On Tuesday, Chinese officials made news by deciding to lift the ban on politically sensitive foreign websites, including Facebook (NASDAQ:FB) and Twitter, inside the Shanghai free-trade zone. While the Shanghai free-trade zone is a large market by itself, in my view, the real story is that China may someday lift the ban on Facebook and Twitter throughout China. There are three clear winners and three clear losers from an open internet in China.
Winner #1 Facebook
In response to the news out of China, FB shares moved higher touching a new all-time high above $49 per share. This is not surprising as FB is a clear winner from a free Internet in China. Previously, market participants had not expected FB to enter the Chinese market soon. If China's 1.3 billion people are able to use FB going forward then the company's valuation must change to reflect the additional growth opportunities. It is not unreasonable to think that FB could nearly double its user base if the company is able to penetrate the Chinese market. Given this, I think FB is a long-term buy. However, I would not necessarily be chasing the current move. FB's move into China will not happen overnight and will almost certainly be a multi-year process. In addition to good news on the China front, FB also started rolling out its online mobile payment system. Simply put, FB news has been quite positive of late. The market has now priced in a lot of good news and the stock is due for a rest. Furthermore, the upcoming Twitter IPO may lead to some short-term weakness in FB shares as investors look to diversify within the social media space.
Winner #2 Twitter
News that Twitter will be allowed in the Shanghai free-trade zone and possible throughout China in the coming years could not have come at a better time for Twitter. The company filed for an IPO with the SEC on September 12. Early estimates were that the company would be valued between $10-20 billion. However, more recent estimates now value the company at $15-16 billion and with good reason. China presents a major opportunity for Twitter going forward if the company is allowed to enter the market. If possible I strongly encourage investors to buy shares at the IPO price if possible. I expect shares to open sharply higher once they start trading. Certainly, the news out of China will only help send shares higher. Furthermore, the small size of the offering, just $1.5 billion, may lead to a massive squeeze higher.
Winner #3 Google
Google (NASDAQ:GOOG) has not yet received approval to launch in China but given the news that Facebook and Twitter will be allowed in Shanghai means that GOOG might not be far behind. Like FB and Twitter, GOOG would have a lot to gain from access to the Chinese market. The reality is that if GOOG is allowed into China, at some point in the future, GOOG shares will need to be repriced significantly higher. I think GOOG is an interesting play here because the stock currently does not reflect the possibility of any positive catalyst coming from China.
Loser #1 Renren
Just a few months ago, I wrote a piece arguing the bullish case for Renren (NYSE:RENN), the Chinese social media stock often referred to as "the Facebook of China." The stock has moved higher since but I am now cautious on RENN given the possibility of Facebook entering the Chinese market. If Facebook enters China, it will hurt RENN as users will likely migrate to Facebook. However, I would not short RENN as the downside is too limited given RENN's $2.23 per share of cash.
Loser #2 Sina
Sina (NASDAQ:SINA), often referred to as " the Twitter of China", will be hurt if Twitter is able to enter the Chinese market. SINA shares have been on fire so far in 2013 as the company has benefited from the increasing valuation of Alibaba. Furthermore, SINA also sold a stake to Alibaba which increased SINA's valuation. Finally, more recently, SINA shares have also benefited from the Twitter IPO story. Due to the sharp move higher so far in 2013, more than 58%, I view SINA shares as quite vulnerable at current levels. News that Twitter will enter China may be just the catalyst needed to send SINA shares sharply lower.
Loser #3 Baidu
On April 22, 2013, I wrote a piece entitled 3 Reasons Why Baidu Is A Buy. Since then, as shown by the chart below, Baidu (NASDAQ:BIDU) shares have surged by more than 75%. If Google is able to enter the Chinese market at some point in the future, BIDU, often referred to as "the Google of China" will face significant competition. Given the sharp move higher in shares of late, like SINA, I view BIDU at quite vulnerable right now.
BIDU data by YCharts
It is too early to say if and how soon China may open up its internet entirely but news that Facebook & Twitter will be allowed in Shanghai is an important development. As this policy in Beijing continues to evolve, Facebook, Twitter, Google, Renren, Sina, and Baidu investors should play close attention.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.