Tencent (OTC: TCEHY) delivered second-quarter earnings that topped on the bottom line but missed on the top line. However, the bigger issue with Tencent, like all Chinese companies, is the government's crackdown on technology companies. As a result, Tencent shares are down by 40% from their February high, however, they are up 12% from last week's low on some positive chatter from Chinese officials that the crackdown may be over.
Tencent is one of the largest Chinese tech companies with no easycomp to a U.S. tech company as there is with Alibaba (NYSE: BABA) or Baidu (Nasdaq: BIDU). It was started in 1998 with an instant messaging app that quickly grew in popularity and evolved into WeChat. WeChat is now the largest messaging platform and it's been able to add apps and services to keep users on the platform by offering all sorts of content and commercial services. Now, many Chinese do all their banking and shopping from the app.
Inside the Numbers
In Q2, Tencent reported earnings per share of $0.54 and revenue of $21.4 billion. Analysts were looking for earnings per share of $0.52 and revenue of $21.5 billion. This was a 29% increase in earnings and a 12% jump in revenue.
Tencent is in the crosshairs of regulators as it looks to decrease the influence of large tech companies and is targeting them from data privacy and antitrust perspectives. Both of which affect Tencent. As a result, Tencent recently paid the Chinese government $7 billion in what some see as a preemptive move.
Tencent also has exposure to the video game industry with its stake in Epic Games, and its own cloud computing division. This breadth of exposure makes it vulnerable to more regulatory action. And, the company in a statement said it expects further action. Its recent bid to merge with music services - DouYu and Huya - were also blocked by the government.
Stock Price Outlook
Tencent is also one of the largest gaming companies in China, and the government has recently been vocal that young people were spending too much time gaming and that it was harming the youth.
Due to Tencent's decline, it is no longer the most valuable company in Asia. Therefore, it's limiting the time that young people can play games. Additionally, it warned that online advertising could take a hit with the destruction of the for-profit school industry.
In terms of its stock price, shares look quite attractive from a certain perspective given that investing in Tencent has exposure to some of the fastest-growing sectors. However, there is simply too much risk given the government's crackdown and increased tensions between the U.S. and China which could negatively impact U.S.-based investors in these companies.