Chinese Internet Stocks are Getting Slammed

Several Chinese Internet stocks, including Baidu, Sohu.com, and Weibo, were slumping early on Monday.

Apr 28, 2014 at 11:30AM
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The Dow Jones Industrial Average (DJINDICES:^DJI) was up more than 65 points as of 11:30 a.m. EDT, with its gain Monday dipping as the morning wears on. Software giant Microsoft (NASDAQ:MSFT) was one of the best-performing Dow components. Not all tech stocks, however, were benefiting -- across the board, shares of nearly all Chinese Internet companies were posting notable declines, including Baidu (NASDAQ:BIDU), Sohu.com (NASDAQ:SOHU), and Weibo (NASDAQ:WB).

Pending home sales rise
Perhaps helping to fuel the Dow Jones' rally on Monday, the National Association of Realtors reported that on a month-over-month basis, pending home sales rose 3.4% in March. Economists had only anticipated an increase of 1%.

Better than expected home sales suggests a stronger than expected U.S. economy. But investors shouldn't put too much stock in Monday's data -- last week, a number of housing indicators missed expectations, suggesting that the U.S. housing market is, at best, choppy.

Microsoft scores a win with the courts
Microsoft shares rose 2.5% after the Supreme Court declined to hear a case against the company. Norvell had sued Microsoft for $1 billion on issues related to its handling of Microsoft Word 95. The courts had ruled in Microsoft's favor, but Norvell appealed all the way to the nation's highest court; its decision not to hear the case effectively results in a win for the Windows maker.

Also of note, Microsoft reported that there was a security issue with its Internet Explorer browser. Initially, this might be viewed as a negative, but strangely it could work out well for Microsoft. While the company will patch the issue, the fix will not come for PCs still running Windows XP. Any stragglers that were still using Microsoft's ancient operating system (more than you might think) could be incentivized to upgrade.

Beijingtiananmensquare

Source: Wikimedia Commons.

The Chinese government clamps down
Shares of Baidu, Sohu, and Weibo all posted losses of more than 6% early in the session.

Sohu, in particular, was effected by a disappointing quarter. While analysts had looked for Sohu to report a loss per share of $1.04, the company reported a loss of $1.26 -- a fairly significant gap. On a positive note, revenue of $365.3 million was in line with analysts' expectations, but the company projected another loss for the current quarter.

Sohu's poor results may have weighed on Baidu and Weibo, given that they're in the same sector, but the losses were likely amplified by news of more stringent regulation. The Chinese government clamped down on the Internet broadcast of U.S. television shows, some of which were officially streamed on websites owned by Baidu and Sohu. Regulators also targeted Internet pornography, threatening to pull publishing licenses.

Stricter regulation from the Chinese government poses an obvious risk to these companies, though to what extent remains to be seen. Still, the sell-off seems justified given that these stocks are historically volatile, experiencing relatively strong shifts regularly.

Chinese Internet stocks have made some investors rich
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

Sam Mattera has no position in any stocks mentioned. The Motley Fool owns shares of Baidu and Microsoft. 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.

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