Is 2020 the year for China's tech trio: Baidu, Alibaba and Tencent?
Many traders may be familiar with the acronym FAANG, relating to five dominant technology stocks: Facebook, Apple, Amazon, Netflix and Google. With most of these stocks already trading at record highs, many investors this year will be trying to identify any markets which are undervalued.
With Chinese stocks experiencing a tough 2019 due to the US-China trade war, it's exactly the place investors will be looking at this year. And, in particular, the BAT stocks - an acronym for three dominant Chinese technology stocks: Baidu, Alibaba and Tencent. Let's take a look at each of these to see where they're headed in 2020.
Baidu: Intense competition vs investing for the future
The fundamental picture
Baidu is China's biggest search engine with around a 70% share of the market. It is much like Google (Alphabet) where the company's revenues mainly come from advertising. However, the online advertising market in China slowed in 2019 after regulators took a closer look at the practice. Subsequently, Baidu's share price closed more than 20% lower in 2019.
While Baidu is facing more competition from other platforms the company's revenue still rose 15%, thanks to the growth of its video streaming platform. Some traders may also be concerned about the company reporting its first-ever quarterly loss since its IPO in 2005. However, this is largely due to significant spending in new growth areas such as self-driving cars, smart speakers and others.
It is quite common for technology companies to trade at a loss, as all revenue and profit are usually put back into the company to achieve more growth. The fundamental picture explains the drop in its share price while also building the narrative for more growth this year. Now let's take a look at the technical picture.
The technical picture
Below is the long-term monthly chart of Baidu's share price:
Source: Admiral Markets MT5 Supreme Edition, BIDU, Monthly - Data range: from 1 August 2005 to 13 January 2020, accessed on 13 January 2020 at 11:58 am GMT. - Please note: Past performance is not a reliable indicator of future results.
In the chart above, it is clear to see the huge sell-off in Baidu's share price from 2017 to 2019. However, for the last quarter of 2019, the company's share price produced an impressive rally - one that has continued into 2020. Many traders taking a long-term view may be looking for signs the company's share price could - at some point - get back to its all-time high levels of around $252.
They will be encouraged by the fact the share price bounced off from the horizontal support line at around $100. How will you be trading it?
Alibaba: Commerce and cloud take centre stage
The fundamental picture
Alibaba has been one of the best-performing stocks among the BAT trio. For investors, exposure to Alibaba is a direct play on Chinese consumer demand. That's because a whopping 85% of the company's revenue comes from its commerce division. Fortunately, it has been firing on all cylinders and remained resilient even in the face of the US-China trade war. In fact, in the last quarter of 2019, figures showed revenue for core commerce jumped 40% year on year.
However, some investors have been concerned about the company's high exposure to just commerce. That's why Alibaba has also moved into cloud computing, where revenues grew 64% year on year, from the last quarter of 2019. The company is also pushing a strategy called 'new retail' which aims at combining online and offline elements of its business such as payments and physical stores.
While the fundamental picture remains positive, let's take a look at what the technical picture shows.
The technical picture
Below is the long-term weekly chart of Alibaba's share price:
Source: Admiral Markets MT5 Supreme Edition, BABA, Weekly - Data range: from 28 February 2016 to 13 January 2020, accessed on 13 January 2020 at 12:40 pm GMT. - Please note: Past performance is not a reliable indicator of future results.
In the chart above, Alibaba's share price experienced a huge rally higher from 2016 to 2018. However, when the US-China trade war started, the company's share price moved into a long-term range. In 2019, price broke through the descending resistance line shown on the chart - which market the upper bounds of the long-term range - to continue its trend higher.
While Alibaba is trading at all-time highs, analysts are still bullish on the company's share price with an average analyst price target of $234. Do you think it will get there? If so, how will you be trading it?
Tencent: A new growth engine in the making?
Tencent runs China's largest messaging app called WeChat which has more than one billion users. It also happens to be the largest gaming company in the world. However, in 2018 the company was hit with a double whammy of negative news.
Firstly, the Chinese government froze video game approvals. In China, any video game needs regulatory approval before they can be released. While the government reinstated the approvals at the end of 2018, the company faced a second hurdle - a slowdown in online advertising revenue, much like Baidu.
However, not only does it seem like things are back up and running, the company is developing a new growth engine in cloud computing and financial technology. In fact, the company is already running a payments platform via WeChat called WeChat Pay.
Unfortunately, Tencent is not listed on the New York Stock Exchange as is Baidu and Alibaba. However, the company has listed a new entity called Tencent Music Entertainment which is a joint venture between them and Spotify.
Trading Tencent Music Entertainment
Tencent Music Entertainment is the music streaming arm of Tencent. It already has more than 700 million users and 120 million paying subscribers through their apps QQ Music, Kugou and Kuwo, making it the largest music streaming company in China. This has helped them to reach exclusive licencing deals with the world's three largest record labels: Warner Music, Sony and Universal.
The company only listed on the New York Stock Exchange in December 2019 but its share price is one to watch:
Source: Admiral Markets MT5 Supreme Edition, TME, Weekly - Data range: from 9 December 2018 to 13 January 2020, accessed on 13 January 2020 at 1:40 pm GMT. - Please note: Past performance is not a reliable indicator of future results.
Conclusion
Perhaps the most interesting narrative of the BAT stocks is the fact the reason for their declines in 2018 and 2019 are known. Often traders cannot understand why a company is not performing well. However, if we can understand it, then we can use that information to our advantage.
For example, the end of China's online advertising investigation and the continuation of video game approvals have helped all three of the BAT stocks in the last quarter of 2019 and, so far, into 2020. Now the question is how will you be trading them?
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