It’s no secret that investors in Chinese technology stocks have seen some heavy losses recently. That’s mainly down to the increasing government scrutiny of the sector.
For long-term investors, though, the consensus has been split between whether the depressed share prices of the technology giants is a trend here to stay or if this is a once-in-a-lifetime buying opportunity.
Either way, the Chinese tech giants aren’t going anywhere. Many are integral to the daily lives of hundreds of millions of Chinese consumers.
Two of the biggest, and generally seen as the “OGs” of the consumer tech sector, are Alibaba Group Holding Ltd (SEHK: 9988) (NYSE: BABA) and Tencent Holdings Ltd (SEHK: 700).
The former owns e-commerce sites such as Taobao and Tmall, as well as operating a sizeable cloud computing business. Meanwhile, Tencent is a social media and gaming powerhouse.
So, for investors who may want to “buy the dip”, which is the better buy between the two Chinese technology giants?
Looking at revenue growth can be a good gauge of how efficient a tech company is at tapping into its total addressable market (TAM).
For Alibaba, the company recorded revenue of RMB 101.1 billion (US$15.7 billion) in fiscal year (FY) 2016 (for the 12 months ending 31 March 2016).
For FY 2021, the company posted revenue of RMB 717.3 billion, meaning its five-year compound annual growth rate (CAGR) on the top line was 48.0%.
Meanwhile, Tencent saw full-year 2020 revenue of RMB 482.1 billion and had 2015 full-year revenue of 102.9 billion, meaning its business has a five-year revenue CAGR of 36.4%.
As with any big and established tech business nowadays, revenue growth alone isn’t enough. There also have to be profits to show for it.
On this front, Alibaba delivered a net profit of RMB 71.3 billion in its FY 2016 while in its most recent FY 2021 earnings, it posted a net profit of RMB 143.3 billion.
That means Alibaba’s five-year net profit CAGR comes out to 15.0%. So how about Tencent?
The WeChat and online gaming giant saw net profit of RMB 29.1 billion in its full-year 2015 while its full-year 2020 earnings report saw it deliver net profit of RMB 160.1 billion.
Overall, that means Tencent had a five-year net profit CAGR of 40.6%.
Share price return
Fundamentals can always point to one thing but what doesn’t lie is the performance of a company’s stock over longer periods of time.
Unfortunately, Alibaba’s Hong Kong shares only started trading in late 2019 so if we look at the company’s US-listed ADRs, they’ve delivered a share price return of 35.9% over the past five years.
As for Tencent, its share price has risen by 125.6% during that same period – easily beating Alibaba’s return.
Focus on quality in Big Tech
While I’m not a huge fan of Chinese “Big Tech” names over the longer term following the latest crackdown, it makes sense for those of us who do want to buy these companies to focus on quality.
In this regard, Tencent has one of the best businesses out of the Big Tech firms in China. It’s also not operating in a fiercely competitive e-commerce landscape like Alibaba, which still generates nearly 90% of its revenue from the sector.
For those of us who are thinking of picking between the “Big Two” tech giants in China right now, Tencent would appear to be the better choice.
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be.
In his spare time, Tim enjoys running after his two year-old son, playing football and practicing yoga.