The valuation collapse of "Old-Guard Stocks" and the death of the valuation coordinate system for a generation of assets

Original Author: Xiaobing

On September 19, 2014, Alibaba was listed on the New York Stock Exchange, closing at $93.89 on its first day. That day, Alibaba's market cap was $231 billion, surpassing the combined value of Oracle and Intel.

On June 25, 2026, Alibaba's closing price was $95.07.

Between these two numbers lies a gap of twelve years.

At the same time, Meituan closed at HK$65.45, falling below its 2018 IPO price of HK$69.

Pinduoduo was hovering around $79, back to its level from June 2020.

Tencent's P/E ratio compressed to 12 times, nearly halved from its ten-year historical average of 25.7 times.

As for the younger Chinese internet companies, Bilibili fell from a high of $156 to $18, a decline of 89%; Kuaishou dropped from its IPO first-day high of HK$417 to HK$44, losing nearly 90% of its market value; iQiyi, Zhihu, DouYu, Huya — each suffered declines between 85% and 98%.

An entire generation of Chinese internet assets is undergoing a collective valuation reset. What framework is the market using to price these companies? Or has the framework itself died?

Setting and Uprooting the Anchor

Looking back, the valuation logic for Chinese internet companies has undergone a remarkably clear "anchor-setting and anchor-uprooting" process.

From 2014 to 2017, the core narrative for Chinese internet companies in global capital markets was "a discount to their US counterparts."

Alibaba was China's Amazon, Tencent was China's Facebook plus China's Visa, and Baidu was China's Google.

This methodology was simple and powerful: first, find the valuation multiple of the US counterpart, then apply a growth premium for the Chinese market and a governance discount to arrive at a fair price. Within this framework, Chinese internet companies generally enjoyed P/E ratios of 20 to 40 times.

Foreign capital flowed in, and Chinese stocks were a must-have allocation. This was the first anchor.

In 2018, the US-China trade war began. Global capital was forced, for the first time, to consider a question it had deliberately avoided: If US-China relations shift from cooperation to competition, are the legal structures of companies operating in China but listed in the US still reliable? The VIE structure had never received explicit legal recognition in China, but no one cared during a bull market. The trade war exposed this hidden vulnerability to sunlight for the first time. The valuation anchor loosened for the first time, but it wasn't yet uprooted.

In October 2020, Ant Group's IPO was suspended, turning the international capital market's pricing of "Chinese regulatory risk" from a vague discount factor into an explicit core variable. The 2021 antitrust storm pushed this logic to its extreme. Alibaba was fined 18.2 billion yuan, Didi was investigated the day after its IPO, and the education and training industry was wiped out overnight. Chinese stocks went from "growth premium" to "regulatory discount."

In 2022, the fear of Chinese stock delisting reached its peak.

The SEC placed over a hundred Chinese companies, including Alibaba, Baidu, and JD.com, on a "provisional delisting list." Although the US and China eventually reached a compromise on audit inspections, the damage was done. Global index funds began systematically reducing their weightings of Chinese stocks, and some institutional investors liquidated their positions entirely due to compliance requirements. This structural withdrawal of capital compressed valuations from an emotion-driven phenomenon to a capital-flow-driven one.

In early 2025, the emergence of DeepSeek briefly sparked a wave of hope. Deutsche Bank called it China's "Sputnik moment," predicting the discount on Chinese assets would disappear.

The stock prices of Alibaba and Tencent rebounded over 60% in the first two months of 2025. But this AI narrative-driven revaluation fizzled out in less than six months. Entering 2026, the Pentagon added Alibaba and Tencent to a "Chinese military-linked companies" list, Anthropic publicly accused a Chinese company of launching a large-scale distillation attack on its Claude model, and Nasdaq introduced new listing rules targeting Chinese stocks, tightening liquidity thresholds. Every attempt to rebuild a valuation anchor was swiftly destroyed by new geopolitical shocks.

At this point, the "US counterpart discount" valuation methodology has completely failed. The market no longer prices these companies based on their business models, growth rates, or profitability.

But the story isn't that simple.

The "Grandpa Stocks" on Both Sides of the Pacific

Turning our gaze from Chinese stocks on the NYSE to the US tech giants trading in the same building reveals: It's not just Chinese internet companies being abandoned by the market.

Microsoft was the worst-performing stock among the "Magnificent Seven" in 2026, down over 20% for the year, falling from its late 2025 high near $490 to around $360. Its P/E ratio compressed from a five-year median of 34 times to 22 times, its lowest level in three years.

