Baidu 'broken net', Tencent fell 70%, Internet companies are too miserable

Exhibit｜

The concept stocks in the Internet have fallen so badly this year that Baidu has "broken the net".

On October 21, Baidu's latest price-to-book ratio was 0.98, the stock price retracement was about 75%, and the market value was about 31.8 billion US dollars. Baidu is also the only company with a market value of over 10 billion U.S. dollars in Internet stocks that has "broken net".

The price-to-book ratio is a financial indicator often used to value traditional asset-heavy companies, reflecting the intrinsic value of market capitalization. However, as a typical asset-light industry in high-tech growth stocks, the price-to-book ratio is almost meaningless as a value indicator. More indicators such as price-earnings ratio and price-to-sales ratio, or non-financial indicators such as the number of users and growth rate are used to evaluate.

Stocks in traditional industries, such as real estate, banking, and steel, often have a lot of "broken net" phenomenon, that is, the market believes that the intrinsic value of a certain company is lower than the book equity equity. High price-to-book ratio is an important feature of high-tech growth companies, and "breaking the net" is a very rare phenomenon.

From a fundamental point of view, Baidu has been in a period of business transformation in recent years, superimposed by the impact of the epidemic, its performance has not been stable, and it has fallen sharply in the last year. Revenues in 2020 and 2021 will be US$16.4 billion and US$19.5 billion, respectively, and net profits will be US$3.4 billion and US$1.6 billion, respectively. In the first half of 2022, revenue was US$8.65 billion and net profit was US$410 million, down 2.4% and 89% year-on-year, respectively.

Baidu's financial report shows that Baidu's net assets have basically maintained rapid growth over the past few years, but the growth rate has begun to slow down in the past two years. At the end of 2020, the end of 2021 and the end of June 2022, its net assets were US$29.4 billion, US$35.1 billion, and US$34.38 billion, respectively. As of the end of June 2022, Baidu's book cash + short-term investment totaled about 26.6 billion US dollars.

This also means that, purely from the perspective of net assets, Baidu's market value has fallen to about $35 billion, which is close to its intrinsic value. Baidu's "broken net" is, to some extent, a reflection of the overall misery of concept stocks in the Internet.

The market frenzy in late 2020 and early 2021 saw the stock prices of Chinese internet companies peaking. At that time, Baidu was once highly sought after by the American ARK Fund, with a market value exceeding US$120 billion, the highest point since Baidu’s listing in 2005. Baidu also completed a secondary listing in Hong Kong in March 2021.

Since then, affected by multiple factors such as regulation, liquidity, industry and epidemic fluctuations, the stock prices of Internet Chinese concept stocks have plummeted. The latest data shows that among the major Internet companies, NetEase, which has the smallest share price retracement, also fell by 50%. Tencent and Meituan have retreated nearly 70%, and Alibaba's share price has fallen by 77%.

At present, among the major Internet concept stocks, Meituan has the highest price-to-book ratio at 6.6 times, and the rest of the price-to-book ratios are basically between 1 and 3 times, such as Tencent’s 2.6 times and NetEase’s 2.67 times, all of which have dropped significantly from their highs. In addition to Baidu, Weibo, Didi and Fog Core Technology have been "broken", while Xiaopeng Motors is close to "broken".

Alibaba now trades at just 1.3 times book value.

"Broken" is not terrible. The "broken net" caused by market irrationality means that listed companies are undervalued, and there will be valuation repairs in the future. But sometimes, the market is also rational: the stock price is the discount of future cash flow. Even if some companies have cash and assets higher than the market value, if they cannot create future value for investors, what's the point?