F.A.N.G.

Have you heard of FANG before? It’s a common acronym for some of the largest technology companies in the United States that have had massive gains over the past few years. The acronym has gotten a little messy thanks to the desire to add Apple and the re-naming of Google as Alphabet, but here are the companies traditionally thought to be a part of the “FANG stocks” :

• Facebook (FB)
• Amazon (AMZN)
• Apple (AAPL)
• Netflix (NFLX)
• Google/Alphabet (GOOG)

You might recognize a few of those names from the October edition of the Freedom Portfolio. Investors who have held any of the above companies for any length of time over the past decade have to be pretty pleased with the results.

But I don’t want to talk about those companies right now.

B.A.T.

There’s an equivalent acronym for Chinese companies that is a little less commonly know: BAT. Like with the FANG companies, the BAT companies are some of the largest technology companies in China (and the world). Thankfully, the acronym is a little cleaner in this case. The BAT companies are:

• Baidu (BIDU)
• Alibaba (BABA)
• Tencent (TCEHY)

Again, a lot of these companies are in the Freedom Portfolio. For Americans who don’t have much (if any) experience with these foreign companies, it can sometimes be difficult to wrap their heads around what exactly these companies do. For that reason, it has become common to associate the BAT companies with American equivalents as a shorthand. It’s not ideal, as oftentimes there are just as many differences as similarities, but it can be a good starting off point for understanding what these companies do. Here are the common equivalents given to the BAT stocks:

• Baidu – Google
• Alibaba – Amazon
• Tencent – Facebook

It should be repeated that these comparisons are far from perfect. I would argue that in many ways Alibaba is more similar to Ebay (EBAY) than Amazon and Tencent is far more involved in gaming than Facebook is. If you find yourself interested in any of these companies, I would very strongly recommend digging in deeper to learn more and discover how the companies differ from the companies they are often compared to.

But I don’t want to talk (too much) about these companies, either. 

J.I.B.

No, I want to talk about a even less commonly known acronym: JIB. I know it’s less commonly used because as far as I can tell, it’s an acronym that I am coining right here, right now, although I’m sure it will be spread like wildfire and be used worldwide in a matter of months. JIB refers to three more Chinese tech companies that I believe have some interesting growth potential:

• JD.com (JD)
• iQiyi (IQ)
• Baozun (BZUN)

Like with the BAT stocks, there are some commonly used equivalents.

• JD.com – Amazon
• iQiyi – Netflix
• Baozun – Shopify (SHOP)

JD.com

Just like with the BAT stocks, I want to stress how imperfect these comparisons are. That should be evident with the JD / Amazon comparison, considering that Alibaba was also listed as “the Amazon of China” above. How can two companies be the Amazon of China considering how dominant Amazon is in e-commerce in the United States? The short answer is that the competitive landscape is simply different. In most ways, JD.com is actually an underdog to Alibaba in China. Alibaba has a larger market cap, has a bigger share of the Chinese e-commerce market, and has more cash on its balance sheet.

So why is JD.com like Amazon? Their business models are very similar. Like I mentioned before, Alibaba is more like an eBay in that it is largely facilitates transactions between two parties instead of directly selling things. Their consumer-to-consumer business is like traditional eBay where the seller and buyer are brought together on the platform, but then the seller is responsible for inventory and order fulfillment. They also have a business-to-consumer business where Alibaba again acts more like a middle-man. JD.com, on the other hand, has invested much more in terms of building out fulfillment centers and a logistics network. This gives it a lot more control over the quality of both the products being sold and the delivery of products which could give it an advantage long term over a company like Alibaba, despite currently being the underdog. 

Another similarity/difference worth noting, especially recently, is leadership. Just as Jeff Bezos has played an integral role in the rise of Amazon and continues to be an incredibly important leader, the same can be said of Richard Liu for JD.com. Unlike Jeff Bezos, though, there are some dark clouds hanging over the JD.com founder and CEO. A few months ago he was arrested over a rape allegation. As of the time of this writing, the case is still under investigation. While JD.com is larger than any one person, it would definitely be a blow to the company if he was forced to step down.

iQiyi

To carry on the theme of imperfect comparisons: While iQiyi is called the Netflix of China because of its subscription streaming video service, it isn’t nearly the leader to the same degree as Netflix is in the United States. They do, however, have another interesting connection with Netflix in that they have a licensing agreement with them. It seems like a good win-win scenario for both companies right now: Netflix gets some of their content exposure in China and iQiyi gets some presumably appealing content that other Chinese streaming services can’t offer.

Another way that iQiyi differs from Netflix is that it also has a fairly popular free, ad-supported video service that is more similar to YouTube. That’s a little interesting because iQiyi was recently spun out of Baidu (the aforementioned Google of China) and YouTube is a division of Google.

Lastly, while the Netflix comparison is the more popular one, iQiyi prefers to think of itself as being more similar to Disney (DIS). Why? So far Netflix has focused solely on video content, while iQiyi offers games, novels, and other merchandise which makes it more similar to a company like Disney, which does a great job of finding different ways to monetize their various properties through toys, clothing, amusement parks, etc.

One last point of interest is iQiyi has a partnership with fellow JIB member JD.com. JD.com has a membership program somewhat similar to Amazon Prime and one of the perks that were recently added was a membership to iQiyi’s program. Like the Netflix licensing deal, this seems like a win-win for both companies in that it makes JD.com’s membership more appealing while also giving iQiyi a greater membership base.

Baozun

Baozun might be the hardest of the group to describe what they do because unlike Netflix and Amazon, many people might not have heard of Baozun’s commonly named equivalent: Shopify. Luckily, I wrote something just last week about Shopify and what they do.

As with all of the companies discussed so far, while Baozun is similar to Shopify in many ways, it also has some differences. One of the larger differences is that while Shopify tends to focus on small companies trying to set up an e-commerce solution, Baozun has a lot of larger, more established companies as clients who are trying to get access to the Chinese market. The Motley Fool has a good article that explains some of the similarities and differences.

Baozun has some big names as clients: Nike (NKE), Microsoft (MSFT), and Starbucks (SBUX). Why would these massive companies feel like they need a company like Baozun? Because Baozun can help those non-Chinese companies quickly set up online stores on all of the biggest Chinese e-commerce sites and apps, like fellow JIB-er JD.com, Alibaba’s (BABA) Tmall, and Tencent’s (TCEHY) WeChat. There are a lot of major non-Chinese companies who are scrambling to get access to the Chinese market and its  increasingly internet-connected and growing middle-class. Baozun is well position to profit from that trend.

Current Events

I’m pretty excited about the prospects of all of the JIB companies that I mentioned above, and all in the Freedom Portfolio, but I would be remiss if I didn’t mention what has been going on with them lately. Put simply: They’ve been getting hammered. Two of them are down double digit percentages and the third isn’t far behind. There are a bunch of possible reasons behind the drops:

• General market volatility over the past month
• Concerns about a slowing Chinese economy
• Concerns over tariffs and the continuing trade war with the United States
• Concerns over increasing Chinese government regulations

All are completely valid concerns and I don’t mean to dismiss them, but if you’re looking at holding these companies for the long term (3+ years), then none of those worry me too much. In fact, I’ve been looking at the recent drops in the JIB companies as a possible opportunity to add to my positions. Trade wars down last forever. Economic slowdowns don’t last forever. The opportunity in front of these companies in terms of a growing middle-class not only in China but elsewhere in Asia is real and is too big for me to ignore, though. I wouldn’t be surprised if the next year or two is tough for these companies (part of the reason why I am holding off on making any moves), but over the long term, I like their chances of being big winners.

In short, I like the cut of their jib.