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Fuzzy Math in Chinese IPOs
05/05/2011 5:07 pm EST
The May 4 initial public offering of Renren (RENN), dubbed the "Chinese Facebook," shot out of the gate.
The shares, priced at $14, climbed to $18.01 at the close, a 29% gain. At the initial $14 offering price, Renren was valued at 72 times last year’s revenue.
Facebook—or should I say the "American Renren?"—isn’t yet public, but a Goldman Sachs (GS) investment in the company recently valued it at 25 times sales.
Once you’ve gotten over marveling at this valuation—not bad for a company that had to revise its IPO prospectus (it had inflated the number of active monthly users it added in the first quarter to 7 million, when the total was actually 5 million)—take a look at what the Renren offering did to the rest of China’s Internet sector: It sent their stock prices tumbling.
- On May 3, the day before the Renren IPO, Sina (SINA), which owns Weibo (one of China’s Twitters) dropped by 9.5%.
- Baidu (BIDU), which operates China’s most popular search engine, fell by 5.2%.
- Sohu.com (SOHU), the owner of China’s fourth-most popular Web site, declined by 8.2%.
This was clearly profit taking. For instance, Sohu.com shares had surged to a record on April 25, climbing almost 9% on the day, after the company announced a 48% increase in first-quarter profits. Baidu had hit a new high on April 26, the day before it reported net income had soared 122% in the first quarter.
But why was there profit taking on the eve of what was clearly going to be a really hot IPO? Just as logically, investors in other Chinese Internet stocks could have bought more shares, betting that the luster of Renren’s performance would add to the value of their holdings.
I think we saw profit taking in the sector—the stocks were down again on May 4, but not by anything like the percentage drops of the day before—because while investors are more than happy to make a quick yuan in these stocks, nobody really wants to own too many of them. They just don’t trust the numbers.
This isn’t just about the “fuzziness” in the number of users Renren added in the first quarter. It goes way beyond that.
All the data for Internet use and online accounts in China is...well...let me use a quote from Bill Bishop, a Beijing-based investor, in The Wall Street Journal: “Savvy investors don’t believe the numbers, other than as directional indicators.”
For example, it’s not even clear how many Internet users there are in China. The government’s China Internet Network Information Center put the number at 457 million at the end of 2010. The U.S.-based research company comScore puts the number at 283 million.
Sure, it's a lot of users either way, but 174 million is a big difference if you’re trying to value a company.
Or take a company-specific example: Tencent Holdings (TCEHY in New York or 700:HK in Hong Kong) says it has 648 million active instant-messaging user accounts. That’s roughly 200 million more than the Chinese government’s figure for the total number of Internet users in China.
The real figure is probably, from all I can figure out, closer to 200 million. (The company says that you can get a good estimate of unique user accounts by dividing their total account number by two to compensate for individuals with more than one account.)
With that kind of ‘fuzziness” in the data, you can see why most investors go with the momentum plays rather than betting on fundamentals. And why some of the dollars that went into Renren’s IPO came out of the shares of other Chinese Internet companies.
Today, May 5, it looks like the tide is flowing in the other direction. Shares of Sina and Sohu.com are up as I post this, but Renren is down 6.2%.
Buy by the momentum...sell by the momentum.
Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Baidu and Tencent Holdings as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.
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