I recently sold several of my Chinese tech stocks for regulatory, merger-related, and ethical reasons. Those divestments reduced the weight of Chinese stocks in my portfolio from about 20% to less than 10%.
But that doesn't mean I'm bearish on all Chinese tech stocks. The sector will remain challenging, due to regulatory threats in both the U.S. and China, but I believe three well-known Chinese stocks are still worth buying today: Bilibili (BILI -2.53%), JD.com (JD -0.25%), and Baidu (BIDU 0.70%). Let's find out a bit more about these tech companies.
Bilibili is a diversified tech company that targets China's Gen Z users. Its gaming business, which generated 45% of its sales in the first nine months of 2020, licenses the hit game Fate/Grand Order from Sony's Aniplex and publishes other games like Cygames' Princess Connect.
Its value-added services segment, which generates most of its revenue from live videos, accounted for 32% of its top line. Ads generated another 14% of its sales, and the remaining 9% mainly came from its e-commerce business, which sells tie-in products to video games and anime series.
Bilibili ties all these businesses together with a single ACG (anime, comics, and gaming) platform. The platform's monthly active users (MAUs) grew 54% year over year to 197.2 million in the third quarter, and its total number of paying users grew 89% to 15 million.
Bilibiil's revenue rose 71% year over year in the first nine months, led by the triple-digit percentage growth of its VAS and advertising segments, and analysts expect its revenue to rise 89% this year and another 47% next year. Bilibili isn't profitable yet, but it's already attracted big investments from Tencent and Alibaba (BABA -0.21%), which both consider it a valuable buffer against ByteDance's Gen Z-oriented apps.
Bilibili's stock already rallied nearly 480% over the past 12 months, but it still trades at 16 times next year's sales. That price-to-sales ratio isn't cheap, but it looks surprisingly reasonable in a market filled with stocks trading at over 40 times next year's sales.
Baidu, which owns China's largest search engine, has traditionally been the weakest link of the BAT triumvirate, which includes Alibaba and Tencent. Its advertising business struggled as China's internet users spent more time on WeChat, ByteDance's Douyin (known as TikTok overseas), and other platforms.
On the surface, Baidu is still struggling. Its advertising revenue has declined year over year for six straight quarters, and its streaming video unit iQiyi (IQ -2.77%) -- which previously offset that slowdown -- also lost its momentum as users spent more time on short video apps.
But Baidu's declines are bottoming out. It expects its fourth-quarter revenue to rise 4% year over year, which indicates its advertising business has finally stabilized. Analysts expect Baidu's revenue to stay flat for the full year but rise 15% next year.
They also expect Baidu's focus on cutting costs, especially traffic acquisition costs for its main search engine, to lift its earnings 17% in fiscal 2020 and another 11% in 2021. We should always be skeptical of analysts' forecasts, but its ecosystem-expanding efforts -- including its Mini Programs, DuerOS voice assistant, AI services, Apollo driverless platform, and takeover of JOYY's YY Live -- could gradually diversify its core business away from ads.
Baidu also doesn't face any antitrust headwinds even as regulators crack down on Alibaba and Tencent. Baidu's stock has already rallied more than 90% over the past 12 months as investors spotted those strengths, but it still trades at 26 times forward earnings and four times next year's sales.
JD is China's largest direct retailer and second-largest e-commerce company after Alibaba. Unlike Alibaba -- which runs paid listing platforms, doesn't take on inventories, and fulfills orders with a logistics subsidiary -- JD takes on inventories and fulfills orders with its first-party logistics network. JD's business model is more capital-intensive than Alibaba's, but it shields shoppers from low-quality and counterfeit products.
JD's revenue rose 28% year over year in the first nine months of 2020, and it ended the period with 441.6 million annual active shoppers, up 32% from a year ago. Most of that growth came from China's lower-tier cities, which brought in about 80% of its new shoppers during the third quarter.
JD's margins have also been expanding, thanks to economies of scale and its infrastructure and logistics investments. Those investments throttled its earnings in previous years, but they're now reducing its infrastructure costs, lowering the costs of acquiring new shoppers, and helping it stay profitable. JD's decision to offer its logistics platform as a service to other companies is also raking in higher-margin revenue.
Those tailwinds boosted its adjusted net income by 45% year over year in the first nine months of 2020. Analysts expect its revenue and earnings to rise 39% and 59%, respectively, for the full year. In fiscal 2021, they expect its revenue and earnings to increase another 23% and 38%, respectively -- which are solid growth rates for a stock that trades at 43 times forward earnings and just over one times next year's sales.
Those valuations, along with Alibaba's antitrust troubles, indicate JD's stock could still have plenty of room to run after more than doubling in 2020.