Calendar 2018 wasn’t a good year for a lot of stocks. But, it was especially bad for formerly high-flying China tech stocks like Tencent (OTCMKTS:TCEHY), which were killed throughout 2018 on slowing China economic expansion concerns. Tencent stock was a loser for lots of reasons.
Rising trade and FX headwinds didn’t help the situation, either. In that beaten up China tech stock group, Tencent, often labeled the Facebook (NASDAQ:FB) of China, but which is much more like the Facebook, PayPal (NASDAQ:PYPL), Spotify (NYSE:SPOT), Microsoft (NASDAQ:MSFT), and Electronic Arts (NASDAQ:EA) of China fared poorly.
From early 2018 to late 2018, Tencent stock was essentially cut it half, from $60 to $30. Now, it’s bouncing back, and this rally appears to have runway for the rest of 2019.
Specifically, Tencent stock has steadily risen from $30 towards $45 in the New Year on various positive developments. For starter’s, China’s economy is showing signs of stabilizing.
Trade headwinds are less severe. As are FX headwinds. Meanwhile, a massive China video game freeze which stalled Tencent’s video game business in 2018 is over, and China is now approving numerous Tencent video game titles.
All together, the growth narrative surrounding Tencent stock is simply improving. It also helps that things are looking up on the technical side, too.
As such, Tencent stock has gone from 2018 loser, to 2019 winner. It will stay a 2019 winner for the foreseeable future, meaning that buying into this rally could be a good idea.
The Big Picture Is Great
In the big picture, Tencent’s long term growth narrative has always been juicy.
You have a company which touches every aspect of China’s digital economy. They operate the country’s largest social media platforms, hence the Facebook comps.
They are also China’s biggest and most popular video game publisher, hence the EA comps. Tencent also operates China’s largest video and music streaming platforms, hence the Netflix (NASDAQ:NFLX) and Spotify comps, as well as China’s largest mobile payments system, hence the PayPal comps.
If that weren’t enough, Tencent is also a formidable player in online security and the cloud.
As such, as goes China’s digital economy, so goes Tencent stock. In the long run, China’s digital economy still has a long ways to go. Internet penetration rates in China are just above 55%. They stand at 85% throughout Europe, and 95% in North America. At the midpoint, that’s a 35 point divergence in a country with 1.4 billion people. Thus, over the next several years, China’s digital economy will continue to add hundreds of millions of users.
Consequently, in the big picture, Tencent stock has huge growth potential. As China’s digital economy adds hundreds of millions of new users over the next several years, that will translate into robust growth for Tencent’s social media, streaming, payments, and gaming platforms.
Ultimately, that will push revenues and profits materially higher, the sum of which will drive Tencent stock way higher, too.
Near Term Headwinds Are Reversing Course
This robust long term growth narrative hit a road-bump in 2018. China’s economy slowed. FX and trade headwinds became more severe. China stopped approving video games. Revenue growth rates at Tencent slowed. Margins compressed. Profit growth fell flat. Tencent stock struggled.
Now, those headwinds are turning into tailwinds. China’s economy is picking up steam again. FX and trade headwinds have eased. China is approving video games again.
Revenue growth rates are expected to start stabilizing with economic activity re-accelerating. Margins should improve against weaker laps. Profit growth should come back into the picture. Tencent stock should rise.
This is already happening. It will continue to happen because the long term growth potential here is so promising. Thus, if near term issues get fixed (it appears they are being fixed), Tencent stock should return to its longer term winning ways.
Bottom Line on TCEHY Stock
Tencent stock is a long term winner powered by robust and dominant exposure to China’s still rapidly growing digital economy.
This long term winner just hit a rough patch in 2018 thanks to temporary headwinds. Those headwinds are finally reversing course, and as they continue to reverse course through the remainder of 2019, Tencent stock will get back on a winning path.
As of this writing, Luke Lango was long TCEHY, FB, PYPL, and SPOT.
