This ETF Is Worth The Price Of Admission

A common concern with Internet stocks, one that dates back to the technology boom of the 1990s, is that these stocks frequently trade at multiples that are often hard to justify. That hasn't changed as Internet stocks remain one of the most richly valued corners of the U.S. equity market.

Chinese Internet stocks, as measured by the KraneShares CSI China Internet ETF KWEB, aren't particularly cheap, either. However, some data points suggest many KWEB constituents merit their lofty multiples. Since coming to market about three and a half year's ago, KWEB has performed inline with the comparable U.S. Internet ETF, while topping the NASDAQ-100 Index by more than 300 basis points.

KWEB has developed a cult following in its three years of trading; China has more Internet users than the US has population. Additionally, KWEB and rival ETFs are known for being home to companies that are considered to be the Amazons, Facebooks and Googles of China. There are potential catalysts for KWEB and its holdings that may not be fully appreciated at the moment.

In a recent interview with KraneShares, Michael Krause of the ETF Research Center explores KWEB's valuations.

“While KWEB’s forward price-to-earnings (P/E) may look high at 38x, P/E doesn’t always tell the full story. KWEB’s long term earnings per share (EPS) growth rate estimate is 36%,” said Krause. “Like all the metrics we calculate, we look at the consensus estimates from analysts covering the stocks held by exchange traded funds. These analysts provide estimates on what they believe a company’s earnings per share (EPS), revenue, dividends and other financial metrics will be. Long-term EPS growth is simply the aggregate of Wall Street analysts’ estimates for each of KWEB’s holdings.”

Even with a price-to-earnings ratio of 38, KWEB trades at a slight discount to the comparable U.S. Internet ETF, a fund that devotes over 20 percent of its combined weight to Amazon.com, Inc. AMZN and Facebook Inc FB.

Fundamental data support KWEB's multiple. For example, China has 22 percent of the world's Internet users, according to KraneShares data. That is more than double the amount found in the US and at the end of last year, China's ecommerce market was worth $590 billion, making the $324 billion U.S. ecommerce market seem paltry by comparison.

“Not surprisingly, in the U.S. internet sector the long term growth forecasts are not as high as in the China internet sector. For example, we calculate the long term earnings growth for firms in the Down Jones Internet Index, which tracks the performance of U.S. internet firms such as Amazon.com and Facebook, to be about 16%, which is less than half of that for the Chinese firms in KWEB,” adds Krause.