Shares of Chinese tech giant tencent in venture/ADR (OTCMKTS:TCEHY) had abandoned all their conquests, 2018 (or more) for the last month.
In the mid – to late March, TCEHY stock is trading around $ 60 and increased by 15% per year. Then the company reported fourth quarter numbers at the end of March, which clearly shows continuous growth in the top line, but also point to a further deterioration of the fields.
Subsequently, the management noted on the call that the company will focus on investments in long-term growth, and will do so for the sake of short-term profit.
Then, for a long time TCEHY shareholder, the South African media giant naspers in society (ADR) (OTCMKTS:NPSNY), sold $10.6 billion, tencent shares and reduced its share from 33.2% to 31.2%.
Only a few days later came the news that the President of tencent, Martin Lau sold tencent shares in the $ 55 million and has reduced its share from 0.49% to 0.48%.
TCEHY stock fell. Big time. Now it varies about$ 50, more than 15% from previous highs.
But this recent weakness an opportunity to buy the red-hot Chinese Internet giant at a discount? I think so.
Short-Term Concerns Are Overblown
The noise of presses on TCEHY stock is noise. This will affect the short-term picture and drag to sentiment. But none of these constraints will affect long-term growth story, which remains quite promising.
Short-term margin compression? This is necessary to fuel long-term revenue and profit growth. Cm Amazon.com Ink. (Nasdaq:weekly news) and Netflix, Inc. (NASDAQ:NYSE: NFLX).
In order to dominate a market (or multiple markets), you need to invest a lot, work on small margins, and win quickly for customers, and then, after you dominated the market, reduce costs and increase margins.
In other words, the margin will be suppressed here and now. But not forever. And when they rise up, they will slide back on much more of the revenue base that implies a huge increase in profits.
Insider selling? This is a natural reaction after TCEHY shares rose over the past year for the past three years, more than 70% and 150%. You can’t really blame the first investors to lock in profits.
In addition, there is not much profit. Naspers will not reduce its share by 2%, but it still has a 31% stake in tencent, and do not plan to sell any more for at least the next three years. Meanwhile, Lau declines to take a measly 0.01%.
Long-Term Growth Story Remains Promising
If you brush these issues aside, there really isn’t much not to like in the story of the growth of tencent.
Is Facebook, Inc. (Nasdaq:FB) of China, but with a lot more than just the country’s largest social media platforms. The company is owned by tencent Weixin and wechat already has over 1 billion monthly active users, and tencent owns QQ has 783 million active users.
Tencent also for ctrip, a leading video streaming platform (think YouTube), the leading streaming music platform (think Spotify technology SA (Ticker NYSE:place)), a leading mobile payment services (think PayPal holdings Inc (Nasdaq:PYPL)) and the leading gaming platform. In addition, tencent also has a growing cloud business and ay.
Because of this broader impact on the Chinese consumer, joint-stock company tencent is really simple to play on the continuing economic boom in China of consumerism. Given the expenditure per capita in China is 15% as big as the spending per capita in the United States, the most likely way forward for China’s consumerism up and out.
If so, TCEHY shares roar higher.
The bottom line on TCEHY stock
The recent fall TCEHY stock is understandable. You have a stock that ran in the last few quarters. The latest quarterly figures were good, but not perfect. Insiders sold a few, and the stock took a step back.
But now, it seems, the worst thing to step back over. Lower margins are already priced in and the focus has shifted away from insider selling.
Over the next few quarters, continued strong revenue growth will steal the show from the deterioration of the margin and TCEHY stock will rise considerably.
At the time of this writing, Luke Lango was a long TCEHY, the events of the week, nflx, FB and PYPL.