Tech or media?
What to many people is an esoteric question could end up making a multibillion-dollar difference to Chinese companies that serve up content ranging from jokes to gossip.
Technology firms, those ground-breaking companies with research teams hard at work building moats, are more highly prized than media counterparts that merely provide content. In the S&P 500, for example, tech firms trade as high as 30 times earnings, with software players leading the field — a handy premium over media companies at 17.5 times.
Facebook Inc. feels this pain. A drop in its P/E ratio was exacerbated by the Cambridge Analytica scandal, which reminded the world that advertising is the company’s business model. From 32 times forward earnings two years ago, Zuckerberg’s monster is now trading at 17.9 times.
In China, there no longer seems to be any debate on the matter.
Since Beijing can (and often does) step in to decide what’s allowed across search, social media and news, it’s clear that regulators see these companies as more than just technology providers offering a neutral platform.
China wants tech companies on its stock exchanges and is prepared to roll out the red carpet to make that happen, including possibly introducing Chinese depositary receipts. Taiwan’s Foxconn Technology Group was the beneficiary of this warm welcome when its Foxconn Industrial Internet Co. unit won listing approval in record time.
Foxconn is just the kind of company President Xi Jinping wants.
Vulgar content, not so much. That’s the label regulators gave to Neihan Duanzi, an app developed by Toutiao, one of the country’s hippest startups. The forum for sometimes off-color jokes, and other apps including some run by Tencent Holdings Ltd., was ordered to shut last week.
Weibo Corp. made clear it’s a media company when it announced April 13 that it would delete posts relating to gay culture as part of a three-month “cleanup,” prompting a swift backlash from users.
Yet Weibo’s 125 percent rally over the last year — to a market value exceeding that of Twitter Inc. — puts the stock at 41 times 2018 earnings, in the realm of tech companies, not media players. Analysts see Weibo’s revenue growing 57 percent this year, with EPS rising 76 percent.
Startups are also thinking a little highly of themselves. Toutiao parent Beijing Bytedance Technology Co., which counts Sequoia Capital China, DST Global and Source Code Capital as investors, is already valued at $11 billion, according to CB Insights. But unicorn status and four rounds of funding clearly aren’t enough: The Information reported in December that Bytedance is looking to a $30 billion valuation.
China is now fast-tracking the IPO process for technology companies and easing profitability requirements. But here’s the rub: The innovative companies Beijing wants must operate in fields of importance to national security, such as big data, cloud computing and artificial intelligence. Silly jokes and human rights don’t count.
So listed companies had better prepare for new valuation models. And startups might be better off not even attempting a Chinese IPO.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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