Internet giants in a valuation crisis

Anti-monopoly is just appearance.

What many people have not noticed is that the global Internet giant Google’s price-to-earnings ratio (TTM) is less than 35 times, which is not as high as that of shoes : Nike ‘s price-to-earnings ratio during the same period is about 45 times.

The valuations of companies in many traditional industries in the US stock market are not low. Food and beverage company Pepsi has a P/E ratio of 26 times, McDonald’s is 35 times, the New York Times P/E ratio is 67 times, and Starbucks is close to 150 times.

Not only is Google given a low valuation, but the valuations of Internet giants such as Facebook and Amazon are also low. This means that global investors are relatively bearish on the future of Internet companies.

In contrast, the valuation problem of Chinese Internet giants is even more dangerous and can already be called a crisis.

On July 26, 2021, affected by multiple negative impacts such as antitrust investigations, Tencent’s Hong Kong stock price plummeted 7.72%. Since February 11, the cumulative decline has exceeded 35%, and its price-to-earnings ratio (TTM) has dropped to 21.89 times;

Alibaba , which is in the U.S. stock market , has fallen into a state of continuous decline since the antitrust penalty was imposed. The cumulative decline has also reached 35%, and the price-to-earnings ratio (TTM) has fallen below 25 times.

In addition to Tencent and Alibaba, Xiaomi , Meituan , Kuaishou and other “second-tier giants” have novel business models and rapid growth in performance, but their stock prices, price-earnings ratios, and price-to-sales ratios are all falling.

Compared with the sharp drop in stock prices, in terms of performance, Internet giants have been making money, and even accelerating their making money. After deducting antitrust fines, Alibaba’s performance is also growing. Even if Baidu keeps spending money on autonomous driving, its profits are still growing.

But a strange phenomenon has appeared: as China’s Internet giants continue to grow, capital is no longer willing to pay any premium for them, and their valuations have dropped again and again.

01 Ignore value

China’s Internet giants have obviously encountered the “dual standard” treatment of international capital.

There is no harm without comparison.

Tencent’s stock price and market value fell again and again. On Monday, July 26, it gapped and opened lower, and it fell sharply throughout the day, causing a certain degree of investor panic.

And Facebook continued to be strong on the second trading day after rising 5.3% last Friday to hit a record high, with a price-to-earnings ratio of more than 30 times. Combined with its current market value and estimated annual revenue in 2021, Facebook’s market-to-sales ratio is approximately 8.5 times.

The gap between the P/E ratio of Tencent and Facebook has widened, and the P/S ratio is also in the process of gradually widening: According to Tencent’s revenue growth of 25% in 2021, its current P/S ratio is about 7.8 times.

Internet giants in a valuation crisis

Alibaba suffered the most serious crisis since the US stock market went public, but its Q4 revenue in fiscal 2021 increased by another 40%. Even after deducting huge fines, the quarterly report still has profits, but these are ignored by the capital market.

On the other hand, Amazon has gained a market value of US$1.84 trillion with a price-earnings ratio of nearly 70 times. Its stock price surged 4.69% on July 6, 2021, setting a record high, breaking through the volatility and platform consolidation formed since July 2020. It is about to embark on a new peak in market value.

Internet giants in a valuation crisis

Amazon has cloud computing, and Alibaba has it; Amazon has a logistics system, and Alibaba has it; Amazon has international business, and Alibaba has it. Amazon’s performance is growing rapidly, and Ali’s growth rate is not low. But the price-earnings ratios of the two companies are more than half the difference.

In the process of rising stock prices, performance improvements, and declining valuations of US Internet giants, Chinese Internet giants have improved their performance, their share prices have continued to fall, and their valuations have even fallen even faster. China’s Internet giants have obviously encountered the “dual standard” treatment of international capital.

In the first quarter of this year, Buffett’s partner Munger chose to buy a large amount of Alibaba’s stock through its Daily Journal. At that time, it was regarded as the good news that Ali was about to regain the value of investment in the antitrust “landing”.

However, even with the blessing of this dean-level investor, Ali’s stock price has not been able to recover from the sluggish performance.

02  disregard growth

Even considering the different entrepreneurial and innovation environments between the two countries, analysts cannot give a reasonable explanation for such a huge valuation difference between the Internet companies of the two countries. 

In addition to Ali and Tencent, “small giants” such as Meituan, Kuaishou, and Xiaomi are also undervalued by capital.

Xiaomi has doubled its profit in 2020 and continued to increase year-on-year in the first quarter of 2021, and its price-earnings ratio has dropped to 20 times. In contrast, the mobile phone giant Apple in the US market has a price-earnings ratio of 32.5 times, and its revenue and net profit growth are lower than that of Xiaomi.

Meituan and Kuaishou are still in the early stages of development, unable to make profits like other giants, and the P/E ratio is not applicable. Their underestimation is reflected in the P/S ratio.

