The Appeal of Chinese Tech Stocks

Brittney Barrett  |

The Internet industry has been in focus across financial media outlets over the last month of two in the face of sky-high valuations and rumors of iPad app developers receiving tens of millions in first round funding. Talking heads from economic publications everywhere are placing their bets on whether or not the likes of Google, Facebook, Groupon and rest of the gamut will explode in a massive bubble resembling the dot-com crash in 2011, or continue their ascent. For the most part, the outlooks have been negative.  Google, the top dog among Internet start-ups has been under anti-trust investigations and reports demonstrate a waning presence in the massive Chinese market. Groupon, another darling among investors, is thought to be overvalued and has been facing scrutiny among participating companies who give their products away for low prices and little reward. The internet has perpetuated an environment where having a short attention span is acceptable, and it is, unless people get bored of Angry Birds, which recently received $42 million in funding, like they did or Snood.  Or maybe they decide that $30 is less than $60 thanks to Groupon but it’s also $30 more than the nothing they would have spent if they didn’t go Jet-skiing for 11 minutes in Marina Del Ray. Essentially, there is an interest turnover rate threatening the longevity many of these start-ups. Unless a company is expanding globally and regularly getting new customers, there’s a risk the current base will become bored. Surely college freshman in 2005 were spending more time on facebook than they are today. Luckily, they have other, new customers, like that college freshman’s mother and young-teens whose parents are finally relenting and allowing them to get accounts.

Not to say that these companies are going to fail or the industry’s giants won’t continue to thrive. Rather, it’s an acknowledgement that many American companies are already bloated with capital, whereas social media companies emerging outside of the U.S. are still growing and have not yet reached their first peaks in terms of talent of public interest. Where the best engineers are getting hard to come by in Silicon Valley, as emerging companies are infused with huge venture capitalist money, companies overseas, specifically in China have a wider well to tap and a longer, more profitable climb up to the top.

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The Chinese customer base is like the Holy Grail among American internet start-ups. Companies are willing to do just about anything to have access with their billion-plus consumer population. Google allowed for government-instituted search result editing and Facebook is still looking for a way to access the. In terms of an investment’s longevity, the Chinese economy is poised to overtake the U.S. in a matter of decades and has been exploding at a pace unparalleled by any other nation in the world.

Just like the new mom’s and teenagers that just got access to facebook, the Chinese population is only recently getting on the Internet. As of now, roughly 400 million Chinese people use the internet, but with urbanization on the upswing and the population turning into major consumer contenders, Chinese companies are an excellent long-term consideration.

This, coupled by the fact that the Chinese government is exceptionally autonomous, much to the despair of Americans, their population, a huge and power entity in itself, has not been privy to many of the Internet companies the rest of the world has access to. The corporations that emerge within their own borders will be the ones benefitting from the interest of that population base in the most direct and significant way. We’ve already seen this with China’s largest search engine, Baidu (NASDAQ: BIDU) . Without pressures from international competition, there is a guaranteed costumer base and the company can take its time with design and development. There is no pressure demanding that they widen their options or figure out an equivalent to Google Buzz. Basically, China has made it extremely difficult for American Internet companies to have a significant presence beyond what they dictate. As a result, their population, become more powerful every day, will always be a resource they are primarily in ownership of in terms of the internet market.

Additionally, without U.S. competition or presence, Chinese companies can take American idea and expand upon it at their leisure. Not having to innovate on any particular timeline allows these companies to function on less capital initially, eliminating the tens of millions in funding that sprout conversations about bubbles. Youku (NYSE: YOKU) for instance, is the Chinese crossbreed between Hulu and Youtube. There’s nothing about the company that seems like it would make it competitive in the U.S. or in other nations, but because a huge number of Chinese have access to it in a way they don’t have to its American forefathers, it attracts massive traffic that will continue to grow with the population of internet users.

There are a number of companies like this already established in China. There’s Sohu (NASDAQ: SOHU) and Sina( NASDAQ: SINA) which allow follow vague social media models. Share prices of these companiess are already running around $100, but as more and more of the country gains access to them over the next 5 or 10 years, those numbers will continue to push higher instead of drop-off.  Tech companies rely on new costumers becoming interested to grow, and that is the primary draw here for an investor. There’s a guarantee that the customer base in China is going to broaden, whereas with American companies, most of the market has already been tapped out.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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