It’s been a rude awakening for video-game stock investors over the past few months. Names like Activision Blizzard (NASDAQ:ATVI), Take-Two Interactive (NASDAQ:TTWO) and Electronic Arts (NASDAQ:EA) have all been under pressure. Surprisingly, Tencent (OTCMKTS:TCEHY) has been holding up lately, but Tencent stock has certainly seen its share of poor price action.
That price action has sparked a major decline in what is quietly one of China’s largest companies. Now trading with a market cap of just over $400 billion, not many investors seem to realize just how big Tencent actually is. It’s slightly larger than Alibaba (NYSE:BABA) and is just smaller than Facebook (NASDAQ:FB).
Go on the street and ask, have you heard of Facebook? It’s hard to imagine anyone would say “no” at this point. Do the same thing for Tencent though and “no” will likely be a majority of the answers.
Granted, Tencent doesn’t have as much of a presence in the U.S. compared to a company like Facebook, but for its size, it’s surprising so many people haven’t heard of it.
Should You Buy Tencent Stock?
We mentioned some big game-makers in the introduction because, first and foremost, Tencent is the world’s largest game producer. However, because the Chinese government has been on a content and video game crackdown, Tencent has been on the wrong of these rulings. As a result, we’ve seen its market value decline by almost 30% over the past 12 months.
Of course, it doesn’t help that Chinese equities are out of favor amid an ongoing trade war with the U.S. Making matters worse, recent economic data out of China has been discouraging as well, scaring already skittish investors even more.
Given its size, it’s hardly surprising to hear what Tencent actually does. Everything from microblogging, music, video games, search engines, social media, venture capitalism, digital payment platforms and far, far more. That’s helping the company’s growth profile too.
Analysts currently expect 2019 sales to balloon 26% to $57.4 billion from 2018’s expectations for $45.5 billion. On the earnings front, analysts are looking for Tencent stock to generate $1.24 in earnings per share this year.
At about $42 a share, that leaves TCEHY stock trading at just under 34 times this year’s earnings. That valuation seems high, given that analysts are calling for earnings growth of “just” 18.5% to $1.47 per share.
The growth is solid, 26% on revenue, 18.5% on earnings, but 34 times is not cheap. It would be nice to have profit margin stability (or expansion) as well as more certainty around regulation regarding some of Tencent’s business segments.
Trading TCEHY Stock
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TCEHY stock spent plenty of 2018 making a series of lower highs. That kept the stock under plenty of pressure. That is, until the end of October. While investors unlikely knew it at the time, that’s precisely when Tencent stock formed its bottom, rallying from $32 then to $42 now. That’s a jump of more than 30%.
But what now?
Tencent stock is now running into the 200-day moving average. So far, this level has kept shares at bay, now consolidating just above uptrend support (blue line). Should TCEHY lose uptrend support, my confidence would certainly wane. Investors in the name may consider sticking with the name unless it loses the 50-day moving average.
Investors who don’t have a position may want to wait. The stock is up notably from the lows and the valuation doesn’t make it a screaming buy either. Let’s see if we get a slight pullback first.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
