You've got the perfect-story stock ingredients. You have China, home to the world's largest population. You have the Internet, untapped. All you needed was a catalyst to kick things into high gear. For forgotten Web portals Sohu (NASDAQ:SOHU), Sina (NASDAQ:SINA), and NetEase (NASDAQ:NTES), it seemed as if that day would never come.
Then came the killer app. Teaming up with wireless providers to offer mobile phone text messaging proved to be huge in China. Then they became profitable. Along the way, it was off to the races.
Last month, Tom Jacobs took a look at the 10 biggest winners over the past two years. Sohu and Sina were at the top, having overcome their penny-stock lows to multiply by more than 30 times apiece. NetEase hasn't exactly been a slouch. The stock's been nearly a 20-bagger over the past year alone.
NetEase posted another record quarter last night, but let's temper some of that enthusiasm. Yes, it closed out the period with 144 million registered accounts. That's an impressive sum. But why did the company only produce revenue of $17.7 million? Isn't that a bit, dare we say, soft for a company that is now commanding a $2.2 billion market cap?
I'll say. But before you run off to sell the whole sector short, consider the heady growth and the amazing margins. NetEase actually posted a net profit of $10.2 million on that $17.7 million. Yes, that works out to net margins of 57.6%. Earlier this week, Sina produced quarterly net margins of 36.7%. Sohu was the slacker in the bunch but still managed double-digit net margins. Microsoft (NASDAQ:MSFT), eat your heart out.
With all three companies showing huge gains in ad revenue, the prospects look bright for the companies. However, the stocks have every right to take a breather. They now have a combined $6 billion in market cap, and it may be some time before they justify those run-ups using traditional valuation metrics.
No, you don't want to bet against the favorable momentum behind the actual fundamentals, but a greater sin than that would be overpaying to participate.
Ready to invest in China? What do you need to know? There have been some great gains over the past two years. Is there still room for more upside? All this and more -- in the China Connection discussion board. Only on Fool.com.
