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Why Futu Fell 26% This Week

What happened

Shares of China's Futu Holdings (NASDAQ: FUTU) are set to close down more than 26% for the week, according to numbers provided by S&P Global Market Intelligence. The dive follows a state-run media suggestion that the online brokerage company may be ill-equipped to comply with new laws requiring better protection of consumers' personal digital data.

So what

Blame China's newspaper and news website People's Daily, mostly. The media outfit suggests that Futu as well as rival Up Fintech Holding may be in violation of data privacy rules laid out in China's Personal Information Protection Law approved in August and scheduled to go into effect beginning next month.

If the names, news, and subsequent plunges from the stock ring familiar, there's a reason. Generally supported by its own media, Chinese regulators have been clamping down on some of the nation's most notable technology companies since last year, including names like Alibaba Group Holding, JD.com, and Tencent Holdings, which is a key backer of Futu Holdings. Baidu, DiDi Global, and several casino stocks have also suffered thanks to new heavy-handed efforts to keep China's strongest industries in check.

Image source: Getty Images.

The goals of China's recent efforts have been to prevent and weaken monopolies as well as protect consumers. Several of its regulatory bodies ranging from its Banking and Insurance Regulatory Commission to the National Press and Publication Administration to the Cyberspace Administration have collectively continued to impose new, highly restrictive rules in the meantime, undermining stock prices for many of China's tech darlings.

Futu Holdings hasn't escaped the impact of investor concern about the future for technology-related players in China. This week's 26% sell-off caps off a 69% pullback from February's high, with worst-case scenario fears being realized; Futu now appears to be in Beijing's crosshairs.

Now what

The argument to step into Futu on this big dip isn't without merit. Shares are now only trading at 25 times this year's projected per-share profits, and a modest 16 times next year's earnings estimates. Plenty of investors have paid more for lesser companies.

Actual fiscal results, however, aren't enough of a factor right now to make a big bet on a bounce.

This week's reporting from People's Daily is a much a message as it is an assessment, and arguably an omen as well. The nation's regulatory bodies continue to crack down on its key technology companies, spooking shareholders as a result. As long as this dark cloud hangs over its market -- and there's no end in sight -- Futu and others likely pose more downside risk than upside reward potential.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Baidu, JD.com, and Tencent Holdings. The Motley Fool has a disclosure policy.


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