It hasn’t been a great few months for Chinese internet giant Tencent (OTCMKTS:TCEHY). Tencent stock has dropped nearly 40% off its high in 2018, but it fits in with a bigger, long-term thesis out there.

It goes something like this: China tech stocks have broadly dropped to relatively anemic valuation levels, but growth rates across the board remain robust and China’s economy, while slowing, is still growing at an impressive 6% rate. Thus, once near-term trade war headwinds pass, this group of stocks should rebound strongly.

Tencent still has robust exposure to all things internet in China, and is still growing revenues at a 20% clip. Thus, the recent dip will ultimately turn into a long term buying opportunity.

But not yet. Trade war headwinds are here to stay. Until those clear up, this whole sector will remain depressed. Meanwhile, Tencent is suffering from revenue slowdown and margin compression problems, the sum of which are hampering profit growth. Until profit growth re-accelerates higher, Tencent stock will have trouble bouncing back.

All in all, near term weakness is here to stay for Tencent stock, making this stock a tough “buy the dip” candidate at the current moment.

Tencent’s Long Term Growth Drivers

In the big picture, there’s a lot to like about Tencent.

When it comes to China tech stocks, everyone is always talking about Alibaba (NYSE:BABA). But, the true core of the digital revolution in China is Tencent. Why? Because, for all intents and purposes, Tencent is everything internet in China.

Tencent is the Facebook (NASDAQ:FB) of China, with social platforms Weixin/WeChat (more than 1 billion active users), QQ (nearly 700 million smart device users), and Qzone (over 500 million smart device users).

Tencent is also the Take Two (NASDAQ:TTWO) or Activision (NASDAQ:ATVI) of China, and is actually the leading game company in the world.

Beyond that, this company is also behind China’s biggest digital video platform (think Netflix (NASDAQ:NFLX)), music platform (think Spotify (NASDAQ:SPOT)), and payments platform (think PayPal (NASDAQ:PYPL)). Tencent also has its finger in the cloud, so think Microsoft (NASDAQ:MSFT).

Overall, from social media to streaming to e-payments, Tencent is China’s internet. That is a favorable position to be.

The internet economy in the United States is still growing rapidly, with everything from digital advertising to streaming subscriptions to digital payments rising at a 20%-plus rate. Over in China, the internet economy is also growing rapidly, but has a lot longer runway due to lower country-wide urbanization and digitization rates.

As such, the long-term growth narrative supporting Tencent stock is quite robust. As China’s internet economy grows by leaps and bounds over the next several years, Tencent will be the centerpiece of that growth, and as such, Tencent stock will rise.

Hope for the Best, Plan for the Worst

In the big picture, Tencent stock looks great. But, if you zoom in and analyze the next several months alone, the outlook becomes much less rosy.

First off, trade war headwinds have been the Achilles heel of China tech stocks for several months. These headwinds, while on pause, aren’t going to disappear over night.

Considering relations between the U.S. and China have grown increasingly strained, the market won’t become constructive on trade war headwinds easing until they actually ease. As such, until something materially positive happens on the trade war front (which could take several months), China tech stocks won’t bounce back.

Meanwhile, Tencent has its own problems. Namely, revenue growth is slowing and margins are compressing.

Margins at Tencent have been compressing for a while now because the company continues to expand into new businesses, which requires additional investment.

For example, in early 2015, Tencent was operating at 60%-plus gross margins and 40%-plus operating margins. Today, Tencent operates at 47% gross margins and 30% operating margins. Worse yet, both of those metrics are still falling.

But, Tencent has been able to shrug off that margin compression because revenue growth was robust enough to offset margin compression and power still healthy profit growth.

That is no longer the case today. Due to slowing economic expansion in China and elevated competition, Tencent’s growth has meaningfully decelerated over the past several quarters. A year ago, revenue growth was in excess of 60%. Last quarter, revenue growth was barley over 20%. Meanwhile, because margins have been weak, profit growth has gone from nearly 70% to just 30%.

The positive read here is that operating margins were stable year-over-year last quarter. That is a positive improvement from margin erosion that has persisted for the past several quarters. But, until those margins start expanding and/or revenue growth re-accelerates and/or trade headwinds clear, Tencent stock will remain depressed for the foreseeable future.

Bottom Line on TCEHY Stock

Tencent stock is a long term winner with a plethora of near term headwinds. So long as those near term headwinds persist, investors should avoid buying the dip.

As of this writing, Luke Lango was long FB, ATVI, NFLX, PYPL, and MSFT.