There is hope for Internet concept stocks to shed their hat as “end-of-life beggar stocks”. In the second financial reporting season of 2023, good news came from leading Internet companies such as Alibaba, Tencent, Baidu, and NetEase. Their revenue and profits achieved significant growth, sending out positive signals. And after two or three years of long bottoming out, the Nasdaq China Golden Dragon Index rose by nearly 20% in July. Although there have been fluctuations since August, the overall trend is upward.
Confidence is also back. It can also be seen from the recently disclosed 13F report for the second quarter of 2023 that many well-known investment institutions such as Hillhouse, Tiger Global Management, JPMorgan Chase, Citigroup, and Jinglin have invested heavily in Chinese Internet concept stocks, indicating the rebound of the Chinese stock market. The window is now open and Chinese stocks are expected to perform better in the coming months.
So, after the "darkest moment", how long can the rebound in Chinese concept stocks last? Which of the most watched Chinese Internet companies has the most stable performance? Can the emerging AI help them take off again?
Who is the most stable Internet concept stock?
Since the beginning of this year, Chinese Internet concept stocks have bid farewell to the "roller coaster"-like storms of the past and experienced new surges after making steady progress. From the beginning of 2023 to August 23, Alibaba’s stock price recorded an increase of 1.22%, Tencent’s increase of 1.01%, Meituan’s decrease of 25.41%, NetEase’s increase of 40.1%, JD’s decrease of 39.84%, Baidu’s increase of 14.95%, Kuaishou’s decrease of 9.36%, and Ctrip’s increase of 11.11%.
It can be seen from this that the stock prices of the two giants Alibaba and Tencent have stopped falling and rebounded, but the best-performing Internet targets in 2023 are neither Alibaba, which splits "1+6+N", nor the number one AI concept stock in China Baidu, but NetEase, which is inconspicuous. What is even more noteworthy is that the 40% increase has enabled NetEase to surpass JD.com and become the fourth company in China's Internet sector by market value.
"Barron's" Chinese version believes that NetEase is the best-performing large Internet company so far this year. "NetEase's investment logic is different from other Internet companies, so its internal business development and external favorable sentiment are somewhat independent."
The opening of the version number, the emergence of AI, and the frequent emergence of hot products have given wings to NetEase's stock price. In the second quarter, NetEase's net income was 24 billion yuan, and its non-GAAP net profit from continuing operations attributable to the company's shareholders was 9 billion yuan, maintaining continued growth, and this solid performance will continue into the third and fourth quarters.
"Nike Shui Han" and "Peak Speed", which will be launched at the end of June, will bring long-term contributions to revenue. So far, the mobile game "Ni Shui Han" has been on the Apple best-selling list for more than 50 days. It has surpassed "Honor of Kings" and "Genshin Impact" and once again topped the App store's best-selling list; After being online for nearly 20 days, it is still ranked first on the free list and fifth on the best-selling list.
In addition, the performance of NetEase's biggest dark horse this year "Egg Boy Party" cannot be ignored. It has ranked second in China's iOS mobile game DAU rankings for 7 consecutive months, showing strong vitality. The list released by Sensor Tower shows that the outstanding performance of new and old products caused NetEase's mobile game revenue to increase by 69% month-on-month in July, returning to the second place in the global mobile game publisher revenue list.
Xiaomo released a research report predicting that since most of NetEase's new games will be launched at the end of June, game revenue in the third and fourth quarters is expected to be 3% and 8% higher than market expectations respectively, while online game revenue growth will be driven by strong new games. Driven by performance, it rose 14% and 23% year-on-year. Affected by the hot trend, many securities firms increased their positions in NetEase. Among them, Jinglin Asset added 531,200 shares of NetEase. At the end of the second quarter, the number of shares held increased to 2.3183 million shares. The total market value of its holdings reached 224 million U.S. dollars, becoming its third Large holdings.
It seems that NetEase will be stable again in 2023.
Why is NetEase “obscure”?
NetEase has always been considered low-key and does not follow the trend. Why has it become the best-performing Internet company since 2023?
Investors’ confidence is naturally given by the product, and the confidence of the product must come from the players. The "demographic dividend" of the game industry has disappeared. As the taste of players in the game industry increases, the past extensive method of exchanging skins and throwing coins no longer works. Users must be given a clear reason to buy.
Therefore, when the same game content cannot arouse the interest of players, disruptive innovation is the only way to break the ineffective involution of the industry. It is not difficult to find that NetEase’s three major hits this year have one thing in common: new technology, innovative gameplay + short video marketing to break the circle.
"Ni Shui Han" mobile game: It is claimed to be the world's first open world game with large-scale AI gameplay. It is based on large models such as "Yu Yan", "Yu Zhi" and "Dan Qing", and intensively applies more than 30 types of AI such as machine learning and engine learning. Technological achievements include the introduction of innovative gameplay methods such as intelligent NPC, AI face pinching, and AI lyrics writing. This type of AI-driven innovative gameplay can, on the one hand, empower game development to improve efficiency, control game character behavior, generate game content, etc., and on the other hand, encourage players to use their imagination to create content that has the power to spread.
