Alibaba and Tencent Could One Day Be Bigger Than Apple

 | Jun 19, 2017 | 10:00 AM EDT
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How far can China's tech giants grow? If current form is anything to go by, they'll soon be a match for the fabled FANGs, and then some. 

Amazon's decision to buy organic grocery-store chain Whole Foods Market (WFM) may be a $14 billion move into bricks and mortar that has some investors scratching their heads. But it has nothing on the wide reach of industries that China's online players consider worthy of expansion.

The FANG stocks of Facebook (FB) , Amazon.com (AMZN) , Netflix (NFLX) and Alphabet (GOOGL) subsidiary Google are the darlings of New York, bar their recent selloff. But China is where it's AT.

Alibaba Group Holding (BABA) and its chief rival, Tencent Holdings (TCEHY) , are now both among the 10-largest companies in the world by market capitalization. Although Alibaba's $341 billion and Tencent's $332 billion size ranks them right at the bottom of that distinguished group, it may not be long before the two companies find themselves toward the top.

Fans of soft drinks or '70s nostalgia might like to say that China has TAB, since Tencent and Alibaba take turns at the top and are often thrown in with Baidu (BIDU) , China's search-engine giant. But at $60 billion, Baidu's market cap is a far cry from the other two.

Alibaba and Tencent are well on their way to the $500 billion mark, given their remarkable rates of growth. Revenues are advancing by close to or at the 50% per year pace.

Among the world's largest companies, they must, in order, push their way up the ranking ladder past a handful of old-world stocks in the form of ExxonMobil (XOM) ($354 billion), Johnson & Johnson (JNJ) ($362 billion) and Berkshire Hathaway (BRK.A) ($421 billion) before hitting their first tech hurdle.

That's Facebook ($437 billion), with the rest of the largest stocks all from the tech world: Amazon.com ($472 billion), Microsoft (MSFT) ($540 billion), Google's Alphabet ($657 billion), and Apple (AAPL) ($741 billion).

I have little doubt they will be among those peers, and soon.

Alibaba drew gasps from the audience earlier this month when it projected full-year revenue growth of 45% to 49% this year. Others listening at the 2017 investor meeting in the company's Hangzhou headquarters clapped when they heard the forecast, higher than even the most-bullish analyst's estimates.

That would bring revenues for 2017 to around $34 billion -- a full $3.0 billion beyond what analysts anticipated.

It was the Hangzhou gathering that propelled Alibaba ahead of Tencent again in size. The companies are neck and neck, and so similar in aspirations and operations, that they will for some time be paired in investors' minds.

Tencent anticipates revenue growth of 50% for 2017. That would see revenues hit $33 billion.

Yet their potential is far from tapped, because the Chinese market is potentially so much larger than the home market claimed by the FANGs. What's more, non-Chinese players find it hard to navigate, thanks in part to Beijing's strict rules on foreign companies. 

Facebook in its home market must contend with Netflix, Amazon and Disney among its various offerings, one venture capitalist noted to the Financial Times. The Chinese companies, meanwhile, have the Chinese playing field essentially to themselves.

Playing fields. Chinese companies often fall victim to a lack of focus. If anything slows their growth, it may be expansion into too many industries for them to track well. It's worth remembering that both ICBC (IDCBY) and PetroChina (PTR) also made the ranks of the top 10 two years ago.

But those are the Berkshire and ExxonMobil of the China world to the ATs.

Their broad operations extend to consumer finance and the TenPay online payment system, similar to Apple Pay. Alibaba has the AliPay online payment system.

Tencent is the largest online-gaming company in the world. It also has the popular voice- and text-messaging app WeChat (similar to Facebook-owned WhatsApp), its instant-message counterpart QQ, and Weibo blog site (similar to Twitter (TWTR) ).

But it is also one of the biggest investors in the ride-sharing company Didi Chuxing, China's Uber, as well as the Chinese online navigation company NavInfo SH:002405. It is an early backer of U.S.-based electric-car company Nio, founded by Chinese internet entrepreneur William Li, and owns 5% of Tesla (TSLA) , which appears simply to be an opportunistic way of parking cash. Oh, and it has a movie-production arm, Tencent Pictures.

Not to be outdone, Alibaba is the world's largest retailer. It has the online navigation company AutoNavi, the entertainment production company Alibaba Pictures Group (which emerged after its purchase of ChinaVision Media Group) and TV-program producer Youku Tudou.

Both Tencent and Alibaba are also in a cut-throat war to offer cloud computing in China. Tencent this March offered Xiamen, a coastal city of 3.5 million people, its cloud services for one fen, or one Chinese cent.

The city had budgeted 4.95 million yuan ($730,000) for the one-year contract. Other low-ball bids came in from China Telecom (CHA) , at 1.7 million yuan, and China Unicom (CHU) , at 3.1 million yuan, with other technology companies and phone-service providers bidding between the range of those two figures in a public tender. 

Alibaba wisely didn't take part. The president of Alibaba Cloud, Hu Xioming, called Tencent's offer "irresponsible to the cloud-computing market" at the company's 2017 computing conference in Shenzhen, and added that the Tencent team "have destroyed the entire industry," according to the South China Morning Post.

Alibaba, Microsoft and Amazon Web Services are the largest providers of cloud computing in China for now. But Tencent will clearly do anything to barge among their ranks. Will it offer one-cent deals in other industries, too?

Both it and Alibaba have an advantage over their foreign-owned counterparts in navigating the fast-changing technology landscape in China, since they are adept at adapting to Chinese bureaucracy. It's a system that plays heavily into the hands of local players. That's particularly true in sensitive areas such as computing, where Beijing seeks to keep a tight rein on content and how it's stored.

Beijing's authority is for now a bonus. But as the Chinese companies spread their influence through the populace, they pose an increasingly powerful force for the Chinese leadership to corral, too. There were rumors a few months back that President Xi Jinping had summoned both Tencent founder Pony Ma and Alibaba's entrepreneur Jack Ma to a meeting to remind them who is the ultimate authority in China. 

Beijing may be the only barrier they have in their race to the top.

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