PERSPECTIVE: Alibaba And Tencent Survive FANG+ Stock Decline, Face Positive Prospects

While Chinese companies Alibaba and Tencent are nowhere near the level of market saturation faced by other FANG+ stocks, they have lost ground recently.

Sara Hsu
    Aug 05, 2018 4:15 AM  PT
PERSPECTIVE: Alibaba And Tencent Survive FANG+ Stock Decline, Face Positive Prospects
author: Sara Hsu   

Some of China's top technology firms have struggled recently in their stock market performance. With the NYSE FANG+ index going through a rough ride recently, the Chinese stocks, including Tencent (HKEX: 0700) and Alibaba (NYSE: BABA), are also lagging behind. Tencent, for example, has lost $143 billion of market value it had gained since January. However, both Alibaba and Tencent have a solid basis for further growth despite the correction and, despite headwinds, continue to compete strenuously with one another.

FANG+ stocks, particularly Facebook and Twitter, have lost value because of a decline in the number of users. These social media business models have been based on gaining user accounts to increase advertising views, with much of the revenue coming from advertising. The number of users appears to have hit a saturation growth. While Chinese companies Alibaba and Tencent are nowhere near the level of market saturation faced by other FANG+ stocks, they have lost ground recently.

Multiple Challenges

Tencent is fighting to maintain revenue increases amid slowing growth in its gaming practice, which is the main revenue driver in the Tencent business model. Tencent needs new blockbuster games like three-year-old Honor of Kings to maintain its top spot in China's gaming industry. Tencent's expenses also rose over 2017 and early 2018.

Alibaba has experienced a recent decline in the value of its shares because of the ongoing U.S.-China trade war and fading prospects for Alibaba's expansion in the United States, despite its limited presence in the U.S. to date. Competition in the internet tech sector is fierce, particularly among the top rivals Alibaba, Tencent, JD.com, and subsidiaries, such as Ele.me and Meituan Dianping. New companies continue to arise as well. For example, Pinduoduo, a group ordering e-commerce website, recently listed on the Nasdaq to raise funds that will help it to compete with JD and Alibaba.

Both Tencent and Alibaba have also been caught in the regulatory crosshairs, as customer deposits have been required since January to be placed in custodial accounts rather than being free to earn interest. In addition, Tencent's WeChat Pay and Alibaba's spinoff Ant Financial/Alipay have been affected by restrictions on payment providers. In December last year, the central bank raised the reserve ratio for payment providers from 20 percent to 50 percent and imposed ceilings on purchases using QR codes.

The general outlook for technology companies in China is dimming as well, as funding for these companies dries up. Even though both Tencent and Alibaba continue to face the prospect of conquering additional market share, slowing growth has hurt all industries, and the tech industry, which was thriving in recent years, is now eating into technology gains. This is one reason why being listed in the U.S. is so critical for these firms.

Upside Still Exists

Tencent and Alibaba face some headwinds, but they do continue to possess strong potential. Alibaba's latest quarterly report showed strong revenue stemming from e-commerce and cloud computing. Tencent's report showed strength in its gaming and video streaming services.

In addition, use of e-commerce and payment apps continue to expand rapidly in China's rural areas and lower tier cities, indicating that there is still quite a bit of room for expansion in these areas. Alibaba's Taobao and Tmall online marketplaces, as well as Ant Financial's Alipay, will benefit from this. Tencent's WeChat Pay and JD.com, of which Tencent is a major shareholder, will continue to grow based on this assessment. For these reasons, the stock downturn experienced recently by Alibaba and Tencent has generally been viewed as a correction of excessively high prices for FANG+ stocks, rather than a worrisome long-term trend.

同济堂Further, Alibaba's and Tencent's myriad investments in other companies in the retail and service industries diversify their holdings and may help reduce revenue volatility. Alibaba on Thursday announced its partnership with Starbucks. Starbucks will deliver its products through China via an Alibaba subsidiary Ele.me, allowing customers to order online and receive products in person. This will help Starbucks expand its hold in China while providing more business to the Alibaba empire. Alibaba is expected to continue to grow in the area of New Retail, or in the hybrid marriage of online and offline retail and delivery.

Tencent plans to tap into a larger gaming user base as it expands its gaming platform, WeGame, worldwide. Tencent is currently preparing a Hong Kong edition of WeGame, after which the company will continue to expand its user base to other nations. As a result, Tencent will need to increase the number of games available on its platform.

Alibaba's earnings report for the fiscal quarter ended June 30 is due on August 23. Tencent's next earnings report is due on August 15. According to Bloomberg, Tencent's year-over-year profit gain is expected to slow to 5.1 percent in the second quarter, the weakest showing since 2012.

As both companies continue to be profitable, however, both in the short- and long-term, they are likely to perform well on the markets, rebounding from brief troubles stemming from FANG+ contagion and economic headwinds.

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