"Peak Speed": A team of technical experts has been specially formed. Based on the industry's top technologies such as physical collision, visual rendering, and sound effect pinching, it has carried out a large number of customized developments based on the characteristics of the mobile game, and collected and scanned runway maps on the spot to enhance the sense of immersion. It has greatly lowered the threshold for running 3A console-level racing games on mobile games. At the same time, AI is used to help players perform some operations, such as choosing safer driving routes to avoid collisions. According to incomplete statistics, there are more than 80 Douyin accounts dedicated to producing and live broadcasting short video content related to "Peak Speed".
"Egg Boy Party": Players not only experience and create in the game, but also share their experiences and results in the community and other social platforms, thereby attracting more users to experience and create, with an average of one million users per week A player-made map was born from the game. Recently, "Egg Boy Party" has added AI-generated map components and colors, image-generated pixel block splicing, etc., freeing everyone from repetitive and heavy manual labor and focusing more time and energy on creative expression.
Being able to innovate game play with the help of AI technology at such a fast speed and launch games that apply AI technology on a large scale is bound to require huge long-term investment. The mobile game "Ni Shui Han" officially announced that it has a team of 700 people and spent 1 billion in research and development expenses. In the second quarter, NetEase said that in the past five years, it has invested nearly 60 billion yuan in R&D, with an average R&D investment intensity of 15%. The intensity of R&D investment remains the leader in the Internet industry. This is why NetEase's game business has remained determined to rise instead of falling after breaking up with Blizzard.
Can concept stocks still rely on AI to continue their carnival in the second half of the year?
Across the ocean, Nvidia once again injected chicken blood into AI concept stocks. On August 23, local time, Nvidia released its financial report for the second quarter of fiscal year 2024. During the period, it achieved revenue of US$13.51 billion, a year-on-year increase of 101%, higher than the expected US$11.19 billion; net profit was US$6.19 billion, a year-on-year increase of 843%. Jen-Hsun Huang and Nvidia Chief Financial Officer Colette Kress repeatedly mentioned the word "tremendous" to describe Nvidia's results in this quarter.
According to the "AI Large Model Industry Innovation Value Research Report", China and the United States account for more than 80% of the global total in the field of large model research and development, with China's number of large models second only to the United States.
Therefore, domestic Internet companies must talk about AI and tell good stories and new stories.
But there is a relatively big trend recently: domestic AI competition has moved from comparing parameters and model sizes to the "industrialization" stage. Simply put, when the market judges whether a company has AI attributes, it needs to clearly see whether AI technology can be transformed into applications and even into company profits.
During the second quarter Alibaba earnings conference call, analysts asked when Alibaba's AI products will be profitable? Zhang Yong replied: “As a cloud service provider, we allow artificial intelligence companies and their models to use Alibaba Cloud’s infrastructure, including our basic models, and deploy these basic models on Alibaba Cloud. Not only Alibaba itself uses them. , and also allows enterprises to use our basic model to fine-tune and make applications suitable for their own industries. To me, this is a huge opportunity."
To simply understand, Alibaba’s route is still to face the B-side, providing large models as infrastructure to all walks of life to make profits.
Coincidentally, Tencent, Baidu, JD.com, etc. also have similar practices. Tencent stated in its second quarter financial report that Tencent Cloud's industry large model capabilities were first applied in many SaaS products such as Tencent Qidian, Tencent Conference, and Tencent Cloud AI Code Assistant. In terms of external industrial ecology, Tencent's large industry model has been applied to more than 10 industries such as finance, cultural tourism, media, and government affairs, providing more than 50 industry solutions. Baidu said it is accelerating the reconstruction of its product line and accelerating the application of large AI models in consumer product lines.
Xia Haoyang, fund manager of Guangfa Fund, said: "AI concept stocks have formed a mainline market in both A-shares and US stocks. Both the upstream computing power sector and the downstream application sector have experienced large gains this year. In the sector, large-scale Internet platform types have been developed. Chinese concept stocks such as the company and downstream application-side game companies imply investment opportunities worth looking forward to."
It can be seen that the battlefield for the battle of hundreds of models in the second half of the year must be deep in the industry, and large Internet companies and game companies that are good at dancing must be the main players in the battle. Currently, one of the first areas of industrialization that AI has entered is games. The changes brought about in terms of planning improvement, art efficiency improvement, auxiliary operations, enhanced monitoring, innovative marketing, etc. are already obvious. Perhaps NetEase is playing a more important role in the mobile game "Backwater Cold". Zhongzhi’s exploration strategy is an idea that can be used as a reference for the industry - take the practical and cost-effective route and use the fastest speed to make vertical large models run in the fields they are best at. Judging from the results, the effect of NetEase's AI large model on the production and gameplay sides of the game industry has been verified. Next experiments in music, education, engineering and other fields are already underway. Whether the final success will be reflected in profits can be expected. one time.
AI technology is changing and even subverting the world. In the second half of the year, the protracted battle between the application side and the industrial side of AI will really begin. Perhaps only after the concept ebbs can we know who the real long-termists are.