China's BAT Stocks Have More Bite Than FANGs
First there were the FANGs: Facebook Inc. (FB), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX) and Google parent Alphabet Inc. (GOOG). This tech quadrumvirate has seemed unstoppable since at least 2013, when Bob Lang coined the term (though it's attributed to Jim Cramer).
The preferred acronym has shifted along with individual companies' fortunes. FAANG made room for Apple Inc. (AAPL). FAAMG shunted Netflix out in favor of the less-phonetically-convenient Microsoft Corp. (MSFT).
But the idea that a small cluster of American tech firms sits at the
commanding heights of the digital economy went unchallenged.
BAT-ter Up
This year it's becoming increasingly clear that a trio of Chinese
tech companies is breathing down the FAAMNGs' necks. Shares in Baidu
Inc. (BIDU), Alibaba Group Holding Ltd. (BABA)
and Tencent Holdings Ltd. (0700.Hong Kong, TCEHY) are up an average of
65.2% in 2017, more than doubling the performance of any permutation of
the FANGs. Since any self-respecting club of tech stocks needs an
acronym, commentators have taken to calling them the BATs.
There are reasons to be skeptical. Chinese stocks have seen enormous
swings in recent years as busts follow close on the heels of speculative
booms. Some make the case that American tech companies are repeating
the follies of the dotcom boom
– 30% gains in less than nine months are nothing to sniff at — so when
their Chinese counterparts rise even farther, faster, all the
more reason to stay away. What's more, the playbook that works behind
the Great Firewall might not deliver the same results beyond it.
On the other hand, there are reasons to think the BATs are more than a
fad. The old China-can't-innovate stereotype is on life
support. Alibaba is not simply "China's Amazon," Baidu is not "China's
Google," and Tencent is not "China's Facebook." Payments are an example
of how these companies are breaking new ground. Ant Financial, a spinoff
of Alibaba that owns Alipay, is the world's most valuable fintech
company for a reason: its 51% share of China's internet payments market suggests
it handles roughly the same value of transactions per year as all
American credit- and debit-card users generate. Tencent's WeChat, a
popular messaging service, also handles payments. But these platforms do
more than act as a glorified Venmo: they offer investments and allow
users to pay utility bills and buy train tickets. They are also
ubiquitous – not the case in the U.S. – and expanding abroad. (See
also, Ant Financial Nearly Doubled Its Earnings in FY17.)
When Uber's Chinese arm capitulated to Didi Chuxing
– which counts all three BATs as investors – last year, it may have
been a sign of things to come. Uber could not keep up with the volume of
rides Didi completed (more in China in 2015 than Uber had completed
worldwide since 2009) or the range of options it offered customers.
Chinese tech companies have moved beyond simply cloning their American
counterparts, and may soon be buying them: regulators are
reviewing Ant's bid to buy Texas-based MoneyGram International Inc. (MGI).
The performance of the BAT stocks so far this year might have a lot to
do with the frothiness of Chinese markets, but the FANG crowd – and
their investors – shouldn't get complacent.
Disclosure: the author has long positions in Apple, Netflix, Alphabet, Microsoft and Alibaba.
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