Bottom line: Shares of China's "Big 3″ Internet firms of Baidu, Tencent and Alibaba will come under pressure in the next few months as investors tire of their heavy spending on mobile and resulting profit erosion.
Internet search leader Baidu (NASDAQ:BIDU) has just become the second of China's "Big 3″ Internet firms to report its latest quarterly results, and investors were clearly unimpressed with its heavy spending on mobile Internet initiatives. Frankly speaking, I'm also a bit tired of hearing Baidu founder Robin Li talk about the importance of mobile at every opportunity he gets. But that said, the strategy certainly looks like a good investment for the future, even if the message has begun to get a bit redundant and has ceased to generate much excitement.
More broadly speaking, the bigger message for the "Big 3″ of Alibaba (NYSE:BABA), Baidu and Tencent (OTCPK:TCEHY) seems to be that investors are looking for any reason to sell shares of these overinflated companies, and earnings announcements lacking any major excitement seem like a good excuse to do just that. Baidu's shares sagged by 10 percent in after-hours trade after it announced its latest results, and will be down around 20 percent from a December peak if the drop holds in regular trading.
Shares of Alibaba look even worse, though it's important to note the stock was already overinflated when the company became embroiled in a tiff with the business regulator a couple of weeks ago over piracy on its Taobao site. Alibaba's shares are now down nearly 30 percent from a peak in early November, and have lost 17 percent in the last 3 weeks since its spat with the regulator began and it also announced quarterly results that were mostly business-as-usual.
All that seems to show that business-as-usual isn't what investors are looking for these days, even though that's mostly what they got with Baidu's latest results. The big trend for Baidu has been a huge gap between revenue growth and much slower profit growth, thanks to a surge in spending as the company invests heavily on the mobile Internet. That trend continued in the fourth quarter, with revenue and profits up 48 percent and 16 percent, respectively. (company announcement)
The company's costs also continued to soar during the quarter, rising 63 percent from a year earlier. At the same time, Baidu provided slightly worrisome guidance for the current quarter, saying revenue would grow by about 35 percent for the period. That looks slightly troublesome, since the company had been posting revenue growth of more than 50 percent over the last year. But we'll have to wait and see if the slowdown is a one-time thing or if it persists into the coming quarters.
There's really not too much more to say about these results, since they really do mostly show a continuation of recent company trends. But the fact that both Baidu and Alibaba shares have both sagged on similar reports shows that investors are tiring of the same old stories and want something new to excite them and justify the premium they usually pay for these Internet titans. In the absence of such a new story, the shares could continue to come under pressure for the next few months.
The trend certainly doesn't bode too well for Tencent, which will report its results on March 18 after the Lunar New Year holiday period that begins next week. (earnings calendar) Of the 3 BAT companies, Tencent is the only one whose shares have actually performed well in the last couple of months, and are up 26 percent from a trough in mid December. If Baidu and Alibaba are any indicator, the company's shares could also come under pressure when it releases its latest earnings report, setting the stage for a broader pullback in the stocks of all 3 BAT companies.
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