Although it remains relatively unknown to investors outside Asia, Tencent [OTC: TCEHY] is one of the largest Internet and technology businesses on the planet.
Tencent is the biggest gaming company in the world, and previously the most valuable company in Asia (until stock prices took a sharp drop in summer 2018).
Even if you haven’t heard of it, Tencent represents an intriguing investment opportunity. The company operates hundreds of subsidiaries in highly diverse domains, from social media and e-commerce to AI and financial services. With this in mind, let’s take a look at the Tencent stock price forecast.
Why Did Tencent Stock Price Fall Last Year?
For the first half of 2018, the future of Tencent’s stock price looked bright. In January 2018, Tencent shares reached a record high of 474.6 Hong Kong dollars.
However, Tencent stock plunged in mid-August after Chinese regulators froze the approval of new game licenses. The suspension came in the midst of a government restructuring, as well as concerns about gambling and violent content.
During the worst of the crisis, Tencent shares were down by 31 percent, and market capitalization sank from $573 billion to $395 billion (more than the entire market capitalization of Netflix [NASDAQ: NFLX]).
As a result of the chaos, Bloomberg called Tencent “the world’s most disappointing stock.”
Will Chinese Gaming Boost Tencent Stock Price?
As the world’s most populated country, it’s no surprise that China is also the biggest gaming market, with an estimated $38 billion in domestic sales in 2018. However, this success is also a double-edged sword, especially under an authoritarian regime such as China.
Moving forward, Tencent will need to operate within the limiting confines of China’s gaming regulations.
While sudden and unexpected, the license freeze last year was also not totally out of character for China.
According to Serkan Toto, founder of the Japanese game industry consultancy Kantan Games, “China is the most difficult market to do business in from a regulatory perspective.”
While the freeze officially ended on December 29, China is still looking to restrict content that it believes to be against “core socialist values.”
Last year, Tencent removed its “Texas Hold ‘Em” poker game, and also introduced facial recognition to cut down on screen time for addicted players.
How Does Tencent Make Money?
For those worried about Tencent’s future in the Chinese gaming industry, the good news is that the company has plenty of other verticals. Indeed, the more accurate question in this section might be: “How doesn’t Tencent make money?”
Of course, Tencent’s most well-known offerings are its mobile and online gaming offerings. Its smartphone titles are the main source of revenue, generating $2.5 billion in Q2 2018.
Beyond gaming, Tencent also owns the wildly popular WeChat app for messages and calls, which recently hit 1 billion daily active users.
WeChat enjoys a virtual monopoly over the Chinese market, since the government has banned foreign competitors such as Facebook [NASDAQ: FB], WhatsApp, and LINE.
Tencent monetizes WeChat via its mobile payments platform, as well as a light dusting of advertisements.
Finally, Tencent recently announced intentions to expand beyond its traditional roots of consumer Internet services.
The company plans to diversify in technology fields such as AI, security, big data, and cloud computing. These products and services will be marketed toward sectors such as healthcare, education, and retail.
Will Tencent Grow Globally?
Tencent’s domination of the Chinese market has investors wondering whether it will expand to other countries and regions. For now, the answer seems to be a tentative “yes.”
In April 2018, for example, Tencent announced that it would launch its first data center in Southeast Asia in Malaysia’s Cyberjaya science park.
Then in August, Malaysian WeChat users also gained access to WeChat Pay, its digital wallet and mobile payments platform.
More interestingly, in May 2018 Tencent signed a pact with the United Kingdom’s Department of International Trade.
The memorandum of understanding seeks to integrate Tencent with British cultural institutions such as the BBC and Oxford University. For example, Tencent will host an “online fashion show” featuring British fashion designers and sponsored by the British Fashion Council.
Tencent Stock Price: Summary and Forecast
Judging by the business alone, Tencent stock would seem to be a must-buy. The company is taking the right steps by diversifying its offerings, both in terms of industry and in market. However, there are a few risks to acknowledge.
Currently, the biggest potential impediment to Tencent’s growth seems to be the Chinese gaming industry regulations. For now, Tencent seems willing to play by China’s rules, which may reassure investors.
With the license freeze over, we expect Tencent stock to rebound in the coming months, as it attempts to climb back to its 2018 high. Still, we can’t disregard the risk of more crackdowns and restrictions in the future.
Potential investors should closely watch Tencent’s actions as it settles into “middle age.” The company must be wary of permanent restrictions from Chinese authorities on its gaming cash cow, all while looking to further monetize products such as WeChat and its cousin QQ. In addition, rumors of a general Chinese economic slowdown could have an impact on Tencent’s growth as well.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.