Jeff Reeves’s Strength in Numbers: If you’re ready to buy China tech stocks again, these five may be the best path to outperformance
Some investors, frustrated by lackluster returns in an uncertain market, have been banging the drum on “bargain” technology stocks. Others point to the long-term potential of overseas markets as an alternative to domestic underperformance.
And some are doing a combination of both, tapping into tech stocks across Asia that are now trading at new lows — and, theoretically, could bounce back big time once markets get back on their feet.
Up until about two weeks ago, Chinese stocks had actually outperformed the S&P 500
this year. And in a recent interview with Bloomberg, a JPMorgan analyst said China is “an important piece of the puzzle because you can add alpha in these markets,” in contrast to traditional U.S. blue-chip stocks.
A lot has changed in March. Just a few days ago, the FT reported overseas investors have dumped Chinese stocks at a record pace across the first three months of 2022 on fears that sanctions against China could be next, causing serious fallout for the entire region.
Many investors clearly think the right move is to hunker down in traditional domestic blue-chips until the dust settles. But with a lot of stocks in China surging last week on renewed optimism, now may be the time to consider a high-risk, high-reward investment in the region.
Here are some stocks worth researching:
Challenges for Asia tech giant Alibaba Group Holding
actually predate the war in Ukraine and sanctions talk, and are instead rooted in a long-term dispute between U.S. regulators and China. BABA has flopped more than 60% from its October 2020 highs on fears of a forced delisting by the U.S. Securities and Exchange Commission. However, signs from Chinese regulators that they will play ball with the U.S. sparked a big rally in BABA and other similar stocks.
But that’s not all. Alibaba also fell out with officials within China itself. In November 2020, the red-hot mobile-payments arm of Ant Group saw its IPO blocked by financial regulators. Many saw that as retaliation against Alibaba founder Jack Ma for criticizing Beijing’s approach to innovation, and the billionaire was forced to retreat from public life as regulators took a close look at the company. But thankfully for Alibaba investors, Ma returned in 2021, and the company is no longer under the microscope.
Still, this politicking has little to do with the core investing thesis behind this stock. This is a fast-growing e-commerce and mobile-payments powerhouse valued at $300 billion. It’s as dominant in the region as Google (owned by Alphabet
) or Amazon
is in the U.S. For the quarter that ended in December, Alibaba posted its slowest growth since going public, with 10% revenue expansion even amid all this fallout. And looking forward, the company expects roughly 20% growth in the top line through fiscal 2022. What’s more, Alibaba bought back more than 10 million of its U.S.-listed shares in the fourth quarter for $1.4 billion — a well-timed purchase, indeed, considering the historically low level of share prices.
There’s certainly still political risk, but there’s also potential for a big snap-back as the dust settles on this Asia e-commerce giant.
If you’re looking for a rebound stock, Baidu Inc.
is perhaps the best there is right now. Shares were trading for roughly $100 or so a year ago, and have surged more than 40% to the $140s at present thanks to a stark shift in sentiment on the China tech giant.
The story for Baidu is similar to Alibaba in that fears of delisting had weighed heavily on the company in recent months. While it didn’t do anything specific to irk Beijing’s powerbrokers, there has been a general regulatory assault on tech companies in China over the last year causing uncertainty. However, the finance committee of China’s State Council will take stimulus actions to stabilize its capital markets and economy — and more importantly, signaled that it will ease off tech stocks such as BIDU.
BIDU is a unique investment in that it is largely insulated from international competition. Baidu operates the second-largest search engine in the world behind the iconic Google tool, with a staggering 76% market share in China thanks to its willingness to play ball with politicians and regulators. Baidu’s fundamentals are incredibly sound as a result. It’s “core” unit saw 21% revenue growth in 2021, but even more impressively it saw non-advertising revenues increasing by 71% in the last year as it pushes into cloud computing, self-driving cars and entertainment offerings.
If you’re primarily concerned with the regulatory environment in China, BIDU is still the favorite son. That may not sit well with some morally, but it may generate decent returns in this China tech stock all the same.
The worst-performing IPO of 2021 by some measures, DiDi Global Inc.
went public at $14 and briefly rose to $18 a share before crashing to about $5 by the end of the year. Things only got worse in early 2022, with the stock plumbing a new low of just under $2 a share in March — before a massive 50% rise in the stock lately sparked by the return of investor optimism.
There’s a perfect storm conspiring to create volatility in DIDI. There are structural factors, including its super-low price per share that has attracted small-time traders. There’s the regulatory outlook, both at home and abroad. And then there’s the disruptive narrative behind the company itself, which offers a ride-hailing and bike-sharing platform akin to Lyft
Profits are non-existent, there’s not much history as it just went public and revenue models are all built on aspirational trends. But if ever there was a time to take a flier on a stock like this, now could be it. Shares have been brutalized and trade for a fraction of what the IPO runners thought they were worth almost a year ago, even as pandemic-related restrictions continue to ease up across Asia-Pacific. Furthermore, a dramatic shift in sentiment recently could signal renewed bullishness as the stock has logged gains over the last week or so that stand among the best in any sector or any nation in the world.
To be clear, this is the most aggressive play on this list. But DiDi won’t have to revisit all-time highs of 2021 to deliver big-time gains should this momentum continue.
Taiwan Semiconductor Manufacturing Co.
has been under pressure for a host of reasons. To begin with, the supply-chain disruptions of the pandemic have lingered on. And furthermore, there is general talk in Europe and America about the importance of onshoring some semiconductor operations — including a prominent mention in President Biden’s recent State of the Union address about a domestic foundry being built by Intel
But let’s face it, ending reliance on Asian chips will take many years to achieve — if ever. And while real pain still persists for some industries because of supply-chain issues, the strong demand of a recovering global economy ultimately means a company like TSM can operate at full capacity and command decent margins on the semiconductors it does manage to crank out.
The result is projected revenue growth of almost 30% in fiscal 2022 for TSM, followed by another 15%-20% in fiscal 2023. It’s also throwing off a nearly 2% dividend yield that is only about one-third of earnings for an added sweetener.
TSM isn’t as sexy as some other growth-oriented names here, but its stability could be a draw if you’re not interested in startups like DiDi. The chipmaker runs a mammoth operation, trading at $500 billion in market value at present. And while there may be long-term concerns over the nature of global chipmaking, it’s not likely that those pressures will have any near-term effect on this stock.
Trip.com Group Ltd.
is a $15 billion online travel service provider. Persistent pandemic restrictions in Asia have weighed on economic activity and supply chains in the West, but some investors may have forgotten that the coronavirus crackdown was much harder in APAC than it was in their own backyard.
Interestingly enough, however, this “COVID Zero” approach appears to be changing as many jurisdictions are looking to allow tourism and international travel again. As one sign of this, consider that gambling mecca Macau lifted a ban on inbound passenger flights in January, with testing and quarantine required. And in mid-February, we saw a short-lived spike in casino stocks in the region on hopes of good times ahead — at least, before the Russia invasion put an end to that optimism.
There is no telling what the future holds, but if behavior in the West is any indication it will be incredibly difficult for Asian jurisdictions to put the toothpaste back in the tube after they have eased restrictions and allowed “regular” economic activity to return. And even the strictest jurisdictions are easing up, including the government of Singapore that has reduced both travel history requirement and quarantining this year.
Profits are a bit thin lately in Trip.com, but it’s worth noting that the company is indeed profitable and won’t collapse anytime soon even if restrictions linger. And when they do ease up, you can expect all the pent-up wanderlust that we’ve seen in the West to cascade across APAC — and in turn, revitalize this online travel portal.