Investing in Chinese tech stocks can bring with it an assortment of risks -- from macro and regulatory uncertainty, to potential governance issues, to (for now at least) the coronavirus outbreak.
But for those willing to brave the waters, Chinese tech companies do provide opportunities to invest in companies posting strong double-digit growth and possessing major long-term moats at multiples that are hard to find among U.S. tech companies sporting similar growth profiles.
Leading Chinese game-streaming platform Huya (HUYA) (previously discussed here) is one name that I think fits this description. Alibaba (BABA) , which just topped its December quarter estimates while reporting strong growth for several key businesses, is another.
Though its stock has rallied since October and its near-term profits are (much like Amazon.com's (AMZN) ) depressed by giant investments in a number of growth initiatives, Alibaba still has an enterprise value (market cap minus net cash) equal to around 20 times the free cash flow (FCF) it appears set to produce in fiscal 2021 (ends in March 2021).
For that valuation, you get a company that:
- Just reported 38% RMB-based annual revenue growth and 36% dollar-based growth, and looks well-positioned to deliver 20%-plus growth over the next few years as it benefits in various ways from China's middle class/disposable income growth.
- Runs a pair of Chinese e-commerce marketplaces (Taobao and Tmall) that collectively tower over all rivals and are still seeing 20%-plus revenue growth and double-digit user growth.
- Is also seeing solid double-digit growth for its international e-commerce and Chinese wholesale e-commerce operations.
- Owns a cloud infrastructure business that (thanks to its leading position in China) grew 62% last quarter and is now on a $6 billion annual revenue run rate.
- Owns a local services/food delivery platform (Ele.me) that's growing north of 40%, a major logistics platform (Cainiao) that saw 67% growth last quarter and direct e-commerce and offline retail businesses that collectively grew 128% and are now on a $15 billion run rate.
- Also owns several other valuable businesses, including a major online video platform (Youku), a popular mobile web browser (UCWeb) and a major online mapping and navigation platform (AutoNavi).
- Owns a 33% stake in Chinese payments giant Ant Financial, which was valued at $150 billion in a 2018 funding round.
Alibaba has admittedly faced some questions about its accounting and governance over the years. And any investor looking to buy now would have to take coronavirus-related uncertainty account.
Alibaba's management downplayed the coronavirus outbreak's financial impact a little bit on Thursday morning's earnings call, and noted that its online grocery sales have seen a lift as Chinese consumers opt to stay home. Nonetheless, it did admit (not too surprisingly) that the outbreak will hurt its March quarter revenue, as online merchants, delivery partners and local businesses all see their operations impacted.
That qualifier aside, there was a lot to like about Alibaba's latest earnings report and call, with the company once more sharing a lot of numbers that suggest its valuation remains fairly reasonable at a time when multiples are getting stretched for many fast-growing U.S. tech firms.