Why Chinese tech stocks were tumbling again today

An analyst's downgrades and geopolitical events have accelerated the sell-off.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

What happened

After Chinese tech stocks plunged sharply last week, the rout continued on Monday with several notable names falling by double-digit percentages -- among them, JD.com (NASDAQ: JD), Hello Group (NASDAQ: MOMO), Baozun (NASDAQ: BZUN), iQIYI (NASDAQ: IQ), and Zhihu (NYSE: ZH).

Once again, several different news items contributed to the negativity powering the sell-off.

First, news outlets reported over the weekend that Russia had asked China for military assistance in its invasion of Ukraine, and economic aid to combat the harsh sanctions Western countries have imposed in response to it. It's unclear what China will do, but if that nation provides material aid to Russia, it could lead the U.S., European nations, and other countries to impose sanctions on China, which would further squeeze its economy at a vulnerable time.

Additionally, China is shutting down the tech manufacturing hub of Shenzhen for at least a week to combat a COVID-19 outbreak. That may not hurt the stocks above directly, but it adds to the supply chain and geopolitical concerns that may drive some manufacturing away from China. If that becomes a trend, it would weigh on the Chinese economy.

Finally, Tencent, owner of the super app WeChat and one of China's biggest tech companies, looks to be facing a large fine for violations of China's anti-money-laundering rules, showing Beijing's regulatory crackdown isn't over. Last week, Chinese tech stocks as a group also fell after the Securities and Exchange Commission said it would delist five Chinese companies from U.S. stock markets by the end of the month if they didn't cooperate with U.S. auditing disclosure rules.

On Monday, as of 11:50 a.m. ET, JD.com was down by 8.2%; Hello Group was off 17.7%; Baozun had fallen 12.5%; iQIYI had lost 20.5%, Zhihu was down 28.6%, and the KraneShares CSI China Internet ETF (NYSEMKT: KWEB), which holds a basket of Chinese tech stocks, was down by 8.6%.

So what

In addition to the macro news, JPMorgan Chase downgraded several Chinese tech stocks Monday morning. Analyst Andre Chang double-downgraded JD.com, China's largest direct retailer, from overweight to underweight, and slashed his price target from $100 to $35. The move was largely in response to valuations falling in the sector, but he pointed to possible headwinds from a tougher macroeconomic environment. JD.com reported solid fourth-quarter numbers last week, but the stock still fell as its revenue growth was the slowest it had been in six quarters, and as investors reacted to the news about the delisting threat to Chinese companies. 

Zhihu, which operates an online question-and-answer platform similar to Quora, reported Q4 earnings Monday morning. It was another quarter of strong growth, with revenue jumping 96% to $160 million.  On the bottom line, the company narrowed its adjusted loss from $0.30 per share to $0.10 per share. However, that came up short of estimates -- analysts had been expecting a loss of $0.08 per share. Despite the strong growth, JPMorgan double-downgraded Zhihu in the same way it did JD.com, and gave it a price target of $1.80.

JPMorgan also hit Baozun with a double-downgrade and cut its price target to $5. Those moves came after the e-commerce services provider reported declining revenue and a smaller profit in its fourth-quarter report last week. 

Finally, iQIYI, the Chinese video streaming company sometimes compared to Netflix, was double-downgraded by JPMorgan, which lowered its price target from $8 to $2 based on market sentiment reasons.

Hello Group, which owns the online dating sites Momo and Tantan, only got a one-level chop from JPMorgan. The investment bank lowered its rating on Hello from overweight to neutral with a price target of $7, citing low business visibility for its leading brands.

Now what

There's no telling if or when the bloodbath in Chinese tech stocks will end; there are several reasons why investors are fleeing the sector, and any of them could persist. If there is a comeback, I'd expect it to be led by stocks like JD.com, a large, established growth company that has thus far avoided drawing the ire of the Chinese government.

But with even stocks like JD.com getting hammered over the last few days, investors are probably best off waiting for things to settle down in China's tech sector before putting money into it. There's a good chance things will get worse before they get better. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Jeremy Bowman owns JD.com and Netflix. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and recommends Baozun, JD.com, Netflix, and Tencent Holdings. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Hello Group and iQiyi. The Motley Fool Australia has recommended JD.com and Netflix. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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