Tag Archives: Technology

Alibaba, Tencent Need to Deliver on Their Riskiest Bets in Years


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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 54 times profit after a 64 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.”

Investors are beginning to hedge their bets. On Friday, Tencent’s shares fell 4.9 percent in Hong Kong — its biggest drop in 18 months. Alibaba was little changed in New York after sliding 3.6 percent on Thursday.

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.

Of the two, Alibaba’s moves seem more out-of-left-field. It began buying grocers from Lianhua to Sanjiang well before Amazon.com Inc. agreed to buy Whole Foods Market Inc. Apart from acquisitions, China’s largest e-commerce player is also investing an unknown amount in initiatives rooted in physical retail, because co-founder Jack Ma believes pure e-commerce operators face “tremendous challenges” in future.

Take HeMa Supermarkets, the first of an envisioned nationwide chain that’s a grocery, restaurant and digital payments showcase rolled into one. Shoppers can dine in on fresh produce from lobster to crab, browse product recommendations by scanning bar codes throughout the store, then pay for everything through the Alipay app. Each store will eventually double as fulfillment centers, with staff picking up and shipping goods ordered online — the goal being to deliver in under half-an-hour to anywhere within a three-mile radius.

HeMa could expand to 22 stores by the end of 2018 from 13 as of June, generating 2.5 billion yuan in revenue, Barclays Plc analysts led by Gregory Zhao estimate.
 
But supermarkets are just the tip of the iceberg — Alibaba wants to overhaul all retail, and not just for China either. The company has said so-called big-data analysis twinned with internet-based cloud technology can fundamentally change the way brands manage inventory to meet real-time demand. Multiple layers of middlemen could be rendered redundant, Chief Executive Officer Daniel Zhang said in October.

“While core commerce is the engine for Alibaba’s near-term growth, new retail is expected to shape Alibaba’s business model in the long run,” Zhao said in a report.

See the data: Alibaba, Tencent earnings to test tech mania

Arch-foe Tencent is betting on initiatives closer to home, though no less ambitious. In the social media giant’s case, its mobile hit Honour of Kings and under-developed WeChat advertising business are fueling investors’ confidence.

Honour of Kings, an in-house adaptation of the better-known slugfest League of Legends, could generate $3 billion of revenue this year, according to Serkan Toto, the founder of Tokyo-based consultancy Kantan Games Inc. Its runaway success has proven Tencent’s mainly desktop-based gaming business can make a successful transition to mobile and demonstrated the competence of its own team, after having led the $8.6 billion acquisition of Clash of Clans studio Supercell Oy and, before that, Riot Games Inc.

But the Shenzhen-based company is also trying to reduce its reliance on games by making more money from WeChat via ads. Online advertising accounted for 13.9 percent of its revenue in the March quarter. Compare that with Facebook’s 98 percent reliance on ads in the same period.

Tencent reports its quarterly numbers on Wednesday, a day before Alibaba posts its results in the U.S. The investors who’ve rewarded the pair can then decide if their rich valuations are deserved, especially in a country where the government can change the business landscape with little notice.

“While gaming and advertising at Tencent are healthy, investors’ anticipation for earnings in cloud, payments and all the other new businesses can’t be substantiated by financial models,” said Li Muzhi, a Hong Kong-based analyst at Arete Research Services LLP. “Both companies face certain political risks.”

    Read more: http://www.bloomberg.com/news/articles/2017-08-13/alibaba-and-tencent-looking-riskier-and-placing-bigger-bets


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    Just Five Stocks Account for Nearly 75% of the Nasdaq’s Plunge


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    When it comes to the ongoing technology beat-down in the stock market, it appears not all shares are created equal.

    Indeed, just five names account for nearly 75 percent of the drop in the Nasdaq Composite Index, which has fallen more than 2.1 percent since June 7. Meanwhile, the Dow Jones Industrial Average and S&P 500 Index are roughly unchanged over the same time frame.

    Much of this dynamic is due to giants like Apple Inc., Microsoft Corp. and Goggle parent Alphabet Inc. falling as much as 6.5 percent. Those companies account for nearly 30 percent of the index’s weighting, and their outsize impact has driven the gauge lower even though the bulk of the stocks are doing fine.

    This selloff was “way overdue given the extreme out-performance and positioning in technology shares,” Morgan Stanley analyst Michael Wilson wrote in a note to clients Monday, Shares of Apple, for instance, are still up 25 percent this year, giving them room to fall.

