Goldman Sachs just did a U-turn on this $10T opportunity

Goldman Sachs has taken a renewed bullish stance on internet services in China and the opportunities that are available for investors, after six years of showing little interest in the sector.

"For the first time since 2010, we have a high degree of confidence in the long term growth and potential (operating) profit pool for China internet," a team of analysts, led by Piyush Mubayi, said in a research note released on Tuesday.

The bank said the "total addressable market" could involve revenues of approximately $10 trillion by the end of 2020 and an "immense online profit opportunity" of around $70 billion in the same time period if the industry is "run solely to maximize profitability." Sectors include gaming, online advertising, e-commerce, cloud computing and internet finance.

The big names in the report are hardly surprising, with the investment bank singling out major players such as Tencent, Baidu, and Alibaba. Tencent is an internet service provider headquartered in Shenzhen and is the "dominant gaming platform in China," according to the bank. It also has a "powerful social network" asset in Weixin.

The stock has popped 636 percent in the last five years but the analysts suggest another 24 percent upside for the next twelve months with a "conviction buy" rating. Alibaba is expected to rally 30 percent in the next year via its dominant position in Chinese e-commerce. Meanwhile, Baidu is described as the "default search engine" in the country with a 38 percent fillip to its share price expected in the next year.

Other notable firms it includes are Ctrip, JD.com, NetEase and VIPShop.

China has a population of over 1.3 billion and a government paper last year said it had 649 million internet users by the end of 2014 (with 557 million of those using handsets), according to Reuters. This is double the amount of people living in the United States.

The demographics look good but China has been at the epicenter of many market tremors in the last year as slowing growth in the country - and how the central bank deals with that - has spread ripples across the globe. Stock markets in Shanghai have seen steep one-day falls and have dragged down the major U.S. benchmarks.

This may offer some caution for investors reading Goldman Sachs' research, but over the longer term many economists remain bullish on the world's second-largest economy. Certain American firms looking to muscle in on the Chinese market could however cause some disruption.

U-Turn
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Apple CEO Tim Cook arrived in China this week for a charm offensive and Facebook's Mark Zuckerberg often meets Chinese officials, previously showing off his Mandarin skills on visits to the Chinese capital.

"We believe the strength of Facebook's respective business models might be moderately disruptive and the landscape would change to some degree if the Great Firewall of China is lowered," Goldman Sachs said in the note.

"We believe a risk to the Chinese incumbents would be any potential entry of Facebook into China, even in a highly regulated fashion, given the large number of students abroad, the

Chinese diaspora worldwide, and their respective local-global social networks," it added.