There are two big players in Chinese tech market Alibaba and Tencent. Alibaba is one of the best E-Commerce platforms competing with companies like Amazon, eBay. Whereas Tencent is more in gaming and streaming media.
When I examined these two stocks in November of this year, I argued that Tencent was a superior investment than Alibaba because of its more diverse company, larger operating margins, and faster earnings growth. However, I hadn’t anticipated China to begin a broad crackdown on its leading tech businesses when I made that decision.
Tencent’s stock has fallen 7% in the last year while Alibaba’s stock has dropped 22%. An antitrust investigation, a record $2.75 billion fine, new limitations on its e-commerce operations, and the postponement of Ant Group’s much anticipated IPO were all brought against Alibaba.
The government of China also prevented Tencent from combining Huya and DouYu, which would have produced the leading esports streaming service in the nation, temporarily halted new WeChat user signups, and had Tencent Music give up all of its exclusive music licencing rights.
A lot of investors probably sold all of their Chinese equities as a result of these challenges and the persistent threats to delist shares of Chinese firms with U.S. listings. That would be a wise course of action, but some contrarian investors might be ready to bet against the market and buy in these two tech behemoths. Which stock has a higher chance of recovering? Let’s find out.
Alibaba is losing its momentum
The majority of Alibaba’s revenue and all of its earnings come from its core commerce operations, which comprise its online marketplaces, physical stores, and subsidiary Cainiao Logistics.
The expansion of Alibaba’s cloud, digital media and entertainment, and innovation initiatives businesses is supported by the company’s core commerce operation. By GAAP standards, none of those three smaller companies are profitable, but over the past three quarters, Alibaba Cloud’s adjusted EBITA started to increase.
In the fiscal year that concluded in March, Alibaba’s sales increased 41% to 717.3 billion yuan ($109.5 billion). Due to the growth of its lower-margin brick-and-mortar and direct sales segments, its commerce revenue jumped by 42%, while its cloud revenue increased by 50%.
However, Alibaba’s operating income decreased by 2% as a result of its increased reliance on its lower-margin commerce sectors and its fourth-quarter antitrust fine. However, its adjusted earnings—which don’t include that fine or stock-based pay—grew by 23%.
Alibaba’s revenue increased 34% year over year to 205.7 billion yuan ($31.9 million) in the first quarter of fiscal 2022. Although its cloud revenue increased merely 29% year over year, its commerce revenue increased 35% year over year despite the pandemic’s high utilisation rates.
Alibaba’s operating income decreased by 11% as a result of its increasing reliance on lower-margin businesses to increase its commerce revenue, continuous losses at its three smaller operations, and other investments. However, despite increasing share repurchases, its adjusted earnings still rose by 12%.
Tencent also faces unpredictable challenges
2020 saw a 28% increase in Tencent’s revenue to 482.1 billion yuan ($73.9 billion). Online advertising, VAS (value-added services, including in-game and in-app payments), and fintech & business services (including Tencent Cloud and WeChat Pay), three of its major businesses, all experienced double-digit growth.
Tencent’s adjusted operational profit increased 30% while its adjusted earnings—which do not include gains or losses from investments—also increased 30%.
Tencent’s sales jumped by 25% year over year to 135.3 billion yuan ($20.6 billion) in the first quarter of 2021. All three of its key sectors had double-digit growth, while the company’s adjusted operating profit and adjusted earnings both improved by 20% and 22%.
Those growth rates appear to be strong, but Tencent’s gaming division slowed down during the quarter as it dealt with more challenging post-pandemic comparisons. Honor of Kings and Peacekeeper Elite are just a couple of the video games that Tencent produced roughly a third of its income from.
Since games were originally referred to as “digital opium” in a retracted Xinhua article, current rumours about another possible crackdown on video games in China pulled down the stock. The government wants to strictly oversee Tencent Music, WeChat, and WeChat Pay alongside Ant’s Alipay. These unresolved issues have also largely obscured the strong growth of its core companies.
Conclusion
Analysts anticipate a 30% increase in Alibaba’s revenue this year, but a 4% decline in its earnings due to the company’s increased reliance on lower-margin retail sectors and more investment. As its three major businesses continue to grow, analysts anticipate that Tencent’s revenue will increase by 22% and 21%, respectively, this year.
Tencent’s forwards P/E ratio is 26, compared to just 20 times for Alibaba’s stock. These values for both companies appear to be historically low, but they are based on shaky projections that may not completely take into account the significant regulatory challenges in China and the United States.
Both stocks are off limits until those challenges subside. But if I had to choose one over the other, I’d say again that Tencent is the better overall investment due to its better diversification, higher operating margins, and faster earnings growth.
FAQ
Is Alibaba is harmful monopoly?
Alibaba Group, an online retailer, will be fined $2.8 billion, according to the Chinese government, for breaking anti-monopoly laws. One of the most significant tech titans in both China and the rest of the world is Alibaba.
Is Alibaba in decline?
After China declared a partial lockdown in Guangzhou, a significant manufacturing hub in China, Alibaba (BABA) experienced a dramatic decline on Wednesday. The decline follows an increase in Alibaba stock on expectations that China might relax its rigors Covid-19 regulations.
Is Alibaba or Tencent bigger?
Alibaba reported an LTM ended September 30, 2021, nett income of RMB 116.5 billion. This is a decline of -18.7% from the full-year total of RMB 143.3 billion as of March 30, 2021. Tencent, on the other hand, continued to expand, increasing by 19.6% from RMB 160.1 billion to RMB 191.5 billion.
Is Tencent the biggest company in China?
The Chinese tech titan Tencent has finally lost the title of largest corporation in China. Since reaching a peak in February 2021, the company has suffered a continual decline in its share price.
Is Tencent the richest company?
With a $565 billion valuation, it is currently the 11th most valuable firm in the world. Tencent was founded in 1998 with the intention of providing a free desktop instant messaging service. Since then, however, the company has expanded its offerings to include mobile instant messaging, payments, video, gaming, and advertising.
Is AliExpress better or Alibaba?
Because you are buying directly from a manufacturer who can make products to your specifications, Alibaba is the superior option for sourcing private label and custom products. You can buy pre-made items from AliExpress that are normally not customizable.