Just when you thought the swollen Chinese economic bubble was, if not bursting, then at least steadily deflating, there comes word this Monday morning of two more huge Chinese Internet IPOs, the $500 million Weibo (Chinese Twitter), and the far larger Alibaba (Chinese Amazon and eBay), which is said to be seeking $15 billion. In what may be a nod to the reality of weakening Chinese economic strength, both companies have opted to trade on U.S. exchanges, rather than Hong Kong exchange, (the later having been widely predicted in the case of Alibaba.)
But is the move wise? Are American investors still ravenous for Chinese Internet companies? Based on the current prices of Chinese Internet stocks trading on U.S. markets, the answer is a qualified “yes.” Internet portal giant Baidu.com’s (BIDU) stock is down 12% YTD, but that still makes it up 60% from the beginning of 2013. Sina.com (SINA), another Internet portal giant and the parent company of Weibo is faring somewhat worse. SINA stock is up 5% on the IPO news, leaving it down 20% YTD, and up only 15% from the beginning of 2013. Venture off the beaten path a bit, however, and you’ll find upstart YY (YY), a company we were bullish on when others were dismissing it out of hand, up a dramatic 56% YTD. Show us your money, the U.S. market seems to be saying, and we’ll keep showing you ours.
But have these new companies any money to show us? Much of the news in Weibo’s IPO filing was troubling. With 129 million monthly users, Weibo, it turns out, is smaller than previously thought. The company is also unprofitable, but its losses are declining. Most troubling of all, however, the company must register its encryption software with the Chinese government, which also reserves the right to shut the company down at any time. As to the first part, one doesn’t know whether to be horrified by the implicit degree of government intrusion or to give the Chinese government props for being upfront about what we now know our own government is doing as well. As to the second part, however, it’s a deal breaker. The U.S. government may eavesdrop on our Twitter (TWTR) conversations, but it isn’t threatening to close Twitter down if we use Twitter to say how upset we are that the government is eavesdropping on our Twitter conversations.
Then there is Alibaba. If there were a golden window for Alibaba’s IPO launch, it may already be closing, as Reuters reported Monday morning that the e-commerce giant is losing market share to a host of smaller competitors, including Tencent holdings. Likewise, the emerging Chinese credit crisis raises questions as to just how valuable that market is going to be. For American investors, the story with Alibaba has long been, and remains today, the 24% stake that Yahoo owns in the company, yet most analysts conclude that this stake is responsible for the overwhelming percentage of Yahoo’s (YHOO) 70% rise over the last year, if not the whole thing, so there may not be much rise left for Yahoo to realize.
Chinese Internet stocks were one of the market’s surprise gifts in 2013, but jumping onboard with the new offerings looks incredibly risky. Investors should consider well how the environment has changed in the last 18 months, lest they make the same mistake as a general who tries to re-fight his last war. At the very least, let the current Chinese economic crisis play itself out, because once that has happened, the global environment may be well-nigh unrecognizable.
Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.