For the average U.S. investor, the Chinese tech market might seem like a daunting one. But dig deeper and you'll realize that many of these companies are actually fairly easy to understand.
Today, I'll highlight three Chinese tech stocks that have very wide moats -- Tencent (OTC:TCEHY), Baozun (NASDAQ:BZUN), and Weibo (NASDAQ:WB) -- and why they could dominate their respective industries for the foreseeable future.
Tencent is best known as the maker of WeChat (also called Weixin), the most popular messaging app in China with 963 million monthly active users (MAUs). But it also owns the older PC messaging platform QQ, which still has 850 million MAUs, and the social network Qzone, which has 606 million MAUs.
Tencent is also the largest video game publisher in the world by revenues. Its gaming portfolio includes the e-sports juggernaut League of Legends, the mobile hit Clash of Clans, and major stakes in publishers like Activision Blizzard. Those growth engines enabled Tencent to post a multi-year streak of double-digit sales and earnings growth. Analysts expect the company's revenue and earnings to respectively rise 52% and 51% this year.
Tencent's biggest advantage is its ecosystem. The company expanded WeChat into a "super app" for ride hailing, food delivery, mobile payments, games, and various other services -- which cuts search giants like Baidu and app store owners like Apple out of the loop. That strategy locks in users and makes Tencent a consistently disruptive force in the Chinese tech market.
Baozun is often called the "Shopify of China" since it's also a one-stop shop which helps retailers quickly build an online presence. It creates digital storefronts; provides customer service, fulfillment, and analytics support; and integrates customers' stores into e-commerce sites like Alibaba's (NYSE:BABA) Tmall.
Baozun's business has been booming thanks to rising internet penetration rates and higher online spending among middle class customers. Baozun posted double-digit annual sales growth in every quarter since its market debut in mid-2015, and analysts see its revenue and earnings respectively rising 22% and 115% this year.
Baozun has two killer advantages. First, it has a first mover's advantage in the Chinese e-tailer market, so it doesn't face much meaningful competition. Second, Alibaba is one of its biggest stakeholders, which eliminates the possibility of the e-commerce giant launching a rival platform for its Tmall and Taobao customers. Therefore, as long as brick-and-mortar retailers pivot toward digital channels, Baozun's top and bottom lines should keep growing.
Weibo is sometimes called the "Twitter of China", but its social network actually resembles a mix between Twitter's microblogging, Facebook's social networking and live video features, and Reddit's forums. Online media company SINA spun off Weibo as a public company in 2014, but retains a majority voting stake. Alibaba is Weibo's second biggest investor.
Weibo's biggest advantage is similar to Twitter's -- it's the top source for celebrity posts and chatter. Weibo organizes celebrity accounts on a "Hall of Celebrities" page, which categorizes people based on their professions. Its live video business, which was temporarily halted due to licensing issues, represents another potential pillar of growth.
But unlike Twitter, Weibo kept growing its MAUs and ad revenues while churning out massive profits. Its MAUs rose 28% annually to 361 million last quarter, its total revenues surged 72%, and its net income surged 144% on a non-GAAP basis and 184% on a GAAP basis. Analysts expect its revenue and non-GAAP earnings to respectively rise 66% and 99% this year.
But mind the potential pitfalls...
Tencent, Baozun, and Weibo all look like great growth plays, but all three stocks have high valuations -- Tencent's P/E hovers around 50, Baozun has a P/E of 85, and Weibo trades at a whopping 113 times earnings. The bulls might believe that those premiums are supported by their growth rates, but the bears could pounce quickly on these stocks on any minor disappointment.