As recently as last month, investors in China’s Internet stocks were clutching on to the belief that the companies would sail through the COVID-19 outbreak unscathed. Alibaba Group Holding Ltd (阿里巴巴), for example, was trading near historic highs, despite the e-commerce giant’s chief financial officer admitting days before that its biggest business would decline as a result of the squeeze on consumer spending.
By the time Baidu Inc (百度) reported two weeks later, shares of the search engine provider had fallen 11.7 percent, while those of Alibaba were down 6.4 percent and social media powerhouse Tencent Holdings Ltd (騰訊) had slipped 6.2 percent.
Just as investors should have known in the middle of last month that there was trouble ahead, they would be well-advised to look at the reality that is presented to them now and be just as circumspect. China might have gotten past the worst of COVID-19, but the world is just starting to grapple with it and a major economic shock is looming.
As investors digest Tencent’s fourth-quarter numbers and muddy outlook, those stocks have continued to drop. As have group-buying outfit Pinduoduo Inc (拼多多) and Internet companies Sina Corp (新浪) and Weibo Corp (微博).
Yet despite declines of one-third or more in market value, some of China’s Internet darlings are trading at levels seen as recently as three months ago. Tencent, for example, is back where it was on Dec. 5 last year.
This indicates that investors are not pricing in a big economic jolt, but merely a minor bump on the highway of fast growth and climbing profits.
In its investor conference call late on Wednesday, Tencent did not give explicit details on what to expect this quarter.
It noted that the payments business, now one of its fastest-growing units, would post a drop in revenue, offset by a reduction in marketing costs.
By comparison, Baidu, Weibo, and Sina all gave specific sales guidance — each predicted declines of 15 to 20 percent from a year earlier.
It is clearly going to be a tough first quarter, but executives spent much time on their conference calls talking up their prospects in the belief that this is a minor blip.
Baidu chairman and chief executive Robin Li (李彥宏) defended his optimism by claiming that expenditure would merely be delayed.
“If you plan to get married, you are still going to marry. If you’re trying to buy a car, you are still buying a car,” he said.
I cannot help wondering if these business leaders are looking too closely at China’s COVID-19 case count, and correlating a decline in new patients to an immediate rebound in revenue. Certainly, the mood on the ground has brightened and workers are returning to their posts.
However, they might not sufficiently be taking on board that the disease has gone global. The disparate attempts in Europe and the Americas to bring it under control mean that any resolution would not come quickly.
It might be the case that with their revenue coming almost exclusively from domestic consumers, they believe that a wider meltdown would not cause much pain.
That might be a little naive. Exports account for an important portion of China’s GDP and occupy a significant part of its labor force. Taiwan’s Foxconn Technology Group (富士康科技集團), for example, is the largest private employer in China and gets more than half its revenue from Apple Inc. If orders at these businesses dry up, Chinese consumers would need to reduce expenditure.
Last year, I noted that what might save Chinese Internet companies was their shift to a post-growth era by trimming costs, such as marketing, which some pragmatic executives have done.
They would need to adapt again, this time to reflect a world that truly is connected and where an external shock could quickly become a local problem.
Chinese tech companies might think they have gotten through the worst of the storm. They would better brace themselves for the fact that there is nowhere to hide.
Tim Culpan is a Bloomberg Opinion columnist covering technology.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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