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After Melting Up, Are These 3 Chinese Tech Stocks Worth a Look?

Chinese tech companies have tumbled in the market over the last year, with many names witnessing double-digit declines in valuation. The fire sale spawned from increasing regulatory pressures and de-listing fears that have long loomed over these companies’ heads. Here’s a quick rundown of the development as it has evolved.

Cracking Down

In December 2020, the SEC rolled out a new law to crack down and increase pressure on China called the HFCAA (Holding Foreign Companies Accountable Act). It allows foreign companies to be delisted from U.S. stock exchanges if they do not comply with U.S. auditing standards.

The SEC then took things a step further, issuing an urgent warning to investors in last September regarding the risks involved in Chinese companies that they have little to no control over. The selling continued for months until the development became much more interesting this week.

China rallied behind its companies on Wednesday, citing its progress towards a cooperation plan with the SEC. The announcement sent Chinese stocks skyrocketing, providing many with a much-needed relief rally.

However, I firmly believe that investors should be highly cautious and weigh the enormous potential risks of investing in these companies. After all, the issue’s landscape hasn’t really changed; China has simply made progress on a transparency issue that has been around for years now.

Let’s look at three big Chinese stocks, their performance over the last year, the forecast for the future, and gauge if their high risks are worth adding to your portfolio.

Alibaba

Alibaba BABA is one of China's biggest and most popular e-commerce giants. The company has been crushed by the market over the last year, with shares losing nearly 60% in value compared to the S&P 500’s return of 13%. Year-to-date, BABA has declined 18%, falling behind the S&P 500’s 8% decline.

Alibaba’s sales have missed quarterly estimates in three of its last four earnings reports, and in its most recent quarter, missed estimates by 0.01%. BABA has also struggled to beat EPS estimates consistently, with two of its last four quarterly reports coming in below expectations. The e-commerce titan has a four-quarter trailing average EPS surprise of 1.74%. As seen below, revenue misses preluded downwards price movement.


Image Source: Zacks Investment Research

Ten estimate revisions have come in over the last 60 days. The consensus estimate trend for the next quarter has decreased 2.2% to $1.33 per share, reflecting a year-over-year decrease of 16%. For the following quarter, the trend has declined 3.3% to $2.04, and next year’s consensus estimate trend has increased nearly 12%, forecasting yearly EPS of $8.23 per share. The trend has decreased 0.80% for next year, bringing full-year estimates to $8.63 per share.

Earnings estimate revisions and a cloudy future outlook have brought Alibaba to a Zacks Rank #5 (Strong Sell). The bottom 5% of all stocks get this rating and are likely to perform dramatically worse than the market.

Tencent

Tencent TCEHY is an Internet service portal company that provides value-added Internet, mobile and telecom services, and online advertising. Shares of the company have been in a steep decline over the last year, decreasing 40% in value and significantly lagging behind the S&P 500. Year-to-date, Tencent shares have declined 17% but underwent a major melt-up yesterday, gaining nearly 33% on China’s cooperation.


Image Source: Zacks Investment Research

Sales of the company have exceeded expectations in three out of its last four quarterly reports, and in its latest quarter, TCEHY beat estimates by 1.9% and reported quarterly sales of $22 billion. Tencent has topped earnings estimates three out of its last four quarters, providing an average EPS surprise of 3.6% and beating estimates by 8.5% in its latest quarter.

The consensus estimate trend has decreased nearly 10% to $0.46 per share for the next quarter, reflecting a year-over-year decrease of almost 12%. The current and next year estimates have both received one downwards revision over the last 60 days, decreasing the consensus estimate trend for the current year by 2.9% to $2.04 per share and next year’s EPS estimate by 5.8% to $2.12 per share.


Image Source: Zacks Investment Research

Like BABA, a weak forecast for the next quarter and a decreasing consensus estimate trend for the current and next year have landed a Zacks Rank #5 and an overall VGM Score of an F for TCEHY.

Baidu

Baidu BIDU is a Chinese multinational technology company specializing in internet-related services and products. Shares of the company have performed poorly over the last year, plunging 45% while the S&P 500 has stayed afloat. Year-to-date, BIDU’s 2.3% decline has been much better than the general market, which was vastly helped by yesterday’s 33% gain.


Image Source: Zacks Investment Research

BIDU is on an impressive streak of eleven consecutive EPS beats dating back to August 2019. In its latest quarter, it beat estimates by $0.33, or 22%, reporting earnings of $1.82 per share, and has an average EPS surprise of 27% over its last four quarters. Sales recently beat estimates by 0.72%, reporting quarterly revenue of $5.2 billion and chaining together nine consecutive revenue beats.

The consensus estimate trend for the next quarter has decreased more than 20% in the last 60 days, bringing quarterly estimates down to $0.65 per share and reflecting a year-over-year decrease of nearly 66%. Additionally, the trend has decreased almost 11% for Q2, increased 6.3% for the current year, and increased 5.8% for the following year.


Image Source: Zacks Investment Research

Quarterly estimates, which have seen drastic decreases in the consensus estimate trend, have played a role in Baidu’s poor ranking. The company is a Zacks Rank #5 and has an overall VGM score of an F.

Final Thoughts

While it’s always tempting to buy companies that have recently skyrocketed due to a shift in perception, I believe that these companies have been waving red flags in front of investors’ faces.  

Additionally, the one-day melt-up isn’t nearly enough to sustain a healthy trend yet for BABA, TCEHY, and BIDU, and paired with their poor Zacks Ranks, I think investors should heed caution when looking for opportunities within these names and block out the short-term noise.


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