China’s online land grab risks value mudslide
By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
China’s internet dealmakers are on a defensive offensive. Tencent’s $448 million purchase of a stake in search engine Sogou from its owner, U.S.-listed Sohu, is the latest attempt to stop competitors snapping up a bite-sized competitor. When cash is abundant and investors forgiving, that kind of land grab can turn into a value mudslide.
Sogou gets 10 percent of Chinese search traffic, putting it in third place behind Baidu and Qihoo. That won’t change after merging with Tencent’s smaller offering, Soso, but it will stop Qihoo from vaulting further ahead. Still, the price is high. If Sogou can replicate its most recent 60 percent quarterly revenue growth over the whole of 2013, the $1.2 billion implied value of Tencent’s offer is at least six times sales – not including the value of the search engine Tencent is adding to the combination. Baidu trades on eight times. By comparison, Alibaba sold a stake of around 10 percent in Sogou in June 2012 at a price that suggested a valuation of $260 million.
Some things have changed since then. Valuations have swelled in 2013 as companies have started to turn mobile hype into revenue. Weibo, the micro-blog owned by Sina, made a third of its revenue from mobile in the second quarter. Travel agent CTrip sells one in five hotel bookings on handheld devices, and Baidu now gets over 10 percent of its revenue from mobile.
The future value of these revenue streams, though, remains murky. Estimating growth is tough enough for U.S. rivals like Google and Facebook. In China, where web users and their disposable incomes are both rising rapidly, forecasts can change even more rapidly. One big question is whether mobile will create new online time and revenue – in which case there may be more to go around for everyone – or just redistribute the existing spoils.
In the meantime, numbers are slippery. Tencent’s $101 billion market capitalisation is almost as big as that of Facebook, which is finally trading above its lofty IPO price. Other pocket-sized Chinese players like dating site Jiayuan and social network Renren have seen their valuations shoot up. Fighting for territory sounds like a clever strategy, but investors could wait for years to find out whether they’re getting gold or dirt.