The company's fundamentals are intact: Azure cloud revenue grew 39% year-over-year, AI business annualized revenue surpassed $37 billion, and quarterly net profit hit a record high of $31.8 billion.

The market doesn't care about these numbers; it cares about another: $190 billion – Microsoft's total capital expenditure budget for 2026, almost entirely poured into AI infrastructure. Its quarterly capital expenditure exceeded the total for a full year five years ago. Free cash flow dropped from $20.3 billion to $15.8 billion, the gap between profit and cash widening.

Microsoft's predicament is not unique.

All of the Magnificent Seven underperformed the S&P 500 in 2026. The combined capital expenditure of the four major hyperscale cloud providers (Amazon, Microsoft, Alphabet, Meta) this year is close to $700 billion. The GPU clusters and data centers purchased with this money will only generate revenue over the next 3 to 5 years through depreciation. Investment is front-loaded, returns are back-loaded, and free cash flow gets crushed in the middle.

The deeper issue is: These companies are using massive amounts of capital to chase a technological paradigm that could potentially disrupt their own business models.

Microsoft's core revenue comes from Office subscriptions and Windows licenses, a per-user fee SaaS model nearing its growth ceiling. The business logic of the AI era is consumption-based billing – pay for the tokens you use.

CEO Satya Nadella has publicly acknowledged that every per-user fee business at Microsoft will transition to a hybrid "user + usage" model. GitHub Copilot switched to a fully consumption-based pricing model in June 2026. But the market's concern is precisely this: the profit margins of the old model are extremely high; can the new model maintain the same level? No one knows.

Viewed from a distance, this picture forms a structural mirror image of the predicament faced by Alibaba and Tencent.

Alibaba's core e-commerce business is a highly profitable advertising machine, as stable as Microsoft's Office, yet the market gives it an increasingly lower valuation multiple. Tencent's WeChat ecosystem remains the strongest moat in China's internet, but slowing game revenue and advertising business erosion by short video platforms echo Microsoft's predicament of being squeezed by Alphabet in search advertising.

Both aging giants are pouring money into AI to save themselves. Alibaba is spending $55 billion on AI infrastructure; Microsoft is spending $190 billion. But in both markets, investors are voting "no confidence" on whether "this money can be recouped."

Professionals in China's internet industry tend to blame their companies' declines on regulatory crackdowns and geopolitics. Their US counterparts tend to blame Microsoft's decline on "spending too aggressively." Peel back the surface narratives, and the same thing is happening at the core: AI-native companies are redefining the entire value chain of the tech industry, and the previous generation of platform giants, regardless of nationality, are transitioning from "companies defining the future" to "companies needing to prove they won't be eliminated by the future."

On the Chinese internet, this type of stock has earned a precise nickname – "Grandpa Stocks."

Nikkei: A Cautionary Tale of a Dying Valuation System

This phenomenon of the "valuation coordinate system itself being replaced" has occurred before in the history of global capital markets. The closest comparison is Japan after 1989.

On December 29, 1989, the Nikkei 225 index closed at 38,915 points, its all-time high.

That year, eight of the ten largest companies globally by market cap were Japanese. NTT's stock price surged to 3 million yen per share just two months after its 1987 IPO, making the company's market cap larger than the combined value of the top eight US companies at the time. Land prices in Tokyo were 350 times those in Manhattan. Sony acquired Columbia Pictures, and Mitsubishi bought Rockefeller Center.

Japanese investors in that era, much like Chinese internet professionals in 2020, genuinely believed their system would dominate the future of the global economy.

The trigger for the bubble's burst was the Bank of Japan's interest rate hike. But the magnitude of the decline was only the most superficial feature of the crisis; the duration and nature of the decline were truly suffocating.

The Nikkei lost half its value in the first half of 1990, halving to 14,000 points by 1992. If it had stopped there, it would have been just another ordinary bubble burst and valuation correction. But the Nikkei didn't stop. It continued to slide for another decade, hitting 7,600 points in 2003, an 80% drawdown from its peak.

The core reason for this decade-long decline wasn't the collapse of Japanese corporate competitiveness. Toyota was still the world's best automaker, and Sony was still creating groundbreaking consumer electronics. The problem was deeper: Global capital no longer believed in the "Japan premium."

Before 1989, the market's valuation framework for Japanese companies was "the world's most efficient manufacturing civilization + a perpetually growing domestic market + unique corporate governance advantages."

