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3 Chinese Internet Stocks I'd Buy Right Now

By Rick Munarriz – May 31, 2018 at 3:42PM

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Momo, Sogou, and Baozun are some of the hottest Chinese stocks that you've never heard of -- for now.

Chinese stocks are roaring back into favor with many of the biggest players hitting new all-time highs. You don't need to stick to the dot-com darlings to cash in on the internet revolution taking place in China. There are many stocks percolating under the investing radar of the world's most populous nation.

Momo (MOMO 3.60%), Sogou (SOGO), and Baozun (BZUN -0.64%) are some of the promising investments that are making waves in China. They're not household names outside of their home country, but these off-the-radar stocks are names that investors may want to consider adding to their portfolios now. Let's take a closer look.

Baozun logo made out of the brands it represents in China.

Image source: Baozun.

Momo

The Chinese social video specialist is coming off of a blowout quarter earlier this week. Net revenue soared 64% for the period, well ahead of the 46% to 52% rise that it was eyeballing in March. It's Momo's first quarter of accelerating revenue growth in more than a year.

Momo got its start as an online dating app, but the booming popularity of its live video platform is giving it a larger role in China than just a place to meet a match. Momo was welcoming 103.3 million monthly active users in March.

Investors would expect to pay up for that kind of growth, but Momo is reasonably priced. The stock is trading for less than 19 times this year's adjusted earnings target and just 15 times next year's analyst forecast.

Sogou 

Everyone knows China's leading search engine, but Sogou -- the country's second largest platform according to iResearch in terms of volume of mobile queries -- also deserves some investor attention. Sogou is growing faster than Baidu (BIDU -0.53%), with revenue rising 53% in the first quarter. Sogou's adjusted earnings grew at a hearty 56% clip.

Baidu deserves a valuation premium as the runaway top dog in China, but Sogou seems cheap now that it's trading well below last year's $13 IPO price. Sogou commands an enterprise value that is 2.6 times its trailing four quarters of revenue -- that's less than half of Baidu's multiple of 5.6. Both speedsters are surprisingly cheap on a forward earnings basis, though Sogou gets the edge at 17 times next year's profit target with Baidu at 19. 

Buying Baidu has always made sense. It's one of the market's biggest winners, a 90-bagger since going public 13 years ago. However, if you want to accessorize, why wouldn't you also buy the smaller, cheaper player growing nicely in the same niche?

Baozun

The third name on this list doesn't offer the same year-ahead earnings multiple in the mid-teens like Momo and Sogou. Baozun fetches 32 times next year's projected profitability. Revenue also isn't growing north of 50% the way we're seeing at Momo and Sogou. Baozun's revenue rose a modest 15% in its first quarter.

Baozun still makes the cut because of its business and its understated growth. Baozun has set itself as an industry fave for global brands trying to gain an e-commerce foothold in China. There are now 156 major brands on its platform, and there's model affirmation and validation with every new entry in Baozun's Rolodex. The slow top-line growth is deceptive. Baozun is shifting away from a distribution model to a consignment one, a strategy that will trade revenue growth for margin expansion and bottom-line growth. Its latest quarter was a combination of an 8% decline in product sales revenue more than offset by a 50% pop in services revenue. Put another way, the stock is more attractive than its surface fundamentals. 

Rick Munarriz owns shares of Sogou Inc. The Motley Fool owns shares of and recommends Baidu. The Motley Fool owns shares of Baozun. The Motley Fool recommends Momo. The Motley Fool has a disclosure policy.

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Stocks Mentioned

MOMO Stock Quote
MOMO
MOMO
$4.75 (3.60%) $0.17
Baozun Stock Quote
Baozun
BZUN
$6.21 (-0.64%) $0.04
Sogou Inc. Stock Quote
Sogou Inc.
SOGO
Baidu, Inc. Stock Quote
Baidu, Inc.
BIDU
$118.84 (-0.53%) $0.63

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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