Can Chinese internet companies Alibaba Group Holdings (NYSE: BABA) and Baidu (NASDAQ: BIDU) recapture their glory days as high-flying growth stocks?
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Both companies have been on a downward trend when it comes to the slowdown in share price and earnings.
Alibaba started trading in the US in 2014 as an American Depositary Receipt. Baidu has been available to US investors for even longer, making its debut as early as 2005.
They are just two of the hundreds of Chinese stocks that can be easily traded in the US today. However, they get attention because they are two of the biggest when it comes to market cap. Other China or Hong Kong-based mega-caps include: JD.com (NASDAQ: JD), PetroChina (NYSE: PTR), Pin duo duo (NASDAQ:PDD), NetEase (NASDAQ: NTES) and China Petroleum and Chemical (NYSE: SNP).
While the broader global market has seen price declines this year due to economic uncertainty, there is an additional reason that some Chinese stocks have been penalized.
A little story back: Over the past decade, US securities regulators have requested access to various financial and other data for Chinese companies listed in the US. However, Beijing blocked this entry due to national security concerns.
That tiff eventually set up Chinese companies risk of being delisted from US stock markets.
However, on August 26, Beijing and Washington signed an agreement allowing US regulators to inspect Chinese audit documents from the companies in question.
Alibaba is one of the first companies chosen for an audit. The company operates a global online and mobile marketplace for various goods. The business model is similar to: Amazon (NASDAQ: AMZN).
The company rebounded from its first quarter earnings on Aug. 4, but returned lower in the next session. The results were better than expected, with a gain of $1.40 far exceeding analysts’ opinion, as you can see by looking MarketBeat’s earnings data. Revenue of $30.69 billion was below views, but analysts were still pleased to see search ad revenue bounce back and the company to manage its costs.
Huge benefit expected
Analysts have a “moderate sale” rating on the stock with a price target of $166.53, which would be a 74.30% increase. That’s an astonishing increase that analysts expect over the next 12 to 18 months.
Shares are down 21% over the year. The stock has underperformed the FTSE China 50 index, of which it is the second largest component by weight. The index has fallen 18.87% so far this year.
Meanwhile, Baidu, which operates a search engine with targeted ads and other content services from which it monetizes – think Alphabet (NASDAQ: GOOGL) – fell only 7.46% in 2022.
The company made a profit on Thursday. It marked the fourth quarter of declines, but at least the pace of declines is slowing. Earnings came in at $2.36 per share, just 1% lower than in the same quarter a year ago. Revenue was $4.425 billion, down 9% from a year earlier.
Revenues have slowed over the past five quarters, always a worrying sign. However, Amazon has seen similar declines as consumers have shifted some of their purchases away from pandemic-era online orders and back to more in-person shopping.
No current quarterly visibility
The quarterly decline was at least partly due to weaker advertising demand in China. Shares fell on the heels of the earnings announcement, as Baidu revealed it lacked a good view of ad revenue in the current quarter.
According to the ratings of MarketBeat analysts, the consensus on Baidu is a “moderate buy” with a price target of $216.15, representing a gain of 50.79%. For the full year, analysts expect the company to earn $7.47 per share, down 11%. In a little piece of good news, that estimate has recently been revised even higher.
With both stocks languishing well below previous highs, there are two ways to view a buying opportunity. First, as analysts expect strong double-digit price increases over the next 12 to 18 months, it could be an opportunity to get in early. On the other hand, it can be a mistake to park money in stocks that are moving lower or sideways while others are moving up.