After the bubble burst, these three assumptions were disproven one by one. Manufacturing advantages were caught up by Korea and China, the domestic market fell into deflation and population aging, and corporate governance proved to be a shelter for inefficiency. The old valuation framework died, but a new one was slow to emerge.

In 1989, 32 of the world's top 50 companies by market cap were Japanese. By 2018, only Toyota remained.

How long did this vacuum period last? About 25 years. The Nikkei didn't begin a true trend recovery until 2012, and it wasn't until February 2024 that it reclaimed the 38,915 level. And the catalyst for this revaluation wasn't a full renaissance of the Japanese economy.

A specific person used a new language to redefine "why you should buy Japanese assets."

In the summer of 2019, Warren Buffett began buying shares in Japan's five major trading companies. The logic of this investment was completely different from how the market had viewed Japan for the past three decades. Buffett didn't talk about GDP growth rates, demographic trends, or technological innovation. His reasoning was incredibly simple: these five companies had low valuations, high dividends, stable cash flows, and were pursuing genuine corporate governance reforms. He used yen-denominated bond issuance to hedge currency risk and lent his own reputation as a backstop for Japanese assets. By 2025, Berkshire Hathaway's stake in the five major trading companies approached 10%.

Buffett provided a new valuation language for Japanese assets. The old language was "Japan will dominate the global economy." The new language was "low valuation + high dividends + corporate governance reform."

Where is the "New Language" for China's Internet?

Placing Japan's timeline alongside the experience of China's internet, several structural similarities cannot be ignored.

The old valuation framework is dead. The failure of the "US counterpart discount" model mirrors the collapse of the "Japan will dominate the world" narrative. In both cases, corporate fundamentals haven't completely deteriorated; what was negated were the macro-assumptions supporting the valuation premium. The macro-assumption for China's internet was "the deep integration of the Chinese market with global capital markets will continue." For Japan, it was "the Japanese model represents the most efficient form of capitalism." Both assumptions have been proven false.

A new valuation framework has not yet been established. The current market pricing of Chinese internet assets is essentially applying discounts on the ruins of the old framework. Just like Japan in 1995, the market knows the old prices were wrong but doesn't know what the new prices should be.

Based on Japan's experience, this vacuum period could last much longer than most people anticipate. It took about 25 years for Japan to move from the bubble burst to the market accepting a new valuation framework. The systematic disintegration of China's internet valuation system began around 2020, making it only six years. If Japan's time scale offers any reference, the current position might just be the early stage of the revaluation process.

However, there are key differences between China and Japan. Japan's asset revaluation occurred alongside prolonged deflation and population decline, and corporate profitability did deteriorate significantly after the bubble burst. China's leading internet companies are still profitable. Tencent's annual net profit exceeds 220 billion RMB, and Alibaba's core e-commerce cash flow remains healthy. This means that if a new valuation language can be constructed, the speed of revaluation could be faster than Japan's.

What could become the "new valuation language" for China's internet?

AI is the most obvious candidate, but also the most contradictory.

For the past two decades, the underlying business models of global internet companies have been highly convergent: capture user attention, aggregate traffic on platforms, and monetize through advertising, e-commerce commissions, or in-game purchases.

AI is shaking the foundation of this business model.

When AI agents can compare prices, place orders, and plan itineraries for users, users no longer need to open Taobao and scroll page by page. When AI can directly recommend or even generate content based on preferences, the time users spend "browsing" on a specific platform may decrease. As attention shifts from human eyes to the interface of AI agents, the gateway for traffic changes, and the platform's strategic position as an intermediary is hollowed out. This poses a threat to nearly every core internet sector: e-commerce, search, social media, content, and gaming.

If any Chinese internet company can successfully transition from being an "attention platform" to an "AI infrastructure and service provider," it could acquire a new valuation language.

The brutal aspect of this path is that proactive disruption means dismantling your most profitable legacy businesses.

Taobao's advertising revenue is built on merchants' bidding for rankings. If AI agents bypass the rankings to help users select products directly, this revenue stream will shrink. Each step of the transition erodes existing profits, while the profitability of the new model remains unproven.

If you chase AI, you must bear the crushing weight of massive capital expenditure on free cash flow. Microsoft's P/E dropping from 34 to 22 times is the outcome of this story. If you don't chase AI, the market will judge you as outdated and obsolete.

Microsoft is betting $190 billion on a rewrite of its revenue architecture. Win, and it becomes the infrastructure of the new era. Lose, and it becomes the biggest capital misallocation in history.

Shareholder returns are the second candidate. Both