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NetEase, Baidu, and Alibaba Have a Lot to Prove This Week

By Rick Munarriz – Nov 15, 2021 at 9:06AM

Key Points

  • NetEase is working on 14 consecutive years of double-digit revenue growth.
  • Baidu shares look cheap to one Wall Street pro after shedding more than half of their peak value.
  • Alibaba generated record sales results during its Singles' Day shopping holiday, and it did so despite the country cracking down on consumerism.

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Three of China's online leaders have big quarterly reports on tap this week.

Earnings season is all but over, but this week will be huge if you're a fan of China's iconic internet growth stocks. NetEase (NTES -0.69%), Baidu (BIDU -0.24%), and Alibaba Group Holding (BABA -1.98%) will report fresh financials on Tuesday, Wednesday, and Thursday, respectively.

It's a challenging time to be a shareholder in Chinese growth stocks. Regulatory agencies are cracking down on some business models, and "common prosperity" initiatives are eating into overall profitability. Let's see how the three companies are holding up ahead of telltale quarterly reports this week.

A gamer playing on a PC in a neon room.

Image source: Getty Images.

1. NetEase 

NetEase is one of the oldest Chinese dot-coms on the market, having gone public more than 21 years ago. It was dabbling in several online businesses initially, but it has come into its own as a major player in online games. Online PC and mobile app gaming accounts for more than 70% of its revenue. 

It may not be a household name for many investors, but NetEase has been a monster growth stock over the years. It has managed positive top-line growth every year as a public company, including double-digit revenue growth for 13 consecutive years. It's on its way to stretch that streak to 14 years, as revenue has risen 16% through the first half of the year. 

Chinese gaming stocks came under fire this summer, after Chinese regulators moved to crack down on the amount of time that minors could spend on online diversions. NetEase investors were relieved after the company revealed that the move would only impact roughly 1% of its business

Revenue growth keeps moving in the right direction, but the same can't be said on the bottom line. NetEase has missed earnings estimates in two of the past three quarters, and that's important since its dividend policy consists of returning 20% to 30% of its after-tax profits to its shareholders in the form of quarterly payouts. 

2. Baidu

China's leading search engine has seen better days, and the stock is trading for less than half of its 52-week high. It reports on Wednesday morning. 

In a welcome sign, Baidu received encouraging analyst coverage earlier this month. Jiong Shao at Barclays initiated coverage of Baidu with an overweight rating and a $243 price target that suggests 42% of upside from current levels.

Shao's bullish take on Baidu is that it's one of the most overlooked Chinese dot-coms, and one that is successfully expanding its online advertising business. Many investors are steering clear of the country's growth stocks in this tricky political climate, but Shao feels that the Chinese government will make local internet and tech companies stronger instead of weaker. 

3. Alibaba

Finally we will have Alibaba reporting on Thursday. China's leading online marketplace has taken the brunt of fines and restrictions imposed this year by the country's government. From antitrust penalties to forced spin-offs, it's not easy being a juggernaut in China these days.

The biggest hit was Alibaba agreeing two months ago to "donate" $15.5 billion to support China's common prosperity initiative, the country's attempt to battle income inequality and slow the culture of consumerism. 

For now, the consumer is still winning. Alibaba celebrated Singles' Day last week, a shopping event that culminates on Nov. 11 -- 11/11, a play on "singles" -- and it was another record showing. Despite the muted promotional atmosphere to play nice with the country's common prosperity objectives, Alibaba still managed to ring up a new high-water mark of $84.5 billion in sales through the 11-day event. 

Alibaba and Baidu have fallen in price to the point where they're now trading for just 19 times this fiscal year's projected earnings, a historical bargain for two of the country's best-known growth stocks. NetEase isn't trading at an earnings multiple in the teens, but its consistent growth over more than two decades is worth a premium. All three stocks have a lot to prove this week.  

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu. The Motley Fool recommends Barclays and NetEase. The Motley Fool has a disclosure policy.

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