Tencent Holdings Limited (TCEHY) released decent second-quarter results. The stock price gained 3.7%, to close at $57.20 on August 18.
Tencent is the world’s leading provider of online chat and payment services in China. It also has a booming cloud computing company and offers online gaming.
Let’s take a quick look at the earnings.
Revenues grew 20% year-over-year to RMB138.3 billion (USD21.4 billion). Meanwhile, net profit came in at BMB42.6 billion (USD6.5 billion), which jumped about 29% year-over-year.
The second quarter’s results were boosted by strong business services and advertising, strong demand for games, and increased digitalization of public services and traditional sectors. (See Tencent Holdings Dividend Date and History on TipRanks)
Despite Tencent’s impressive recent earnings performance, China’s ongoing regulatory issues still remain a matter of concern for investors.
Uncertain Regulatory Environment to Persist
China has been tightening its hold on the tech sector for a few months now. It has been focusing on strengthening consumer rights and fighting data misuse.
As a result, this gaming and social-media giant has been among companies that have been hit hard by Chinese authorities’ regulatory crackdown on the digital industry.
In a recent example, the State Administration for Market Regulation (SAMR) of China released new rules on Tuesday aimed at prohibiting unfair competition. The proposed new guidelines state that businesses should avoid spreading false information in order to harm competitors’ reputations.
Notably, these ongoing regulatory scrutinies have hit the stock hard and the shares of Tencent lost almost 40% over the past six months.
It’s worth noting that Tencent warned the tech industry on Wednesday to expect increased regulations and uncertainty.
Along those lines, Tencent President Martin Lau told analysts in a call after the company’s results, “There will be short-term uncertainties and there will be a lot of new regulations that will be coming.”
Investors are worried that these regulatory overhangs could further bring the share price down to another low.
Wall Street’s Take on Tencent
The Wall Street community is cautiously optimistic about the stock, with a Moderate Buy consensus rating based on 2 unanimous Buys. The average TCEHY price target of $90.00 implies 57.3% upside potential from the current levels.
Prior to the earnings call, on July 15, Oppenheimer analyst Bo Pei CFA reiterated a Buy rating on the stock and a price target of $90.00. This implies 57.3% upside potential to current levels
The analyst believes that the strict data security regulations “should have a limited impact” on Tencent, as the company is listed on the Hongkong exchange and not on U.S. exchanges.
However, he stated that “all Chinese Internet companies might need to invest more in data security to comply with the new rules.”
Bottom Line
Tencent’s strength in the online gaming space and its growing advertising business are intriguing to many analysts and investors.
Nonetheless, the stock price has been falling over the past week. Moreover, TipRanks’ Stock Investors tool shows that investors holding portfolios on TipRanks currently have a Very Negative stance on Tencent, with 1.3% of investors decreasing their exposure to TCEHY stock over the past 30 days.
While the analysts are cautiously optimistic about the stock, the regulatory overhangs could pose a challenge for the company going forward.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
