NEW YORK (TheStreet) -- Chinese Internet companies Alibaba, Baidu (BIDU) and Tencent (TCEHY) are spending heavily on research and development and on acquisitions, spending that should allow the companies to continue to dominate their fields and make them good long-term investments.
Alibaba dominates e-commerce, Baidu drives China's Internet traffic with its search engine, and Tencent is ahead on social platforms and games.
Baidu's American depository receipts trade on the Nasdaq, and Tencent's ADRs trade on the over-the-counter Bulletin Board.
Alibaba is expected to have its IPO on the New York Stock Exchange in September. The deal is estimated to bring in more than $20 billion, which would make it the biggest IPO ever.
The Street's Jim Cramer has fears about Alibaba's IPO, but long term, the company should continue to grow.
In China's e-commerce sector, Alibaba's twin engines, Tmall and Taobao, should continue to power revenue. Taobao has no credible rival in the consumer-to-consumer field, and it profits from Internet shopping bonanzas such as last year's $5.75 billion Single's Day, the day each November in China that was known for unmarried people for celebrating singles' life but that has become an online shopping holiday.
Meanwhile, Tmall controls half of China's online business-to-consumer market, which was worth $300 billion in 2013. Its nearest competitor, JD, is trailing at 20%, with next nearest rivals in the single digits.
Some pundits are placing undue confidence in JD's alliance with WeChat, China's popular instant-messaging service that now offers an exclusive JD.com shopping channel. But Alibaba's similar partnership with Sina Weibo, which had been China's most popular social-media platform, reaped no great rewards. In fact, it may have convinced more Weibo users to migrate to the less commercial WeChat.
Baidu has capitalized on China's ban of Google (GOOG) , and has made regular acquisitions to sustain a regular base of users.
Mobile devices had been seen as Baidu's Achilles heel, but that is no longer the case.
More than 80% of China's 630 million people online use mobile devices as their primary Internet connection, and the mobile sector was seen as one in which rival Qihoo could grab market share. But Baidu has reached 500 million monthly mobile users, accounting for 30% of its revenue and justifying TheStreet's bullish call a year ago.
Although Qihoo has cut into Baidu's search market share by 10 percentage points, the company is still well behind in mobile and in adding features that Baidu already offers, such as mapping and e-commerce tools. Baidu has 63% market share in mobile search, compared with Qihoo's 22%.
Tencent is part of the Chinese Internet troika with its popular social-media and gaming apps. It owns WeChat, the messaging-service that will probably generate more revenue in the future by offering services such as restaurants bookings and brand-loyalty programs.
Also, Tencent owns QQ.com, whose messenger app has more than 700 million registered users. The QQ line of sites also includes a gaming app, the chief source of Tencent's revenue.
Tencent Video, the country's top streaming site, had 318 million monthly users as of March, with about half of users viewing videos on mobile devices.
At the time of publication, the author had no position in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates BAIDU INC as a Buy with a ratings score of B+. TheStreet Ratings Team has this to say about their recommendation:
"We rate BAIDU INC (BIDU) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, growth in earnings per share, increase in net income, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. We feel these strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- BIDU's very impressive revenue growth greatly exceeded the industry average of 11.5%. Since the same quarter one year prior, revenues leaped by 55.6%. Growth in the company's revenue appears to have helped boost the earnings per share.
- BAIDU INC has improved earnings per share by 31.4% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, BAIDU INC increased its bottom line by earning $4.96 versus $4.78 in the prior year. This year, the market expects an improvement in earnings ($36.34 versus $4.96).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Internet Software & Services industry. The net income increased by 31.7% when compared to the same quarter one year prior, rising from $434.72 million to $572.56 million.
- Powered by its strong earnings growth of 31.45% and other important driving factors, this stock has surged by 57.76% over the past year, outperforming the rise in the S&P 500 Index during the same period. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
- Despite currently having a low debt-to-equity ratio of 0.55, it is higher than that of the industry average, inferring that management of debt levels may need to be evaluated further. Even though the debt-to-equity ratio shows mixed results, the company's quick ratio of 3.77 is very high and demonstrates very strong liquidity.
- You can view the full analysis from the report here: BIDU Ratings Report