It has been a tough year for China tech stocks, and in particular China internet conglomerate Tencent (OTCMKTS:TCEHY). Due to rising trade tensions, a strong dollar, and weaker-than-expected operating results, Tencent stock has dropped 10% this year, and presently trades more than 20% off its January 2018 highs.

Tencent is a big company, so a 20%-plus drop in stock price is a big deal. Indeed, since January, the stock has lost more than $100 billion in market cap.

Is this sell-off over done? With trade tensions easing, it is time for Tencent to bounce back?

Probably. Due to bad optics from escalating trade tensions, China tech stocks have traded down to levels that make them severely undervalued relative to fundamentals.

But, trade tensions are easing thanks to a U.S.-Mexico trade deal, and the U.S. dollar has continued to cool against the Chinese yuan. As such, the optics surrounding China are improving, and China tech stocks are reasonably bouncing.

Tencent stock has been included in this rebound. Over the past two weeks, Tencent is up about 5%. This run should continue thanks to improving optics surrounding China tech stocks.

But, investors shouldn’t be too optimistic regarding Tencent. While this company has great growth exposure, margins are a persistent problem which will keep upside potential limited.

As such, while Tencent can and will head higher here, big upside potential won’t be unlocked until margins turn around.

China Tech Stocks Are Rebounding

The bull thesis on Tencent stock is two-fold.

On one end, this is a company with robust exposure to all things internet in China. Tencent is perhaps most noted for being the Facebook (NASDAQ:FB) of China and operating the countries largest social media platforms (Weixin and WeChat, with combined monthly active users north of 1 billion).

The company’s other social media and communication apps, QQ and Qzone, aren’t small either. They both have 500 million-plus monthly active users.

Beyond social, Tencent is also the gaming giant in China, and is the number one online games company globally by revenue. Tencent is also behind China’s biggest digital video, news, music, and literature platforms.

As if that weren’t enough, Tencent also operates China’s largest mobile payment platform and China’s largest mobile security network.

In other words, Tencent not only has exposure to all things internet in China, but actually dominates all things internet in China. Thus, as goes the China internet growth narrative, so goes Tencent. Considering that narrative still has legs, Tencent stock is still supported by a big, multi-year growth outlook.

The other reason to get bullish on Tencent here and now is that China tech stocks appear to have formed a bottom. For several months, these stocks were getting whacked by rising trade tensions and a rapidly strengthening dollar. However, those trends have reversed.

The U.S. just signed a trade deal with Mexico, a sign that a deal with China isn’t impossible. And, the dollar has consistently weakened over the past two weeks.

Thus, the near to medium term bull thesis on Tencent looks compelling now. Optics surrounding China tech stocks are improving, and Tencent’s robust growth exposure to all things internet in China does give investors reason to buy this dip.

Tencent Stock Has Some Issues

Although I’m a fan of Tencent here and now, I’m not that big of a fan of the company longer term so long as margins remain depressed.

Margins have been a big issue for this company for the past several years. During that stretch, gross and operating margins have been consistently falling.

That hasn’t been a huge problem for Tencent because revenue growth has been big enough to offset margin compression. But, last quarter, revenue growth decelerated meaningfully, and that showed up on the profit line, where profits actually dropped year-over-year.

Therefore, unless revenue growth re-accelerates higher or margin compression moderates, Tencent’s profit growth outlook isn’t all the great.

Granted, I think margins will find a bottom soon and inevitably rebound. But, until that happens, earnings growth prospects simply aren’t attractive enough to warrant paying that big of a multiple of Tencent, especially with revenue growth slowing.

Bottom Line on Tencent Stock

The rebound in Tencent has started, and will persist for the foreseeable future. But, big upside in this stock won’t be unlocked until margins stabilize, and there isn’t much clarity as to when that will happen.

As of this writing, Luke Lango was long FB.