Chinese internet valuations reset as old model fades

Chinese internet stocks are trading near or below levels seen years ago, underscoring a prolonged reset in how markets value the sector after the collapse of its traditional pricing model.

Alibaba closed at $95.07 on June 25, 2026, כמעט unchanged from its 2014 debut close of $93.89. Meituan has fallen below its 2018 IPO price to HK$65.45, while PDD is hovering around $79, near mid-2020 levels. Tencent’s valuation has also compressed sharply, with its price-to-earnings ratio dropping to 12, roughly half its decade average.

Sector-wide repricing deepens

Losses are even steeper among younger firms. Bilibili has plunged 89% from its peak, while Kuaishou has lost nearly 90% of its value. Iqiyi, Zhihu, Douyu, and Huya have each fallen between 85% and 98%. The declines reflect a broad repricing across the sector rather than isolated underperformance.

The earlier valuation framework—benchmarking Chinese companies against U.S. peers at a discount—has effectively broken down. Between 2014 and 2017, firms such as Alibaba, Tencent, and Baidu were compared to Amazon, Facebook, Visa, and Google, supporting price-to-earnings multiples of 20 to 40 times.

Regulatory shocks dismantle old model

That structure began to unravel after 2018. The U.S.–China trade conflict raised concerns over corporate structures, followed by Ant Group’s canceled IPO in 2020, which made regulatory risk a central pricing factor. Antitrust penalties in 2021, including Alibaba’s 18.2 billion yuan fine, further eroded growth premiums.

By 2022, U.S. threats to delist Chinese firms added another layer of uncertainty. Even after audit agreements were reached, global funds reduced exposure, leading to further valuation compression driven by liquidity pressures rather than earnings deterioration.

AI hopes fail to sustain rallies

A rally in early 2025, driven by enthusiasm around AI developments such as DeepSeek, briefly lifted Alibaba and Tencent shares by more than 60%. The gains faded within months as new U.S. policy restrictions and tighter listing rules disrupted momentum.

At the same time, Chinese tech firms have been increasing spending on artificial intelligence. Alibaba alone has committed around $55 billion to AI infrastructure, while core businesses like advertising and gaming face slower growth. Markets remain unconvinced that new AI revenue streams will offset pressure on traditional operations.

Similar pressures hit U.S. tech giants

A comparable contraction is unfolding in the United States. Microsoft shares have fallen over 20% in 2026 despite strong fundamentals, including 39% growth in Azure and an AI business generating $37 billion annually. Its valuation multiple has dropped from 34 to 22.

The decline reflects rising capital expenditure rather than weakening demand. Microsoft plans to spend $190 billion this year, contributing to a drop in free cash flow. Across major cloud providers—Amazon, Microsoft, Alphabet, and Meta—combined annual spending is approaching $700 billion, straining near-term profitability.

Shift toward cash flow scrutiny

With growth narratives under pressure, markets are increasingly focused on the relationship between spending and cash generation. Companies are being judged less on future potential and more on how quickly investments translate into returns.

Amazon faces similar scrutiny as it pursues $200 billion in planned capital expenditure while maintaining strong cloud growth. The scale of AI-related investment is forcing traders to demand clearer timelines for returns before assigning higher valuations.

Search for a new valuation anchor

In China, two approaches are emerging as potential frameworks. One centers on measurable AI progress. Alibaba’s Cloud Intelligence unit, for example, has achieved 40% external revenue growth, with AI-related products contributing 30% after sustained rapid expansion.

The other focuses on shareholder returns. Tencent has implemented consistent share buybacks, including daily repurchases often totaling around HK$500 million. These moves provide price support and signal management confidence, though their scale remains limited compared to overall value losses.

Lessons from Japan’s long reset

The current situation echoes Japan’s post-1989 market collapse, when the Nikkei 225 lost 80% of its value over more than a decade as confidence in the “Japan premium” faded. A new valuation framework only emerged decades later, supported by low valuations, strong dividends, and governance reforms.

Warren Buffett’s investments in Japanese trading houses from 2019 onward helped reinforce that model, showing how a clear and simple value proposition can restore market confidence.

Outlook remains uncertain

China’s internet sector appears to be in the early or middle phase of a similar adjustment. The previous valuation system tied to global comparisons has disappeared, and a widely accepted replacement has yet to take hold.

Unlike Japan’s earlier downturn, however, many Chinese tech firms remain highly profitable. Tencent continues to report annual net income exceeding 220 billion yuan, while Alibaba generates strong cash flow from its core operations. This leaves open the possibility of a faster recovery if a credible valuation framework emerges.

For now, the sector remains in transition, with markets waiting for a new narrative—or a defining event—that can justify higher valuations.

To navigate this shifting valuation landscape, explore cross‑market tech dynamics with Toobit’s technical analysis guide.

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