Alibaba, Tencent to deliver on ‘bets’

Bloomberg

Alibaba and Tencent can count themselves among the world’s costliest technology companies after a stellar run. To justify those lofty valuations, China’s two largest corporations have to deliver on some of the riskiest bets they’ve placed in years.
Alibaba Group Holding Ltd., which created China’s largest online bazaar but has scant brick-and-mortar experience, spent $8 billion investing in a string of retailers including Suning Commerce Group Co. to prove it can transform old-school shopping. Tencent Holdings Ltd. is extending a gaming empire built around social phenomenon WeChat, buying studios and creating content to evolve into an entertainment powerhouse. Those multibillion-dollar bets come under the microscope when both report earnings this week.
The aim is to sustain the sort of growth that’s driven their share multiples in excess of Facebook Inc., Apple Inc. or Google parent Alphabet Inc.—members of the vaunted FAANG quintet that also includes Amazon.com Inc. and Netflix Inc. Alibaba and Tencent are projected to report June-quarter profit growth of 36 percent and 25 percent respectively. While investors have so far given them the benefit of the doubt based on their track records, the fact that projections for share gains are rising faster than for actual earnings signals an impending market pullback, warns Neil Campling at Northern Trust Capital Markets.
After rising 73 percent in 2017, Alibaba shares trade at a multiple of 64 times earnings. Tencent is trading at 56 times profit after a 71 percent rise in its stock. That’s almost twice Alphabet’s 30 times and well ahead of Facebook’s 38. And Tencent’s shares this month surpassed projections on its stock price for the first time since 2015.
“The digital scale platform titans, such as Tencent, Alibaba and Facebook deserve premium ratings, but they will need to ‘grow’ into such ratings rather than skyrocket higher,” Campling wrote in a report to clients. He highlighted the gulf between projections on prices versus earnings. “For those stocks where there is a significant gap between the two metrics we wonder if we may see some pressure on stock prices in the short term.”
The scale of Alibaba and Tencent’s acquisitions and deals—a total of $55 billion announced or completed in 2016 and 2017— had initially taken investors by surprise, given their years-long conservative streak of minority stakes. They’re motivated in part by the driving need to remain at the forefront: as Alphabet Chairman Eric Schmidt put it, competitors in the internet industry may be just one click away.