• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Stocks

China's 'Big Four' Internet Cos. Suffer Ad-Sales Slowdown

Rapid growth in online advertising is slowing -- by Chinese standards -- creating potential headaches for Weibo and Tencent.
By ALEX FREW MCMILLAN
Sep 16, 2019 | 01:58 PM EDT
Stocks quotes in this article: BABA, BIDU, TCEHY, WB, TWTR, SOHU, CYOU, NTES

Most industries would kill for growth in the mid-double-digits. So, it's a sign of just how fast China's Internet sector is growing that 15% growth in advertising revenue is now considered disappointing.

Total ad sales for China's "Big Four" Internet companies - Alibaba Group Holding (BABA) , Baidu (BIDU) , Tencent (TCEHY) and Weibo (WB)  -- increased 15% for the second quarter of this year, compared with the same time last year. But it has steadily declined by almost half in recent quarters, from 27% in the third quarter 2018. The pace also looks set to slow further.

It's still "robust" growth, S&P Global Ratings notes in a report on the topic. But companies with ad-revenue streams that are not related to e-commerce may suffer, as new players crowd into the space.

Chief among those is the privately held Beijing ByteDance Technology. The company has seen rapid growth in users for TikTok, its hyperpopular short-form video service. That is known as Douyin in China, were ByteDance is successfully making money off that traffic. It also has a popular news-headlines app, Jinri Toutiao, or "today's headlines." ByteDance also in 2017 bought Musical.ly, the U.S. short-video app, for almost $1 billion (USD).

ByteDance is targeting to double revenues to $14 billion this year from 2018, according to the Chinese media. There was talk last year that ByteDance might go public with a $45 billion initial public offering in Hong Kong or New York. Now there's word it may list on Shanghai's new tech-focused, Nasdaq-style board instead.

S&P figures that the slowing growth in online ads is primarily a challenge for Weibo. Weibo is the parent of Sina Weibo, the microblogging site that's the Chinese version of Twitter (TWTR) . Celebrities are encouraged to post content on Weibo, and actors and pop singers throw up some of the most-popular content among Weibo's almost 500 million users.

Bytedance and Douyin are therefore a direct challenge to Weibo, which relies on advertising for the bulk of its revenue. S&P has slashed its forecast for revenue growth at Weibo to 6%-10% for 2019, down from an initial forecast of 15% to 20% growth. Likewise, the ratings agency anticipates sales growth of 8% to 12% in 2020, having previously predicted another year of 15% to 20% growth.

Weibo's user numbers are still growing attractively, however, and it had 486 million active users in the second quarter, up 13% over the same time last year.

Tencent may also take a knock from slowing ads growth, particularly to the growth it's seeing in the chat app WeChat, which is omnipresent in China, and used for diverse purposes such as booking a taxi or splitting a bill. Tencent is, however, seeing strong gains in its core business, online and mobile video games. That business is resurgent, with this year's figures up significantly over 2018, since the Chinese authorities temporarily stopped granting licences for new games last year.

Tencent has a hit game, too, on its hands with "Peacekeeper Elite." Only around 20% of Tencent's sales come from online advertising. Its ad customer base is also pretty diverse.

Weibo makes almost all of its revenue from online advertising. It may suffer compared with Tencent, since it gets a significant amount of sales from smaller advertisers, where the drag on sales is heaviest.

Alibaba's ad revenue mainly comes from performance-related advertising on its e-commerce sites, chief among them Taobao and Tmall. S&P believes this makes Alibaba less-susceptible to any slowdown in ad growth. E-commerce continues to surge in China.

Alibaba has been beating forecasts on revenue growth as a result. In mid-August, it reported a 42% jump in revenue for its fiscal first quarter, which ended on June 30, with sales up to $16.3 billion. Earnings were up 30%. S&P therefore looks to be being conservative with a full-year forecast for the year through March 2020 of sales growth of 30% to 35%.

The slowdown in online revenue may spell consolidation for smaller players.

Last week, Sohu.com (SOHU) offered to buy out the shares in its U.S.-listed video game subsidiary Changyou (CYOU) that it does not already own. It's the second bid from Sohu, which already owns 67% of Changyou, where it has struggled to match its early success in desktop gaming with games for mobile phones.

Boss Charles Zhang has launched a bid at $10 per American depositary share, a 69% premium on the price before the bid came. Zhang failed with an earlier attempt to take Changyou private two years ago.

Other video game stocks such as iDreamsky may also offer tempting takeover targets, Reuters noted in an opinion piece. Shares of iDreamsky have fallen by one-fifth since the company went public last year.

Alibaba, just as it ushered retiring chairman Jack Ma out the door, struck a deal to buy the Kaola luxury e-commerce business from NetEase (NTES) . That allows NetEase, which like Tencent makes most of its money from online gaming, to focus on its core business.

Alibaba and Jack Ma's own business, Yufeng, is also investing an additional $700 million into the latest round of funding for the NetEase Cloud Music service. Tencent and, yes, Alibaba have rival music-streaming services.

Look for Alibaba and Tencent to continue to gobble up smaller businesses if online ads slow further.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Alex Frew McMillian had no position in the securities mentioned.

TAGS: Investing | Stocks | Retail | Technology | Technology Hardware & Equipment | China

More from Stocks

The 5 Pillars of Exceptional Trading

James "Rev Shark" DePorre
Apr 10, 2021 10:00 AM EDT

When you put them together, trading success is nearly inevitable.

Market's 'Superficial' Highs Are Only Skin Dip

James "Rev Shark" DePorre
Apr 9, 2021 4:36 PM EDT

You can't call this market overbought when so much of it isn't participating.

Pinterest: Double Top or Breakout Pending?

Bruce Kamich
Apr 9, 2021 3:00 PM EDT

What would I do in this case? Here's the logical choice.

I'm Continuing to Build a Position in Skillz

Timothy Collins
Apr 9, 2021 2:24 PM EDT

SKLZ shows explosion moves to the upside when it emerges from the oversold area.

Royalty Pharma Shows Promise

Bruce Kamich
Apr 9, 2021 1:10 PM EDT

Here's how traders should play RPRX right now.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 04:44 PM EDT PAUL PRICE

    Pretty Incredible + Hard to Believe

  • 11:18 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    The 5 Pillars of Exceptional Trading
  • 08:05 AM EDT BOB LANG

    Bitcoin vs. Gold: Which Should You Invest In Now?

    Read my article TheStreet here!
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login