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Why are Chinese tech giants slumping on US stock markets?

It’s been a rare bad news week for China’s internet giants and their investors. A Bloomberg report on Tuesday reported that half of the 14 Middle Kingdom dotcoms that IPO’d in the States last year are now trading at below the price at which they were initially offered. This is despite the Nasdaq tech-dominated market having risen of late to levels not previously seen since the dotcom boom.

So is this a sign the powerhouse tech firms of Asia are finally losing their lustre abroad? And what impact might it have on their international strategy and products roadmap?

Down, down, down

First the bad news for China’s recently US-listed internet firms: shares across the 14 are down on average 3.1% this year compared with a 6.1% increase in the Nasdaq as a whole. Even investor darling Alibaba has seen its share price slump 28% since a record high in November. Twitter-like service Weibo has seen its stock drop over 21%, wiping out $1.4bn (£940m), while Tinder clone Momo has witnessed a stock tumble of 23% since December.

Why are they performing so badly?

Some have suggested it may be related to the Chinese economic slowdown. But things are doing pretty well back home on domestic markets, so it can’t be the whole story. Other analysts speculated that, ironically enough, it could be mainland investors shifting money back from US listings to better performing stocks inside the PRC.

Reality Bites

In reality it’s probably more the fact that Wall Street overhyped the likes of Alibaba, Weibo and others in the first place. Momo, for example, was valued at 300 times its $248m revenues at IPO last year and even after a sharp decline is now at 20 times – still a higher multiple than Facebook. We’re not talking about a bubble developing here, but these firms have certainly not performed as (perhaps naïve) investors expected them to.

Part of the reason is that many of these technology players have been undergoing a period of investment themselves, which is not great for propping up financials. And when they start to miss analyst expectations – as search giant Baidu and video behemoth Youku Tudou have recently – investors get jittery. When I covered the Alibaba IPO last year I predicted that the firm was likely to plough its IPO cash into cloud and infrastructure investments to help it expand out of e-commerce. No quick revenue-making wins there. An Alibaba spokesperson, for the record, declined to comment this time around.

But there is one other potential area of concern for investors in these firms: persistent concerns over accounting standards. The SEC last month blinked first in a stand-off with Beijing which effectively means there’ll be one set of accounting rules for Chinese firms listed in the US and another for all the rest. Crucially, US regulators will not be able to demand to see internal documents or conduct inspections of Chinese auditors.

Keep your eyes on this one – it may well have a few more twists and turns in it yet. In the meantime, perhaps the lesson to be learned from all this is that having a domestic market of 650 million internet users to sell-in to doesn’t make you immune to the ups and downs of the stock market.

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Phil Muncaster

Phil Muncaster has been writing about technology since joining IT Week as a reporter in 2005. After leaving his post as news editor of online site V3 in 2012, Phil spent over two years covering the Asian tech scene from his base in Hong Kong. Now back in London, he always has one eye on what's happening out East.

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