Chinese Internet stocks have finally hit a Great Wall.

That, at least, is what skeptics are arguing, in the wake of recent disclosures of insider selling and news of mobile-telephone policy changes in China.

Shares in

Sina

(SINA) - Get Report

,

Sohu.com

(SOHU) - Get Report

and

NetEase.com

(NTES) - Get Report

-- all of which operate Internet and mobile-telephony-content businesses in China -- have enjoyed an amazing run over the past year, one reminiscent of the U.S. dot-com boom of the late 1990s.

At their peak in July, shares in the three companies were trading anywhere from 21 to 35 times current 52-week lows from last summer.

Now, with the trio's shares down double-digits percentagewise from their July peaks, but still at impressive levels compared to last year, investors may be asking whether the recent pullback is merely another breather in the stocks' relentless climb upward -- or the beginning of a damaging backslide like the one that began in 2000 for U.S. Internet stocks.

At issue is the same conundrum that bedeviled investors in portals such as

Yahoo!

(YHOO)

,

Lycos

,

Excite

and

Disney Internet Group

in the prebust era: How should one assess the potential rewards to be reaped by riding the online content wave in a massive market against the risks of minimal current profits, stock volatility, debatable measures of success and constantly shifting business models?

On Tuesday, Sohu was up 11 cents at $30.31, Sina was down 35 cents at $30.22 and NetEase was down 41 cents at $44.54.

Games People Play

Though investors might believe their analysis of the Chinese market may benefit from expensive lessons learned stateside, they have to contend with a new set of complications: Economics and consumer behavior vastly different from the U.S. market, a greater degree of government involvement in the business and the difficulty of gathering reliable information about a market operating in a non-Indo-European language 12 time zones away.

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"This is a dangerous game to play, long or short," says Darren Chervitz, director of research for Jacob Asset Management, which runs the

(JAMFX) - Get Report

Jacob Internet fund. "But I like the fundamentals, so I'm willing to bet the next move is on the upside." The fund, which is an investor in Sina, Sohu.com and NetEase.com, made small additional investments following the recent pullback, says Chervitz.

In one sign of the differences between U.S. Internet content companies and the Chinese portals, the three companies at issue make most of their money not from online advertising and commerce, but from content supplied to mobile-telephone customers of two dominant carriers:

China Mobile

(CHL) - Get Report

and

China Unicom

(CHU) - Get Report

. This content includes short messaging service fees, dating clubs and games, for example.

Chervitz says the biggest investment risk for the portals is that the telephone companies -- which handle customer billing and collection on behalf of the content providers -- will demand a greater percentage of the portals' revenue in return for the platform and services they provide. That cut for China Mobile and China Unicom appears to be about 15% of the portals' mobile revenues. One buy-side skeptic argues that it's inevitable that the phone companies will seek a greater cut of the portals' revenue. (That investor, who spoke on condition of anonymity, is a shareholder in the phone companies, but claims to have no position, long or short, in the portals.)

Danger Zone?
Chinese Net stocks rally

That skeptical argument is bolstered by the margins enjoyed by the portals, which seem too good to be sustainable. NetEase.com, for example, reported a gross margin of 79% for the second quarter ended June 30 and an operating margin of 57.2%. Both of those numbers are expected to improve in coming quarters, said a company executive on NetEase.com's earnings conference call.

Margins like that will no doubt attract new market entrants willing to undercut current portal economics, says the anonymous buy-sider. But Chervitz argues that a shakeout has already taken place, and the top participants have enough cash to defend themselves from competitive onslaughts.

As for revenue sharing with the China Mobile and China Unicom, Chervitz says indications are that operators aren't pressing for greater revenue shares as they renew contracts with the portals. In its second-quarter conference call, NetEase.com said that a contract negotiated with China Unicom two months earlier in fact had better terms for NetEase.com than the prior contract. Execs said they didn't expect that revenue-sharing terms with China Mobile would be amended "in the near future." Those terms are covered in one-year contracts negotiated on a regional basis, says NetEase.com.

Bill Me Later

But revenue sharing is only one of the concerns that investors have to stay on top of. One negative for Sina, Sohu.com and NetEase.com last week was a report that China Mobile had asked the portals to stop billing mobile customers for computer software and movie downloads -- a move that

Bloomberg

reported was aimed at curbing pornography.

U.S. Bancorp Piper Jaffray analyst Safa Rashtchy, who has outperform ratings on all three of the portals, argued last week that the selloff was unwarranted. "We believe this announcement has been generally misinterpreted to mean China Mobile will stop billing for SMS services."

Even so, it confirms the opinion of skeptics -- a population that presumably comprises short-sellers -- that the telephone operators are keeping a close eye on content, and may intervene again should it be decided that dating services, for example, veer into the neighborhood of pornography or prostitution.

Then there's the insider sales. In addition to sales at the portals by executives and directors -- several of whom have been selling on a regular basis while retaining significant stakes --

News Corp.

(NWS) - Get Report

said in early July it was selling its remaining stake in NetEase.com. Chervitz, who says he's confident that American media companies would buy major stakes in the portals had they the chance, isn't rattled by News Corp.'s departure.

Revenue growth is "explosive," summarizes Chervitz, and the companies have "real leverage" on the bottom line.

"These things aren't really going to break down until something fundamental changes," Chervitz says. "And we don't see that."