    But while Wilson expects the drubbing to continue in the short-term, he doesn’t think the market has seen a peak in tech shares.

    “We would be surprised if this is the end for technology stocks given the very strong earnings growth we are witnessing,” he wrote.

    Analysts now believe performance in technology will depend on the economic outlook. And if conditions change, finance will be the likely beneficiary.

    “If the current economic ‘Goldilocks’ environment persists, technology and other growth stocks should continue to outperform, despite today’s price declines,” Goldman Sachs Group Inc. analysts led by David Kostin wrote in a note to clients late Friday. “However, if investors recalibrate expectations for inflation and Fed policy to match the growth optimism suggested by the S&P 500 level, higher rates should lead to financial sector outperformance.”

    For more on the global tech industry, check out the podcast:

      Read more: http://www.bloomberg.com/news/articles/2017-06-12/just-five-stocks-account-for-nearly-75-of-the-nasdaq-s-plunge


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      Nasdaq Megacaps Go Careening Off Course


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      A key stock market fault line buckled Friday as a group of momentum stocks that were fueling this year’s rally suddenly plunged.

      So abrupt were the losses in companies from Facebook Inc. to Apple Inc. and Netflix Inc. to Nvidia Corp. that they pulled the Nasdaq 100 Index to its biggest decline relative to the Dow Jones Industrial Average since 2008. Accounts of what spurred it ranged from bearish tweets by a short seller to a cautious note from Goldman Sachs Group Inc.

      The reversal on an otherwise placid day was violent enough to spur soul-searching in bulls after a rally that had added more than $500 billion to the market value of Apple, Alphabet Inc., Microsoft Corp., Amazon.com Inc. and Facebook in 2017. An index of momentum stocks last week completed its longest streak of daily gains since 1992.

      “The question is whether sentiment is shifting for the long term or just a temporary setback,” said Bill Schultz, who oversees $1.2 billion as chief investment officer of McQueen, Ball & Associates Inc.

      Click here to read about Goldman Sach’s note on tech stock volatility.

      Losses were significant. Even as the Dow eked out an 87-point gain as of 4:02 p.m. in New York, the Nasdaq 100 slid 2.4 percent, trimming a decline that at one point reached 3.8 percent, the most in a year. The Philadelphia Stock Exchange Semiconductor Index slumped 4.2 percent and at one point was down 6.1 percent, the most since 2014.

      Within the S&P 500, tech shares also trailed the full index by the most since 2008 as investors took profit in an industry whose gains this year through Thursday had almost tripled the S&P 500. Traders cited a rotation out of technology and into banks and energy, the biggest losers in 2017, driving up those groups up at least 1.9 percent.

      Sentiment was shaken early in the day when Robert Boroujerdi, Goldman’s global chief investment officer, warned that low volatility in Facebook, Amazon, Apple, Microsoft and Alphabet may be blinding investors to their risks. Those include cyclicality, tech disruption and regulation, which could exacerbate downside volatility should market conditions change.

      It didn’t help when Andrew Left of Citron Research tweeted about “frenzied casino action” in Nvidia. The Santa Clara, California-based chipmaker, up 50 percent year-to-date through yesterday, lost 6.5 percent and was earlier down almost 11 percent, the most since May 2011. It ended the day with the worst loss in the S&P 500.

      Julian Emanuel, a strategist at UBS Group AG, was more optimistic. Despite the potential for a summer setback for technology shares, the long-term picture remains upbeat, Emanuel, who is overweight tech stocks, said in a note Friday. What could give investors pause is a surge in inflows, expanding multiples, he said.

      Still, concern remains that the valuations of technology firms have gone too far. Amazon, Facebook, Apple have added at least 29 percent this year, compared with a 8.6 percent gain in the S&P 500. The Nasdaq 100 trades for 26 times annual earnings, the biggest gap to the S&P 500 since the end of 2015.

      “People have focused too much on market-share gains of the largest names but have forgotten that technology is cyclical,” said Ilya Feygin, senior strategist at WallachBeth Capital. “Valuations in tech sector are too high. It has a long way to go in underperformance.”

      For more on the global tech industry, check out the podcast:

        Read more: https://www.bloomberg.com/news/articles/2017-06-09/megacap-tech-stumbling-to-worst-day-verus-dow-in-seven-months