The beneficent window when internet stocks looked like a one-way bet upward seems to be closing, and not only in the U.S. Shares in Chinese e-commerce titan Alibaba Group Holding are flat for the year, while social-media giant Tencent Holdings has slid by 17%. Yet investors aren’t screaming buying opportunity. “What I’m seeing is some signs of fatigue in tech, particularly internet,” says Rohit Chopra, an emerging markets portfolio manager at Lazard Asset Management. “Signs that these investments aren’t risk-free anymore.”
The Chinese online prodigies work in a very different environment than Facebook or Twitter. But they are beginning to face analogous questions about their ability to maintain leaps-and-bounds growth, and their relationships with government and society. The Beijing hierarchy laid aside its typical control-freakery for some years to let the internet champions thrive. That attitude is eroding, though.
Tencent (ticker: 700.Hong Kong) is waiting for a bureaucratic green light to earn money within China off the wildly popular family of Battle Royale videogames, which it controls. (Beijing won’t allow it to generate revenue from local players buying virtual objects within the fantasy world.) Investors suspect the problem is that one of the game creators, PUBG, is from South Korea.
Alibaba’s (BABA) problems with the authorities could be more substantial. Regulators are pushing back against its sprawling financial spinoff, Ant Financial—tightening requirements for its money-market funds and weighing the imposition of bank-style capital requirements. “Tensions have been building for the past few years around how powerful Alibaba is getting,” says Gil Luria, director of research at D.A. Davidson Cos.
The very fact that investors are focusing on these noncore businesses reflects a creep (or dash) toward conglomerate status for Alibaba and Tencent, which makes the companies harder to analyze and risks management distraction. Alibaba is particularly keen on nurturing “moonshots,” from artificial intelligence to media, on the model of Google’s parent company Alphabet (GOOGL), Luria says. That’s not even to mention the external threat of China’s economy slowing due to mounting trade conflict with the U.S.
Other emerging market internet stars are faring no better. Shares in Chinese search provider Baidu (BIDU) have lost 6% this year as the company invests billions in various Next Big Things of dubious promise. Yandex (YNDX), which dominates Russia’s digital space, is maintaining focus and 20%-plus growth of both revenue and profit. But jitters about the ruble and its home country generally have knocked almost 20% off the shares since March. “Yandex is a decent business. The problem is it’s in Russia,” says Brian Bandsma, a portfolio manager at Vontobel Asset Management. Shares in MercadoLibre (MELI), the Latin American eBay-cum- PayPal based in Argentina, have pitched and rolled even more than the stock of its global peers, but ultimately lost one-fifth of their value in the past five months.
Long-term investors are hardly fleeing big tech names, which in emerging markets especially concentrate the best managers and most dynamic prospects. But they’re taking a breath to consider valuation and external pressures. “The big debate in emerging markets is whether it’s time to take profits from the disruptive tech narrative and switch to value,” Lazard’s Chopra says. He thinks it is, and hunts for cheaper stocks among banks or consumer staples producers.
Luria is more worried about the world around the tech ecosystem. “As long as the economy keeps growing in a healthy way and we avoid major trade conflict, these corrections should heal themselves,” he says. “But those are two big ifs.”
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