September is often considered a tough month for stocks. However, many Chinese stocks have already had a rough year due to escalating trade tensions between the U.S. and China, and they might rebound on any positive developments.
The "Chinese Twitter"
Leo Sun (Weibo): Weibo's microblogging platform is often called the "Twitter of China." It was once a subsidiary of SINA, before being spun off as a separate company in 2014. Weibo then flourished as it attracted top celebrities and brands to its platform and expanded into lower-tier cities.
Weibo now reaches a bigger audience than Twitter -- its monthly active users (MAUs) grew 19% annually to 431 million last quarter, as its daily active users (DAUs) also rose 19% to 190 million. During the quarter, its revenue surged 68% annually to $426.6 million, supported by a 69% jump in advertising revenue and 62% growth in value-added service revenue for integrated services like live video streaming.
It's also extremely profitable. Its non-GAAP net income soared 80% to $156.1 million, its adjusted EBITDA climbed 68% to $173.3 milion, and its GAAP net income jumped 92% to $140.9 million. Wall Street expects its revenue and earnings to grow 56% and 53%, respectively this year.
Yet Weibo's stock tumbled about 25% over the past year due to concerns about trade tensions, potentially tougher regulations for social media and streaming video platforms, and competition from new rivals like Jinri Toutiao.
But after that sell-off, Weibo's stock is trading at just 28 times this year's earnings and 20 times next year's earnings, making the stock very cheap relative to its growth potential. The company also remains a lucrative takeover target for Alibaba, which is already Weibo's second-largest stakeholder after SINA.
When falling profits are acceptable
Nicholas Rossolillo (Tencent Holdings): Shares of Tencent retreated again in August after the world's largest video game maker reported its first decline in profitability in years. Piling on a trade war between the U.S. and China, as well as an ever-shifting regulatory environment in the world's most populous country, has caused the stock to drop 30% from all-time highs reached back in January.
So why is now the time to put Tencent on your radar? I'll admit: Stocks can at times get stuck in free-fall mode and continue to fall beyond all expectations. Perhaps more pain could be in store for Tencent shareholders; some of the company's top games still don't have a release date for China as the country overhauls its regulations department and a ceasefire in the trade war with the U.S. also hasn't been called for. Plus, I was wrong once already when I called out the sell-off in Tencent as overdone back in April.
Nevertheless, I remain confident regardless of which direction the stock decides to head from here. Now's the time to keep an eye on the Chinese tech giant as long as top-line sales momentum continues at the double-digit tear it has been on for years, assuming you have the time to wait. Through the first half of 2018, revenue was up 39% compared with 2017. That's in spite of the headwinds already mentioned, and all coming from a stalwart business valued at $404 billion as of this writing. Operating profit margins took a hit, falling to 36% from 39% in 2017. Much of that decline had to do with the company's investment into new businesses, though, rather than any fundamental issues with operations.
In short, if you believe social media, video games, online payment systems, and cloud computing have a future in China, Tencent should be on your watch list.
Buy best of breed
Jamal Carnette, CFA (Alibaba): The Chinese stock market has been under pressure this year as concerns of trade wars with its biggest partner -- the United States -- and concerns about raw-material prices and rents are putting a dent in equity demand. The benchmark Shanghai Shenzhen 300 Index down approximately 17%.
U.S. stock investors may have forgotten how to invest in down markets, but the best strategy is to take advantage and buy high-quality companies at cheaper prices. With that in mind, Alibaba, also known as China's Amazon, fits the bill.
According to Thomson Reuters, Alibaba now trades at 22 times forward earnings, which is expensive compared to the greater S&P 500's multiple of 17. However, the company is still growing at a rapid clip, turning in 61% year-over-year growth in the recently reported quarter -- up from its past 50% growth average. Despite the strong report, shares of Alibaba are down 11% in the last three-month period.
Investors should note Alibaba's growth is being led by higher-margin services like cloud computing, which increased by 93% year over year. The bottom line is that the long-term thesis in Alibaba is still intact, and due to stronger fundamentals and sluggish stock performance, shares are cheap in relation to past valuations.