INTERNET: Time to Enter Alibaba, Baidu After Soros Departure?

Bottom line: Alibaba’s stock could be set for a modest rebound in the remainder of the year after a round of heavy institutional selling, while Baidu’s shares could see more downward pressure on concerns about its stagnating profits.

Alibaba shares set for rebound

Big news at the end of last week saw billionaire investor George Soros declare that he recently sold most of his shares in China’s 2 leading US-listed Internet companies, Alibaba (NYSE: BABA) and Baidu (Nasdaq: BIDU), as he decided to lock in profits on concerns the stocks were overvalued. His actual holdings in both stocks weren’t that big, but his huge influence almost certainly prompted other big fund managers to follow suit. That could explain the big downward pressure both stocks felt during the second quarter.

Of course small investors like myself and anyone reading this post are usually the last to find out about this kind of trading by influential buyers, meaning it’s already already too late to trade on this news. But the more interesting prospect is whether or not shares of one or either companies have reached a bottom and could be set for a rebound.

I’ve been bearish on both Baidu and Alibaba for quite a while now, mostly because their shares are usually quite expensive in terms of valuations compared to their profitability. But following a recent sell-off that has seen its shares rapidly approach their IPO level, Alibaba stock suddenly doesn’t seem that rich anymore. The same isn’t true for Baidu or Tencent (HKEx: 700), China’s other big Internet company, whose shares still look pricey to me despite their own recent sell-offs.

Of course valuations aren’t the only way to judge whether a stock is expensive or cheap, but they certainly can give some indication of where prices are going for these 3 companies that have very similar growth profiles. Before we look at Soros’ sell-down and do some other quick analysis, let’s review the recent price movements for China’s “big 3” Internet companies, and their latest price to earnings (PE) ratios.

Alibaba and Baidu shares are both down nearly 30 percent this year, while Tencent is actually almost up by 30 percent. As a result, Alibaba and Baidu now have relatively high PE ratios of about 30 based on next year’s profit forecasts, while Tencent is at an even loftier 45.

Shares Overpriced

Both Alibaba and Baidu valuations were most likely quite a bit higher when Soros began selling off his stakes in both companies during the second quarter, and his selling probably contributed to declines in both stocks. (English article; Chinese article) His Soros Fund Management LLC sold off nearly all of its 4.5 million Alibaba shares during the quarter, most likely raising about $400 million — a tiny fraction of the company’s overall market value. He also sold off most of his nearly 400,000 shares in Baidu, which again would have raised an equally modest $60 million or more.

But as I’ve said already, Soros is hugely influential on Wall Street and his decisions could easily have prompted other major fund managers to follow suit. At the same time, many of Alibaba’s early investors were also probably weighing a sale of some or all of their shares in the second quarter, after a standard lock-up period officially ended in March following the company’s September 2014 IPO.

With all that downward pressure, it’s no huge surprise why shares of both Alibaba and Baidu have fallen so much this year. Baidu’s situation is made worse by the fact that its profits are expected to stagnate in the next year, as it spends heavily on new businesses like its online-to-offline (O2O) services.

I’ve predicted for a while now that Alibaba’s stock was overvalued and was likely to fall back to its IPO level in the first half of this year. Now that that’s happened and many speculators have left the stock, I’m going to make the bold prediction that the shares could be set for some modest gains in the rest of the year, perhaps rising 10-15 percent. I’m less convinced about a comeback for Baidu due to market worries about its heavy spending on new businesses, and expect that Tencent is also likely for a pullback soon due to its own run-up this year.

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