Several Chinese tech companies have been facing increasing regulatory pressures in China and the United States. However, given the tech industry’s solid long-term growth prospects, many large-cap stocks in this space are well positioned to dodge any short-term issues the industry is facing. Furthermore, an investment strategist with Matthews Asia told CNBC on July 1 that China’s recent moves to regulate its technology companies are not necessarily intended to “take the wings off” of its entrepreneurs.
Home to the world’s largest internet population, China’s internet users could hit 1 billion by next year, according to a report by Insider Intelligence. Also, the world’s second largest economy’s latest five-year plan is tightly focused on technological advancements, which could attract higher investment in the sector.
Consequently, we think it is wise to bet on fundamentally strong large-cap Chinese tech companies NetEase, Inc. (NTES) and Baidu, Inc. (BIDU). Their solid financials and consistent innovations should help these stocks continue advancing.
NetEase, Inc. (NTES)
NTES delivers online services that focus on gaming, communication, and commerce internationally. The company operates in three segments: Online Games Services, Youdao, and Innovative Businesses. It has a $76.30 billion market capitalization. It develops and operates PC and mobile games and offers games licensed from other game developers.
On May 17, 2021, NTES entered a direct digital distribution relationship with Sony Music Entertainment. Under the agreement, NTES will make music from Sony available to its users in China. Ding Bo, the Vice President of NetEase Cloud Music, said “The partnership will enrich and enliven our already vast and expanding library of quality music and propel China’s online music ecosystem forward.”
NTES’ net revenue increased 20.2% year-over-year to $3.1 billion for the first quarter ended March 31, 2021. Its gross profit grew 17.9% year-over-year to $1.7 billion. Its non-GAAP net income increased 20.6% year-over-year to $775.5 million. The company’s non-GAAP EPS has increased 15% year-over-year to $0.23.
Analysts expect NTES’ EPS and revenue to increase 24.9% and 21.3%, respectively, year-over-year to $4.22 and $13.77 billion in its fiscal year 2021. It surpassed the Street’s EPS estimates in three of the trailing four quarters. The stock has gained 32.9% over the past year to close yesterday’s trading session at $113.71.
NTES’ strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting. It has a B grade for Stability, Sentiment, and Value.
Baidu, Inc. (BIDU)
With a $70 billion market capitalization, BIDU offers internet search services, primarily in China. Its Baidu Core segment offers products that include Baidu App to access search, feed, and other services using mobile devices. Its iQIYI segment provides online entertainment services that include original and licensed content.
On Jan 10, 2021, BIDU announced its plans to establish a company to produce intelligent electric vehicles (EVs), and to that end it has entered a strategic partnership with multinational auto manufacturer Zhejiang Geely Holding Group.
The company’s net revenue increased 25% year-over-year to $4.29 billion for the first quarter, ended March 31, 2021. Its non-GAAP operating income grew 204% year-over-year to $666 million, while its non-GAAP net income increased 39% year-over-year to $656 million. The company’s non-GAAP earnings per ADS increased 40% year-over-year to $1.89.
For its fiscal year 2022, analysts expect BIDU’s EPS to increase 22.6% year-over-year to $11.45. It surpassed consensus EPS estimates in each of the trailing four quarters. Its revenue is expected to be $4.8 billion for the quarter ended June 30, 2021, which represents a 24.9% year-over-year rise. The stock has surged 67% over the past year to close yesterday’s trading session at $201.46.
BIDU’s POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary ratings system. The stock has a B grade for Value.
Note that BIDU is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here.
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NTES shares were trading at $114.77 per share on Friday morning, up $1.06 (+0.93%). Year-to-date, NTES has gained 20.21%, versus a 16.26% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...
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