Observing the market-sales ratio of the two companies, we can find that Kuaishou officially fell below the issue price on the 26th, and the market-sales ratio has dropped to 6.19 times simultaneously. Meituan’s stock price began to fall from a maximum of 460 yuan, one step away, and the market-to-sales ratio dropped to 8.89 times.

Internet giants in a valuation crisis

Xiaomi, Meituan, and Kuaishou are all new companies that have grown up in the Internet environment with Chinese characteristics. The development and maturity of their business models are ahead of the Internet industries in Europe, America, Japan and South Korea. IoT, local life and short videos are gradually penetrating other countries. And regions are relatively advanced Internet business models.

But these business models have also been treated unfairly by international capital. A simple comparison of the small giants in the U.S. stock market that also have innovative business models:

Internet giants in a valuation crisis

By the Chinese in the United States and a local life business start-ups run by US group similar to the Doordash, after market capitalization has more than $ 61 billion, sales ratio of more than 17 times;

Shopify, the second largest e-commerce company in North America and an innovative SaaS business model, has a current market value of US$204.4 billion, or 1.3 trillion yuan, with a price-earnings ratio of 639 times and a market-sales ratio of 70 times;

Even Microsoft , an established giant with a market value of US$2.18 trillion , can achieve a market-to-sales ratio of more than 13 times with its cloud business.

It can be seen that for those growing companies that also have innovative business models, the valuation difference between the small giants between China and the United States is even greater than the gap between the big giants.

Even considering the different entrepreneurial and innovation environments between the two countries, analysts can not give a reasonable explanation for such a huge valuation difference between the Internet companies of the two countries. In the process of anti-monopoly and regulating the Internet economy, the valuations of Chinese Internet companies are even falling again and again.

03 Not as simple as antitrust

Under the current policy and regulatory environment, concerns about anti-monopoly have affected the value judgment of domestic capital for Internet companies. 

People tend to use “China’s Internet economy is experiencing the throes of antitrust” to explain the current dilemma of low valuations facing Chinese Internet companies, but the actual situation may not be that simple.

Internet companies, like all other industries, will go through several stages from germination to growth, and then from growth to maturity. As the industry gradually matures, the valuation of companies will also decrease.

However, the maturity or even decline of an enterprise is not simply determined by the length of time, but needs to be combined with the growth of the enterprise. Growth means development space, which is ultimately reflected in the growth of financial data.

Judging from the financial data of several Chinese Internet giants, their growth has not disappeared.

Observing the endogenous growth and extensional expansion of Chinese Internet companies, it can be found that in the past period of time, extensional growth (including external mergers and acquisitions and internal expansion of new business) has supported the sustained growth of giants.

These large Internet companies have used their platform advantages to form a strong squeeze on upstream, downstream, and partners in the past period of time, and therefore earned a portion of excess revenue. This has also become the most important reason for the supervision of Internet platforms. one.

But even if there is no excess revenue, Internet companies can still charge various types of service fees from B-side suppliers and C-side consumers by operating and serving users. This is determined by the needs of consumers for a more relaxed and convenient life, and will not be transferred by any regulation or policy.

There is still a long way to go for the Internet-based and data-based transformation of business services, and it will not stop abruptly because of the emergence of anti-monopoly. However, under the current policy and regulatory environment, concerns about antitrust have affected the value judgment of domestic capital for Internet companies.

Overseas capital’s judgment on the low valuation of China’s Internet economy is more derived from a kind of vigilance and prejudice that has nothing to do with value . This is a force that transcends the economy and the market, and has nothing to do with whether the company’s products, operations, and financial data are excellent.

04 Written at the end

At the end of May 2021, Ningde Times (SZ: 300750), a star A-share company, became the first trillion-dollar company on the Growth Enterprise Market, with a stock price approaching 400 yuan. Morgan Stanley analysts downgraded its rating to “low allocation” with a target price of 251 yuan, which directly discounted the stock price by 40%.

Some investors commented that such a rating is “not very harmful and extremely insulting”. Since that day, CATL’s share price has continued to rise, with a cumulative increase of nearly 30%, and it has ignored Morgan Stanley’s downgrade.

Pricing power is a good thing. Although the A-share market dominated by domestic investors has problems such as insufficient pricing power and following the trend, it has never been stingy with emerging industries, outstanding companies, even some entrepreneurial companies that are still in the conceptual stage. Given a high valuation. In the development wave of China’s new energy and chip industries, domestic capital dared to give high valuations.

On the contrary, in overseas markets, even the most successful new economy companies in China still have to be scrutinized with the most demanding eyes. It is not so much a “free market choice” as it is a kind of misfortune and sadness.

Posted by:CoinYuppie,Reprinted with attribution to:
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