projections are real) indicative of the larger established firms still on the growth track (but who have successfully navigated the initial growth phase) .

A similar screen based upon today’s values and analyst estimates out to 2018 is presented below. This screen is not directly comparable with the December 2014 one as it goes out two years rather than one.

click to enlargeinternet-multiples-feb2017

Based upon this graph, Google and Netease again look worthy of investigation with similar profiles to two years ago. Netease has the attraction of a strong growth track record with the obvious Chinese political risk to get over. Expedia looks intriguing given the strong growth projected off a depressed 2016 EPS figure. Ebay and Priceline may also be worth a look purely on valuation although I have a general aversion to retail type stocks so I doubt I’ll bother look too deeply. All of the data used for these graphs is based upon analyst estimates which also need to be validated.

Valuations currently are juicy, generally too juicy for me, so this exercise is simply one to determine who to investigate further for inclusion on a watch-list. Time permitting!

Chinese Web

In a previous post last December, I had a quick look at the valuations of a few Chinese internet stocks that are traded in the US, solely for curiosity’s sake. At that time, I mused that Google (GOOG) may be a better bet than any of the Chinese high growth/high risk plays given its valuation. The one maybe I highlighted amongst the Chinese internet stocks was Baidu (BIDU), the so called Chinese Google. It is somewhat ironic that BIDU today fell 15% after disappointing results from higher expenses and lower revenue projections whilst GOOG, which had a great quarter due to revenue growth and squeezed expenses, is up over 20% since its Q2 results. Just shows what I know!

Given the drama in the Chinese stock market, I had another quick look over the Chinese internet stocks to see how they are performing, as per the graph below.

click to enlargeChinese Internet Stocks July 2014 to 2015

It is far too early to tell what the impact of the current turmoil will have on the Chinese consumer and on the Chinese internet sector (if any, given the government’s current policy of propping up the market). At this stage, it is interesting to see that it’s NetEase, primarily in the online game services sector, which has stood up the best so far, up 40% this year. That just confirms to me how far these stocks are outside my comfort zone.

To China and back

Chinese internet stocks are way way way out of my comfort zone. Besides the hype and transient nature of many business models, the stratospheric valuations and the political risk are issues that I can’t get my head around. With the Chinese stock market up 25% in a month, it looks like classic bubble territory.

That said, the latest IDC predictions for 2015 recently caught my attention. One of the predictions asserted the following:

“China will experience skyrocketing influence on the global information and telecommunications technology market in 2015 with spending that will account for 43% of all industry growth, one third of all smartphone purchases, and about one third of all online shoppers. With a huge domestic market, China’s cloud and ecommerce leaders (Alibaba in ecommerce, Tencent in social, and Baidu in search) will rise to prominence in the global marketplace. Similarly, Chinese branded smartphone makers will capture more than a third of the worldwide smartphone market.”

Every now and again (as I did in this post) I look at how a few of the Chinese internet stocks that trade in the US are progressing for the sake of curiosity. The graph below shows a selected few – Baidu (internet search), NetEase (online gaming), Ctrip (travel services), Sina (online media), Sohu (various online services), Tencent (social, traded in Hong Kong), and Alibaba (e-commerce). click to enlargeChinese Internet Stocks December 2014 Tencent is the biggest gainer at over 300% since 2011; NetEase is just below 300%; with Baidu over 200%. Alibaba is up 16% since its stock market debut in September. Since 2011, the underperformers are Ctrip about breakeven, Sohu down 20%, and Sina down 50%. An equally weighted portfolio of these stocks, excluding Alibaba, invested at the beginning of 2011 would have resulted in an 84% gain or an approx 16.5% annual return. The current price to 2015 projected EPS multiples against the 2014 to 2015 projected EPS growth for these stocks compared to the same metric for a number of the established US internet names gives an insight into current valuations, as per the graph below.

click to enlargeInternet multiples Looking at this graph, Baidu is the only Chinese stock of the names highlighted by IDC that looks to me like one that may warrant further investigation as an investment possibility (but only when there is a meaningful pull back in the market in 2015). However, I wouldn’t be rushing out to get involved anytime soon as it seems to me that an established internet name like Google is more interesting as an investment prospect at current relative valuations than any of the higher growth Chinese equivalents.

Chinese internet stocks on fire, again.

Every experienced investor, like a jaded poker player, has stories akin to bad beat tales – great investments that got away. This post is not one of those tales. Seven odd years ago I did have a look at a few of the then hot Chinese internet shares – SINA and SOHU in particular. Both were growing solidly and were valued with big future growth assumed. Given the heated valuations and the lack of a credible history at that time, I passed. I was also uncomfortable with the political risk factor.

It was therefore with interest that in recent months I noticed a few stories about stock increases in some familiar Chinese internet names. A quick look through the key statistics on Yahoo confirms that valuations remain aggressive with PEs based upon 2013 projected earnings in the 20 to 40 range across a sample of firms (albeit not as wild as in the past).  Quarterly revenue, if not profit, growth also looks healthy at 20% to 30%.  The graph below shows the share prices of some of the better known Chinese internet firms over the past seven years.

click to enlargeChinese Internet Stocks August 2013

Although I suspect my risk appetite will never be comfortable with valuations in this sector, at some stage, I’d like to dig deeper into the quality firms in this space to figure out if there is any appropriate risk/reward investment angle that I could live with (and at what entry level on valuation). If nothing else, the rise and fall over 2011 to 2012 of SINA and SOHU looks intriguing (for old time’s sake!).