It's all about conquering the climb. Whether it's Mount Everest or a stock that has had an insane uphill run, topping them both, and then relishing the downhill glide, is human nature. We cheer David's slingshot. We blast the bully and cheer on the underdog.

So when Chinese portal specialists Sohu (NASDAQ:SOHU), SINA (NASDAQ:SINA), and NetEase.com (NASDAQ:NTES) soared through last year to become some of the best performing stocks on this side of 9/11, it was simply instinctive to wait for the downfall.

Why climb Mount Everest? Why bash the highfliers?

Because they're there, George Mallory might say -- and few would argue otherwise.

The fact that we lived through our own stateside dot-com bubble, with the stainless-steel pin of reality ripping deep into the helium-filled heart of euphoria, made the eventual pop that much more inevitable.

Yes, all three stocks are trading lower today. However, for those who are surprised that the free falls haven't amounted to much in terms of perilous height -- the stocks were mere penny stocks two years ago -- maybe it's time to consider some truths. As the fundamentals improved for all three of the tech stocks, the floor was raised every step of the way. Yes, the summit proved to be thin of air, but explosive growth and consistent profitability filled up the foothills at the base to the point where the market was left with little choice but to make molehills on the way down out of what were once mountains.

Why China matters
Before we get into why all three of these stocks are compelling values, let's take Ctrip.com (NASDAQ:CTRP) for a spin. The travel agency specializing in Chinese travel commands a lofty $500 million market cap. For its March quarter, the company saw revenues more than double to $7.8 million. Despite the company's heady speed, you can imagine, even over three more strong quarters to close out the year, that the company isn't going to appear to be much of a bargain on a sales multiple.

Let's stack that up against Yahoo! (NASDAQ:YHOO). The closest match to Ctrip's March quarter came back in the bellwether's final three months of 1996, when it produced $8.6 million in revenue. Yahoo! was a $600 million company at the time, about to embark on a deliciously volatile tear that would make it the $40 billion market cap it is today.

But there are two financial differences between Yahoo! and Ctrip that bear pointing out. For starters, Yahoo! was only growing half as fast as Ctrip at the time. More important, while Yahoo! barely broke even -- nil on a per-share basis and actually a loss if you back out the investment income gimme -- Ctrip earned $2.6 million during its March quarter. That Ctrip generated 85% in gross margins is neat, but it's the 34% in net margins that should really have you licking your chops. That's huge!

So is Ctrip the next Yahoo!? What are you, nuts? Of course not! If anything, I'm hankering to write an article entitled "Slow Junk to China" to show how Ctrip may be overvalued at this juncture. This was just an exercise to broaden your horizons before I hit you with how overpriced Ctrip is relative to the more promising Sohu, SINA, and NetEase.

Ctrip, like China Life Insurance (NYSE:LFC), are obviously first movers in a country that's a billion strong in people, and it's even more tantalizing in potential, but these are sectors that may ultimately dissolve into commodities with low barriers to entry. Content, on the other hand, is king -- or emperor, as the case may be.

What's important to take away from the Ctrip dissection is that unlike the domestic dot-com bubble and its fiscal wild-child brood, most of the companies that have gone public as China plays are doing so with vibrant growth, sharp profitability, and bountiful net margins.

The big three
The media tends to lump SINA, Sohu, and NetEase together. I'm doing just that by shining the same light on their valuations. Yet while they tend to toil in the same areas of Web portals, online games, and wireless value-added services, their concentrations and actual niches vary.

However, what they do have in common is that they are all blessed with cash-rich balance sheets, growing soundly on the top and bottom lines, and are doing so on explosive margins.

Let's see how they fared on these fronts during the March quarter:

Q1 2004 Sohu SINA NetEase

Rev. ($MM)

$25.9 $41.1 $22.6
Rev. growth 80% 129% 67%
Earnings ($MM) $10.9 $16.0 $12.6
EPS growth 125% 300% 46%
Net margins 42% 39% 56%


Not bad, huh? After a dip on Wednesday, the three companies find their shares trading between 15 and 21 times this year's projected earnings. That certainly doesn't seem too pricey. And if you back out the companies' cash balances to arrive at their enterprise values, you can shave another 2 to 3 points off of those multiples.

But why did the stocks inch lower? Oh, sure, NetEase announced that it was continuing to show weakness in its wireless subscription services. Yes, there's always a catch.

But wait a minute. That segment will account for no more than 18% of the company's revenue pie in the June quarter. It was also declining in the March quarter, and the numbers show how well the company did in overcoming that lapse. Serving up nearly 400 million pages a day, NetEase has so much more going for it on online than it does through what is becoming a finicky and competitive wireless market. After producing $16.5 million in revenue during last year's second quarter, it is looking to post between $23.4 million and $23.8 million this time out. So why the glum faces? NetEase is still looking to show sequential growth and at least 42% in revenue growth over last year's showing.

The mispriced future
Looking back, the messy burst of the American dot-com bubble may have been the best thing that ever happened to the sector. The spigot of freshly minted rivals dried up as the market put an end to bankrolling new ventures. While the stateside portals initially suffered as many of its advertisers disappeared and potential advertisers never appeared, they're standing much firmer now that the taller barriers to entry have granted them substantially more flexibility, earnings power, and sponsor desirability.

The Chinese portals, already one step ahead of their Western pioneers by valuing profits as well as eyeballs, are in that transitional phase. With the Chinese government looking to cool off the country's red-hot growth, any moves to dissuade new lending to upstarts will point to the same dot-com bubble endgame, only without the soapy residue. It will also buy the three companies time and distance in the race for mindshare in the world's most populous nation.

But what about the established outsiders? When Yahoo! decided to team up with SINA earlier this year to open up an online auction site that pretty much set the precedent -- if an outsider wants in, then it's probably going to happen by partnering with one of the three established players. While eBay (NASDAQ:EBAY) has never been shy about entering new countries on its own, it entered China only after acquiring its largest player, EaseNet. But even if heavies like eBay or Amazon (NASDAQ:AMZN), or any other multinational bricks-and-mortar giant decides not to partner with Sohu, SINA, or NetEase, odds are that it will find a way to contribute to the portals' coffers anyway. Serving up a billion Web pages in any given day already in a country where more than 90% of the population is still offline? Let's just say that another word for "non-partner" might as well be "sponsor," given the clout of these three far-reaching portals.

But won't all of these long-distance relationships play right into Ctrip's plans? Quite right. It seems as if I'll have to hold off on that bash piece, for now. While it certainly doesn't offer the bargain multiples to ride into a country ripe with as much promise as political and economic risk, it too shouldn't be immediately dismissed.

The Great Wall of worry? Bah! After all, it's all about conquering the climb.

Ready to invest in China? What do you need to know? What are the economic and political risks? All this and more in the China Connection discussion board. Only on Fool.com.

Longtime Fool contributor Rick Munarriz realizes that his parents, who fled a communist country so that their son would be born under the flag of capitalism, may not appreciate his stance this time, but blood is thicker than bylines. He does not own shares in any of the companies mentioned in this story.