NEW YORK (CNN/Money) -
How do you say "Internet bubble" in Chinese?
Shares of three publicly traded Chinese-based Internet portals -- Sina, Sohu.com, and Netease.com -- are up an average of 68 percent during the past month. What's going on?
These three companies are very similar to Yahoo!, the leading online media company in the United States. All three are based in China (but have U.S.-listed stocks) and offer services such as news, e-mail, instant messaging, auctions and e-commerce to Chinese Internet users.
It seems that one reason behind the meteoric rise, perversely enough, is the outbreak of severe acute respiratory syndrome (SARS) in China, which has taken turns dominating the headlines along with the war in Iraq since mid-March.
The Internet message boards for Sina, Sohu, and Netease (admittedly not the best source for objective analysis) are chock full of enthusiastic posts.
One on Friday on Yahoo! Finance's Sina board sums up what some speculators are getting so excited about: "SARS=People stay home use internet. Inernet usage will increase dramatically due to SARS..so worries are unfounded"
And a newfound Sohu fan on Raging Bull seemed to care about nothing more than the stock's upward momentum. "I can't believe it! I'm actually plunging into China and the internet. GO SOHU! (whoever you are)"
Scary ... especially when you consider that when Sohu (SOHU: Research, Estimates) and Sina (SINA: Research, Estimates) reported their first-quarter results this week, management of both companies said that if anything, future results could be negatively impacted by SARS as companies in China cut back on advertising. Netease (NTES: Research, Estimates) will report its first quarter earnings Monday.
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To be sure, the companies do have some fundamentals in their favor, and SARS is not the only reason the stocks have gone up. In fact, the three stocks are up an average of 108 percent this year and almost 760 percent since the Nasdaq's early October lows.
Chang-hua Qiu, an analyst with FORUN Technologies, a Princeton, N.J.-based research firm, said that the three companies have done a good job of boosting their fee-based businesses, such as premium messaging services and online gaming, in order to lessen their dependence on advertising. Sounds a lot like Yahoo!, doesn't it? Qiu owns shares of all three companies.
As a result, the companies have recently started to report profits after enduring several years of losses. And for what it's worth, the Chinese portals aren't nearly as expensive as Yahoo!, even with their huge run. Based on 2003 earnings estimates from Qiu, the only analyst in the United States following the three companies, according to First Call, the three stocks are trading at less than 30 times earnings. Yahoo! has a price/earnings ratio of 73.
Still, making a bet on one analyst's estimates is obviously a huge risk, so investors would probably be wise to steer clear of these stocks.
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