China's Alibaba-Led Dot-Com Boom Starts To Fade
Just as the Nasdaq Composite Index surges to the cusp of the record high set during the dot-com-era, the excitement about China’s Internet boom is fading.
Half of the 14 Chinese dot-coms that debuted in the U.S. last year are now trading below their initial sale prices. Even Alibaba Group Holding Ltd., one of those still up in price, has dropped 28 per cent from its record high in November. On average, the 14 Chinese shares are down 3.1 per cent this year, compared with a 6.1 per cent advance in the Nasdaq.
Investor confidence, so high when Alibaba brought its record $25 billion initial public offering to market last September, is being undermined now by a wave of poor earnings at Chinese technology companies. Those that went public last year including Weibo Corp., the microblogging service, and mobile dating app developer Momo Inc. have failed to deliver the revenue investors were expecting.
“The market is nervous,” Michael Wang, a strategist at Amiya Capital LLP in London, said by e-mail March 18. “Whether investors come back is questionable.”
The earnings disappointment -- and stocks’ slump -- is clearly a reflection in part of the slowdown in the world’s second-biggest economy, but a look at broader Chinese equity gauges shows that can’t be the only explanation. The benchmark index in Shanghai is up 12 per cent this year, part of a 77 per cent rally since mid-2014, and Bloomberg’s gauge of Chinese shares traded in New York has climbed 5.1 per cent.
Buoyed by the growth prospect of the world’s largest Internet market with 649 million users, investors assigned higher valuations for the Chinese companies than their U.S. peers at the IPOs. Intensifying competition and spending increases, however, are taking a toll on revenue growth, prompting investors to cut back their valuations.
Sixteen of 28 Internet and technology firms in Bloomberg’s China benchmark reported fourth-quarter earnings below analysts’ forecasts, including search engine Baidu Inc. and video website Youku Tudou Inc. The percentage of stocks that slid below their IPO levels this year was the highest since 2011, when a series of corporate scandals eroded investor confidence, data compiled by Bloomberg show.
Momo, whose matchmaking app is akin to Tinder Inc.’s, said it lost $2.5 million in the fourth quarter as it boosted marketing expenses six-fold to promote its brand. The stock has fallen 8 per cent this month, extending the decline to 23 per cent since December when it raised $248 million. While the valuation has declined to about 20 times sales from almost 300 times at the IPO, it’s still more expensive than Facebook Inc., which has a multiple of 18.
The company’s press office, in an e-mailed response to questions on March 18, said Momo is focused on a long-term strategy and it’s too early to judge it’s success.
News by Bloomberg, edited by ESM