The Chinese internet population has currently reached 854 million people, which is a market penetration of only 61.2%. Comparatively, the U.S. internet population reached 294 million people, which is a much higher penetration rate of 89.5%. For investors, the cherry on top of Chinese internet stocks is that the valuations of these Chinese companies are much lower than those of their American counterparts. That is unusual. These Chinese internet giants have usually traded at a premium. With the sell-off in recent months, price-to-earnings ratios on these Chinese stocks are now half their historical norms. The only time I can think of when these companies were this cheap was back in 2013. So... what's the catch, you might ask? How can such dominant, cash-rich, fast-growing companies be so cheap? The answer - as is often the case when great opportunities arise in the stock market - is uncertainty. The stock market hates it. Investors today are uncertain about what the Chinese government's intentions are for these world-class businesses. For almost a year now, Chinese authorities have been passing directives and regulations against the most powerful Chinese internet players. The stock market has reacted as though the Chinese government is going to kill these companies. I don't believe that to be the case. My opinion is that the Chinese government wants to regulate the sector to enhance privacy and security, eliminate constraints on the growth of small and medium-sized enterprises, and ensure social equity. I'm not saying what the Chinese government is doing is bullish... But I am saying that China's crackdown won't fundamentally change the future of these great companies all that much. The Chinese stock market feels differently. Share prices are down nearly 50%. These businesses are outstanding, with bright growth prospects and attractive long-term margins. That makes this a rare buying opportunity in an investment world that currently offers very few of them. When it comes to Chinese internet stocks, it's time to get a little greedy when everyone else is fearful. Good investing, Jody |
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