Tencent Holdings Ltd Stock Eventually Gets Clobbered by Trade War Talk

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Tencent stock - Tencent Holdings Ltd Stock Eventually Gets Clobbered by Trade War Talk

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Fears of a trade war between the U.S. and China are overshadowing what should be another great quarter from Tencent Holdings Ltd. (OTCMKTS:TCEHY). Tencent stocks are nowhere near where they could be.

Tencent, which came out of the instant messaging and video game industries to become the largest Chinese tech company by market cap (yes, Virginia, even bigger than Alibaba Group Holding Ltd. (NASDAQ:BABA), is expected to earn 28 cents per share on revenues of $11 billion when it reports overnight on March 28.

That should be decent news, and in line with the September quarter. Tencent is gradually moving from being an online company into an offline giant, and its ability to retain fat profit margins, with nearly one-third of revenue hitting the net income line, is key to its market gap growth.

But that’s not what is going to drive Tencent stock.

Go, Go Xi and Tencent Stock

Tencent may be best known in the U.S. for WeChat, a sophisticated chat service that combines elements of Twitter Inc. (NASDAQ:TWTR), Facebook Inc. (NASDAQ:FB) and Paypal Holdings Inc. (NASDAQ:PYPL).

Unlike U.S. tech services, WeChat doubles as a digital cash service, WeChat Pay, in China. Such fintech services are geared toward a growing middle class, larger than the population of the U.S., which has minimal banking infrastructure with which to compete.

Fintech makes Tencent stock wildly profitable. Its value grew 115% in 2017 and is up another 15% so far in 2018. CEO Ma Huateng, known as Pony Ma, founded the company around an instant messaging technology called ICQ in 1998, then part of America Online, then expanded into games, e-commerce, and WeChat itself in 2009. (Full disclosure. I’m a WeChat user.)

While Alibaba’s executive chairman Jack Ma comes across as almost prototypically American, spouting aphorisms like Warren Buffett and enjoying movies like Forrest Gump, Pony Ma is 100% Chinese, supporting Xi Jinping’s censorship regime.

When the regime says jump, Pony Ma simply asks how high. WeChat has even been enlisted in the continuing absorption of Hong Kong and Tencent itself has become a major producer, and exporter, of Chinese entertainment that sells Chinese values.

For that reason, while Tencent stock bulls continue to pound the table for the company’s epic online growth, the stock remains below its January 26 high going into earnings.

Fear Over a Trade War

Much of Trump’s trade war rhetoric is aimed squarely at Chinese technology. The state has a closed internal market but competes fiercely in more open markets, with Tencent often leading the way. Its latest investments go well beyond Internet chat and are aimed directly at U.S. giants like Amazon.Com Inc. (NASDAQ:AMZN) in areas like artificial intelligence and robotics.

The Administration’s moves to restrict Chinese investment in the U.S. could easily be matched by Chinese action against investment in China. Both moves would hit Tencent hard. Add tariffs against Chinese hardware exports and you have a perfect storm for Xi’s technology proxy, Pony Ma, to try and navigate.

The Bottom Line on Tencent Stock

If Tencent stock can beat earnings estimates handily it will ease pressure on the stock in the short term. But in the longer term Tencent is bound to be hurt by a trade war. As much as the Chinese media may warn about American impacts, those on China will be just as great, and Tencent will suffer them along with everyone else.

To me this makes Tencent a poorer bet than Alibaba (although both will suffer as rhetoric escalates). Pony Ma’s identification with the regime has put a target on his back and on Tencent stock.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and BABA.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2018/03/tencent-stock-trade-war/.

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