Image source @ Visual China
Text | Internet monster gang
The earnings season for U.S. stocks has just begun. As is customary, companies with better financial performance will be the first to release financial reports. As a result, four important U.S. tech giants — Microsoft, Netflix, Apple, and Tesla — have released earnings for the last quarter (each with a different fiscal year, not necessarily called the fourth quarter). For Tesla, I basically don't understand it, so I don't give it ugly; for the other three companies, I still know a little bit.
Overall, the three tech giants have all performed very well, reporting double-digit revenue and profit growth. Among them, the best growth momentum is Microsoft, with operating income and net profit growth rate of more than 20%. But the biggest performance exceeded expectations in Apple, especially net profit, which exceeded consensus expectations by about ten percentage points; strong sales of new iPhones in Greater China are an important source of exceeding expectations.
Microsoft's net profit margin is as high as ever, close to 40%, which is determined by the business attributes of the software company. Apple's net profit margin has expanded significantly, already approaching 30%, mainly due to the increase in the proportion of service revenue (cloud services, app stores, etc.). In fact, in the smartphone industry, Apple's net profit is higher than all Android phone manufacturers combined.
In contrast, Netflix's net profit margin seems to be relatively cold, but mainly because of seasonal factors - the fourth quarter is the season when Netflix's costs are more amortized, and in other quarters, its net profit margin is generally more than 20%. This fully shows that the video platform is not a bad business, but China's iQiyi and B station have not run this business well.
Driven by multiple positive factors such as economic recovery, product cycles and technological progress in Europe and the United States, the performance growth of US technology giants will continue for some time. Wall Street analysts are very optimistic about Google and Facebook's earnings reports; expectations for Amazon are less optimistic, but mainly due to seasonal factors. I am personally unfamiliar with the U.S. Internet industry and have studied it far less deeply than the Chinese Internet industry; but I personally believe that the market dominance of Apple, Amazon, Microsoft, and Google is sustainable, and the upward cycle of new products and technologies is not over. I'm not that optimistic about Meta and Netflix, but they're still good companies.
Comparing the financial reports of Internet stocks, we will find that the gap between Chinese and American Internet giants is further widening, whether at the level of market value, revenue or profit. Affected by many internal and external factors, the revenue growth of Chinese Internet companies has slowed down significantly, and net profits have entered a downward trajectory. Since the Chinese stocks have generally not yet disclosed the four quarterly reports, we will temporarily use the financial data of the third quarter of 2021 as a benchmark:
Of course, some investors may claim that the Internet industry also has a unique seedling that is "still growing against the trend of high speed", that is, ByteDance. Unfortunately, ByteDance is not yet public (and unlikely to go public in the near term), and we do not have access to accurate financial data. ByteDance officials have never claimed that they are "still growing against the trend at a high speed", and it obviously does not approve of the brain supplement of some investors.
Comparing the financial reports of the Internet giants in the United States and China, we will find the following unexpected and reasonable facts:
At the end of 2020, five of the ten largest companies by market capitalization in the world will be American Internet giants (Apple, Microsoft, Amazon, Google, Facebook) and two will be Chinese Internet giants (Tencent, Alibaba). At that time, Tencent's market capitalization was already very close to Facebook,000, and the gap with Apple and Microsoft was only two to three times; Ali's market capitalization was more than half of Google's and Amazon's one-third. At that time, investors around the world will think that Tencent, Ali and byteDance, which has not yet been listed, are a heavyweight and comparable company with the US Internet giant. And because these Chinese giants are growing faster, more efficiently, and expanding more, it's understandable if they overtake their American counterparts for a while.
Just thirteen months later, the scene is gone. U.S. internet giants have generally hit new highs (with the exception of Amazon), while their Chinese counterparts have tended to fall sharply. At this moment, Tencent's market value is only equivalent to 22% of Apple, 25% of Microsoft, and 68% of Meta; Ali's market value is only equivalent to 21% of Amazon and 18% of Google. The largest company in Greater China by market capitalization has become TSMC, which is equivalent to 1.1 times that of Tencent and nearly 2 times that of Ali.
Over the years, overseas investors have often used a compound word: Chinternet, which is also known as "China + Internet". In 2021, the term is clearly outdated. Overseas investors also once believed that only two countries in the world had the internet industry been most fully developed, that is, the United States and China; and only these two countries had given birth to Internet giants that were enough to shock the world. Now it seems that it is necessary to change the statement - the Internet industry and Internet giants in the United States are far above all other countries, and the gap will be further widened.
We can do a simple arithmetic problem: suppose that in the next three years, the US Internet giants can maintain a net profit growth rate of about 20%, while the Chinese Internet giants can only maintain a net profit growth rate of less than 10%; in this way, by 2025, the profit gap between the Internet giants in China and the United States will widen by 0.3 times on the existing basis. Since U.S. Internet giants have higher profit growth rates, they will enjoy higher valuation levels. Therefore, we have every reason to believe that in this case, the market value gap between Chinese and American Internet giants will widen by 0.5 times or even 1 times. At that time, we can think that the two are not a heavyweight company at all, or even a creature.
Will this happen? Hopefully not. However, in adverse circumstances, investors must prepare for the worst. At this point, the most rational option for long-term investors who can distribute money around the world seems to be to further over-allocate US technology stocks and under-allocate Chinese stocks until some kind of structural reversal signal arrives – the question is, who knows when it will come?