The Chinese Internet stocks started out 2012 with a nice rally. The four stocks discussed here produced share price gains of 20% to 40% in the first six weeks of the year. However, the price gains were – in general – just a break in longer term down trends as these companies either try to maintain levels of profit growth to justify the share valuations or figure out how to grow profits along with growing revenues. Traders looking for short sale prospects should check if their analysis match the reasons below why these stocks are better short candidates than buy long investments.
Youku Inc. (YOKU) Youku is the Chinese answer to YouTube or Hulu in the U.S., offering Internet television and video services. Youku was a hot IPO in December of 2010 and the shares traded as high as $70 in early 2011. Then reality set in. The company has posted net losses every quarter for the last four and is expected to lose 38 cents per share when the 2011 fourth quarter results are released, putting the loss for the full year at a loss of $1.52 per share. The Wall Street analysts have been slashing their 2012 expectations: Ninety days ago the consensus estimate for 2012 was a loss of 10 cents per share. Currently the consensus is a loss of $1.42 with the most pessimistic analyst predicting a loss of $2.27. The most optimistic analyst expects a measly 15 cents per share profit. Price rallies on Youku, like the recent runup above $20 to $24 are short selling opportunities. Cover a short position at $15 and avoid being short during an earnings release announcement.
Sina Corporation (SINA) Sina is the owner of a Chinese micro-blogging weibo website. Micro-blogging is a growth craze in China and Sina reported 250 million users at the end of 2011 and was adding 20 million per month. Unfortunately, Sina has suffered from the curse of social media companies as a business: How to generate profits in the face of growing expenses to support the growing number of subscribers? Sina earned $1.74 per share in 2010, saw usership increase exponentially in 2011 and the consensus earnings estimate for 2011 is 94 cents per share, a 50% decline. The company reports 2011 fourth quarter results on February 27. The earnings estimate for the quarter is a profit of 21 cents per share, less than half the 46 cents earned a year earlier. The Wall Street analysts as a group have a little more optimism about 2012, forecasting earnings of $1.41. Over the last several months, the consensus earnings have been declining and Sina is trading at 44 times very iffy forward earnings. It is hard to see a good reason to be long this stock, so short it.
Renren Inc. (RENN) Renren is the Chinese answer to Facebook. The company went public in May 2011 and after the $14 IPO the shares peaked at $21.93 on the IPO trading day. The share value has been mostly downhill ever since. The share price dropped below $10 in early August 2011. Since the end of summer the stock's trading range has been $3.20 to $7. The share price popped 50% – from $4 to $6 – when the Facebook pending IPO was announced. As the forerunner to the Facebook IPO, Renren was not profitable who it went public, but was expected to soon turn profitable, after raking in that $700 million of IPO money. For 2012, the consensus earnings estimate is a loss of 7 cents per share with the most optimistic analyst forecasting a 4 cent profit. Sell Renren short above $5 and cover at $3.50.
Baidu.com Inc. (BIDU) Baidu is probably the most dangerous short selling candidate listed here. Baidu is the Chinese version of Google (GOOG), receiving 75 percent of the country's search results and is a large cap stock itself with a $47 billion market cap. Baidu operating profits were up 91% in 2011 and net income for the fourth quarter increased by 77%. The Wall Street consensus estimate has net income growing by 50% in 2012. So what are the reasons to short sell this growth stock?
- The stock is valued based on both the company's and the China economy projected growth rates. Any stumble in either of these growth projections will lead to a price tumble.
- Baidu earns all of its revenue and profits in the Chinese currency with no viable outlet to invest that currency or earn revenue outside of the China economy. If the Yen is devalued, the Baidu share value will be hammered.
To short Baidu a trader can either wait for some bad news then ride the share price down until it bottoms or aggressively try to predict a slowing of the growth results. Keep those stops set tight.
These Chinese Internet stocks have mostly received positive press and share value forecasts over the recent past. Yet they all have vulnerabilities which could result in profits for short sellers. Traders who short sell often must go against the Wall Street crowd, which has a vested interest in stocks generally going up in value. As a final point, foreign stocks from a specific country often move in the same direction together. If a large company such as Baidu starts to lose value, many other Chinese tech stocks will follow along as investors sell of the country as a whole.