Is Tencent (TCEHY) the canary in the coalmine? That thought keeps crossing my mind as I watch the stock get hammered in trading on the Hong Kong exchange, site of its main listing. Tencent's earnings miss combined with Chinese regulators' as-of-yet-unexplained decision to ban sales of popular game Monster Hunter: World, have sent the shares well beyond bear market territory. All told, Tencent shares have lost $175 billion in value since January.
As faithful readers of my columns will know, I am traveling on business in Asia this summer and I use Tencent's WeChat to keep in touch with Asian connections. It is not my favorite app, in fact I find it clunky to use and re-installing it after I lost my old phone meant I had to setup a new account, which was time consuming and frustrating.
Hassles aside, I still use WeChat for the simple reason that everyone else in China does. If they are not using Weixin, the native WeChat app on the mainland, they are using QQ, also owned by Tencent. According to this week's Tencent earnings release, monthly average users (MAUs) of WeChat/Weixin totaled a mere 1.058 billion in the second quarter while QQ had 803 million MAUs. Obviously there is much overlap between those two figures, but that is just an extraordinary number of eyeballs looking at Tencent products every day.
So, there's value in the communications portal, as I mentioned in a prior RM column on Japan-based LINE Corp. (LN) . I think LINE does a better job monetizing its core chat app, but Tencent is not far behind. Weixin Pay, Tencent's competition to Alibaba's (BABA) Alipay, showed strong growth in the second quarter, and Tencent is figuring out how to monetize its basic chat app through sponsored Moments (which are like Facebook FB posts) and other such indirect means.
How does that add up to a plunging stock? Brokers have positioned Tencent as a play on games and music. So any kind of disruption to the games business is a huge negative.
Also, Tencent's operating profit was flat for the quarter on 30% revenue growth and that margin compression caused Tencent's EPS to fall below analysts' estimates. Tencent is spending more to acquire content and with 154 million subscribers to its devices business, the company posted 30% subscriber growth year-on-year on the second quarter.
For those who say that Tencent's growth is costing too much I have one word: Bezos! For how many quarters did the Street pound Amazon (AMZN) on margins before analysts finally realized that top-line growth (representing share of customer wallet) is key?
For those who say Tencent is spending too much on content I have another word: Hastings! For how many quarters did analysts look at the huge liability for future content costs on Netflix's (NFLX) balance sheet and pound Netflix for spending too much? Again, the naysayers were wrong in assuming that grabbing consumers is not worth spending heavily on the content that holds consumers.
Fortunately for my clients and me, I do not currently own Tencent stock. I missed Tencent's mad run-up in 2016 and 2017, but if the market wants to bring it back to levels that a value investor like me could handle, I will happily oblige. Do not get me wrong, I don't doubt routs, and even if I believe the market is focusing too closely on perceived weakness in Tencent's games business while ignoring subscriber acquisitions, I believe Tencent shares are radioactive here.
Every asset has its price, though, and another 20% decline, putting Tencent shares in the range of 260-270 HKD would put them squarely in my buying range.