Investors flocked away from Tencent [stock symbol=”TCEHY”] on the heels of an earnings report that showed strong revenue growth but also margin pressure mainly to aggressive capital expenditures. It didn’t help that Naspers unloaded 190 million shares — almost 2% of shares issued. That takes Nasper’s stake from 33.2% to 31.2% with no plans to sell for at least three years. This during saber rattling between Washington and Beijing that sent the market reeling in preparation for a prolonged trade conflict.
Let’s face it, this is just the beginning of the volatility not the end — but Tencent is a fantastic “red chip” play on Chinese innovation. It’s a Chinese tech giant with a huge army of engaged users and only one main Chinese competitor — Alibaba. Both should make it through this rocky period poised for steady growth as the Chinese economy inevitably rises.
Plus, don’t read too much into Nasper’s profit taking. Nasper’s CEO Van Dijk explained that the release of shares had nothing to do with bearishness on Tencent:
“We are true believers in the ability of Tencent. It has served us and our shareholders very well, and continues to do so. We also saw the opportunity to grow more in other segments and wanted to free up some capital for that. We are bullish about Tencent, but also bullish to grow our other businesses to scale,” he said.
Tencent is a compelling buy and hold at 25% off it’s 2018 high of $60.96.
Target price: $49.
At the time of this writing, I am long Tencent and preparing to accumulate additional shares.