INTERNET: Alibaba Lifts Tencent, Sungy Sputters
Bottom line: Shares of Tencent and Alibaba are overvalued and will stagnate or fall for the rest of the year, while a group trying to buy out Sungy Mobile may have to raise its offer but should succeed in privatizing the company.
It seems I was partly wrong when I previously said that e-commerce giant Alibaba (NYSE: BABA) was quite expensive following its record-breaking IPO last year, and that its value would gradually sink to a level comparable with rival Tencent (HKEx: 700). In this case I wasn’t wrong in thinking the 2 companies should be comparably valued. Instead, I should have focused on the potential for a rally in Tencent shares, which have risen sharply to approach Alibaba’s level since the start of the year.
While those 2 companies look comfortably situated in the stratosphere of Internet valuations, the same can’t be said for mobile game operator Sungy Mobile (Nasdaq: GOMO), which has just announced its receipt of a management-led buyout offer. If the attempt succeeds, it would mean Sungy’s life as a publicly traded company could end after less than 2 years, the briefest for a listed Chinese company that I’ve ever seen.
Sungy’s current market value is just $165 million, a tiny fraction of the $203 billion that Tencent reached after its shares surged 5.4 percent in Monday trading to reach an all-time high. Local media focused on the fact that Tencent’s value topped the $200 billion level for the first time, following a 52 percent rally in its shares this year. (Chinese article) That brings Tencent’s value within easy range of Alibaba, whose latest market cap now stands at $210 billion following a nearly 20 percent drop for the stock since the start of the year.
Alibaba’s shares have come under pressure partly due to a scandal involving the high volume of trafficking in pirated goods on its popular Taobao C2C site uncovered by a government report. But I’ve been saying for a while that the scandal is more of an excuse for shareholders to sell the stock following a huge posts-IPO rally. I further added that the stock would continue to fall on any news, negative or positive, until it reached a level more comparable with Tencent.
So now that we’ve seen that happen, what’s next? I would argue that shares of Alibaba and Tencent are now both overvalued and probably due for a period of correction. I have a lot of respect for both companies, but frankly speaking I don’t believe they’re worth more than much older, more diversified names like Amazon (Nasdaq: AMZN) and Oracle (Nasdaq: ORCL), which are both valued at less than $200 billion.
Meantime, let’s close out this valuation discussion with Sungy, whose meager $165 million market cap is making it an easy buyout target that has attracted an offer from a team lead by the company’s top management. (company announcement) Sungy’s American Depositary Shares (ADSs) were trading at $4.50 before it announced the offer, less than half the $11.22 they fetched when the company made its IPO in New York in late 2013.
In an interesting development, Sungy shares rallied 12.4 percent to close at $5.06 after it announced the deal. That’s a bit higher than the buyout offer of $4.90 per ADS, indicating investors feel a higher bid may be needed to complete a deal. That wouldn’t be too surprising, as another minority investor in Chinese matchmaking site Jiayuan (Nasdaq: DATE) last week protested a similar buyout offer for that company, saying it was way too low. (previous post)
Both Jiayuan and now Sungy are part of a group of neglected Chinese Internet companies whose shares have languished due to lack of interest from investors, who have shown a preference for bigger names like Alibaba and Tencent. Sungy is also in the ultra-competitive gaming space, which hasn’t made its prospects too appealing. Perhaps we’ll indeed see a higher offer for Sungy, though I wouldn’t expect to see it raised too much. In the meantime, we can probably expect to see more buyout offers for similarly neglected smaller listed Internet firms, followed by similar protests from investors who feel the offers are too low.
Related posts:
