Alibaba Group Holding Limited (BABA) is based in Hangzhou, China. BABA is a holding company that provides the technology infrastructure and marketing reach to help merchants, brands, and other businesses to leverage the power of new technology to engage with users and customers and to operate. BABA operates through Core Commerce; Cloud Computing; Digital Media and Entertainment; Innovation Initiatives; and Others business segments. In comparison, NetEase, Inc. (NTES) is a technology company based in Hangzhou, China. It operates in three business segments. Its Online Game Service segment is engaged in developing and operating online game services. Its Youdao segment provides intelligent learning services, while its Innovative Businesses and Others segments provide Netease Cloud Music, Netease Mail, Netease News, and other products.
Chinese technology companies are at the forefront of the adoption of newer technologies and innovations. However, the Chinese government’s crackdown on its high-flying technology giants has reduced investors’ interest in them over the past year.
China’s economic growth slipped to 4% in the final quarter of 2021, and the regulatory crackdown has led to a plunge in stock prices. To arrest the slide, the Chinese government has promised support to real estate and technology companies. In its Financial Stability and Development Committee meeting, Vice Premier Liu He urged the adoption of market-friendly policies to support the economy. The Xinhua News Agency said that the government “will promote the development” of internet industries and improve their competitiveness. Thus, technology companies BABA and NTES stand to benefit.
BABA’s stock has declined 24.2% in price over the past six months, while NTES has gained 16.4%. But NTES is the clear winner with 3.6% gains over the past month versus BABA’s 1.8% gains.
Which is a better stock to buy now? Let’s find out.
Latest Developments
On Dec. 17, 2021, BABA announced its pledge to achieve carbon neutrality in its own operations by 2030 and introduced a Scope 3+ target, an initiative that aims to facilitate 1.5 gigatons of decarbonization across its business ecosystem by 2035. BABA’s Chairman and CEO Daniel Zhang said, “We aspire to be a force for positive, innovative change in society. Our ESG strategy is predicated on our mission to be a good company that will live for 102 years, and it is the vital foundation for Alibaba’s future development.”
On Feb. 10, 2022, NTES and Warner Bros. Games announced Harry Potter: Magic Awakened, a free-to-play immersive collectible card and massively multiplayer wizarding dueling game that features a blend of strategy and roleplay slated for worldwide launch in 2022. Founder and CEO of NTES William Ding said, “We are excited to open this title to a worldwide audience, and we believe fans of one of the world’s biggest brands will be delighted that they can embark on adventurers and experience an immersive story through a marvelous journey in the wizarding world, with infinite possibilities empowered by magic.”
Recent Financial Results
BABA’s revenue increased 9.7% year-over-year to RMB242.58 billion ($38.10 billion) for the third quarter, ended Dec. 31, 2021. The company’s non-GAAP net income declined 24.6% year-over-year to RMB44.62 billion ($7 billion). Also, its non-GAAP EPS came in at RMB2.11, representing a 23.2% decline year-over-year. In addition, its adjusted EBITDA declined 24.8% year-over-year to RMB51.36 billion ($8.06 billion).
NTES’ net revenues increased 23.3% year-over-year to RMB24.37 billion ($3.82 billion) for the fourth quarter, ended Dec. 31, 2021. The company’s non-GAAP net income increased 312.7% year-over-year to RMB6.59 billion ($1.03 billion). Also, its non-GAAP EPS came in at RMB1.98, representing a 321.2% increase year-over-year. In addition, its gross profit increased 30.1% year-over-year to RMB12.91 billion ($2.02 billion).
Past and Expected Financial Performance
BABA’s revenue and EBITDA have grown at CAGRs of 34.3% and 17%, respectively, over the past three years. Analysts expect BABA’s revenue to increase 21.2% in the current year and 14.3% next year. The company’s EPS is expected to decline 18.8% in the current year and grow 8.3% next year. Furthermore, its EPS is expected to grow at a 0.3% rate per annum over the next five years.
NTES’ revenue and total EBITDA have grown at CAGRs of 19.6% and 17.8%, respectively, over the past three years. Analysts expect the company’s revenue to increase 12.8% in the current year and 13% next year. The company’s EPS is expected to grow 4.7% in the current year and 15.4% next year. Furthermore, its EPS is expected to grow at a 20.5% rate per annum over the next five years.
Profitability
BABA’s trailing-12-month revenue is 9.5 times NTES’. However, NTES is more profitable, with net income and gross profit margins of 19.24% and 53.62%, respectively, compared to BABA’s 7.86% and 37.32%.
Further, NTES’ 19%, 8.72%, and 10.97% respective ROCE, ROC, and ROA are higher than BABA’s 6.85%, 4.51%, and 3.73%.
Valuation
In terms of forward EV/EBIT, BABA is currently trading at 23.60x, which is 54.5% higher than NTES’ 15.27x. And its 30.56x trailing-12-month P/E is 27.1% higher than NTES’ 24.03x.
So, NTES is more affordable.
POWR Ratings
BABA has an overall C rating, which equates to a Neutral in our proprietary POWR Ratings system. In contrast, NTES has an overall rating of B, which translates to Buy. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
NTES has a B grade for Value, which is consistent with its 15.27x forward EV/EBIT, which is 4.5% lower than the 16x industry average. However, BABA has a C grade for Value, which is in sync with its 23.60x forward EV/EBIT, which is 95.8% higher than the 12.05x industry average.
NTES has a B grade for Sentiment, which is in sync with the company’s revenue growth estimates. In comparison, BABA has a grade of C for Sentiment. This is justified because analysts expect the company’s EPS for fiscal 2022 to decline at a rate of 18.8% year-over-year.
Among the 51 stocks in the China industry, BABA is ranked #13. However, NTES is ranked second.
Beyond what I have stated above, we have also rated the stocks for Growth, Momentum, Stability, and Quality. Click here to view all the BABA ratings. Also, get all the NTES ratings here.
The Winner
The Chinese government’s efforts to reinvigorate the country’s economy by providing support to technology companies should drive the performance of tech stocks BABA and NTES. While both BABA and NTES are expected to gain, we think it is better to bet on NTES now because of its lower valuation, higher profitability, and robust financials.
Our research shows that odds of success increase when one invests in stocks with an overall rating of Strong Buy or Buy. View all the other top-rated stocks in the China industry here.
Recently the Reitmeister Total Return Portfolio (RTR) closed a winning trade in BABA for a 53% gain. Learn more about the RTR service here.
BABA shares were trading at $119.18 per share on Wednesday morning, up $4.19 (+3.64%). Year-to-date, BABA has gained 0.33%, versus a -5.50% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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