Looking to keep its stock price moving higher, Tencent Holdings (OTCMKTS:TCEHY) announced Apr. 2 that it plans to buy back 10% of its shares. While that’s good news for investors who bought Tencent stock at its all-time low in January 2018, I wonder if it isn’t a poor time for the conglomerate to be buying back its stock.
Tencent stock is up 22% year-to-date, and TCEHY stock has a lot of momentum heading into spring and summer. TCEHY lost almost 24% of its value in 2018 because the Chinese government put a hold on approving new video-game licenses.
As InvestorPlace feature writer James Brumley recently reminded readers, Tencent generates 32% of its revenue from online games, ten percentage points more than its social networking platforms, its next biggest revenue generator, account for. That’s why the government’s move put a severe kink in Tencent stock.
In March 2018, China’s General Administration of Press and Publications (GAPP), the agency that approves applications for video-game publishers to monetize new video games, stopped accepting applications.
At the time, Tencent stock was trading around $60, near its all-time high set in January 2018. From there, TCEHY stock dropped by almost 50%, reaching $33 in mid-October. TCEHY has since recovered some of those losses. However, it is still down 22% from its all-time high.
Why TCEHY May Be Buying Back Tencent Stock
There are many reasons why companies buy back their stock. One is to show that their managements and boards have confidence in the companies’ future i.e. that the fundamentals of their businesses are sound today and will continue to be sound.
A company may also buy back its stock because it believes that its share price is undervalued, making the stock a good investment.
Tencent could also be buying back TCEHY stock because it wants to prop up its stock price after GAPP again stopped accepting new video game applications in Feb. 2019.
I won’t begin to speculate as to the specific reasons why TCEHY is buying back Tencent stock. What I will do is look at its previous stock buybacks.
Poor Buybacks?
Bloomberg Opinion columnist Tim Culpan wrote a piece last October which highlighted Tencent’s poor share-repurchase record. He noted that over six weeks, Tencent bought back 2.56 million of its shares for $103 million,at an average price of HK$315.49.
On an annualized basis, Tencent lost 85% on its share repurchases between Sept. 7, 2018, and Oct. 11, 2018.
“So far this year, Tencent has bought shares in a range of companies — from a location-based services provider to a grocery-deliveries startup — yet getting a return on its own stock has turned out to be a loser from the start,” Culpan wrote on Oct. 11, 2018.
“To be sure, buybacks aren’t designed to make money from your own stock; they’re supposed to support the share price and signal confidence, a strategy that’s failed so far,” he added.
Well, in hindsight, Tencent stock’s recovered those losses and then some. It now trades 16% above what it paid for its shares, so its record on share repurchases is better than initially thought.
But now it wants to buy back $44 billion of Tencent stock. With its share price on a roll, it seems like a bad time to be contemplating buying back this much stock. Granted, the purchases of Tencent stock will be made over multiple years, but companies generally don’t do a good job buying back stock over the long-haul.
The Bottom Line on Tencent Stock
As my colleague, Brumley, stated in March, Tencent still is at the mercy of China’s video-game regulators. Until that entire issue gets straightened out, Tencent stock is going to face considerable volatility.
Would I buy TCEHY stock at $47? Only a little. I’d save lots of cash to buy Tencent below $40.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
