Tencent Holdings Looks to Maintain its Upside Momentum

Since tumbling to a 6-year low in October, shares of China’s Tencent Holdings (TCTZF) have more than doubled to a 1-year high.  Tencent Holdings has rallied on anticipation of future sales streams and optimism that the Chinese government will keep its promise of supporting the private sector.  As a result, Tencent Holdings is up more than +8% this quarter, even as peers Alibaba Group Holding (BABA) and JD.com (JD) remain in the red. 

According to analysts’ estimates, Wednesday’s quarterly earnings report for Tencent Holdings is expected to show Q4 revenue growth rose +0.2% after two quarters of contraction. Revenue growth is then expected to accelerate 6.7% in Q1 as the Chinese economy reopened from Covid lockdowns. Since the start of this year, analysts have raised their price target for Tencent Holding by +17%, citing a resumption of new game approvals, recovery in consumption, and the growing popularity of its WeChat video feed.

The increasing popularity of Tencent Holdings TikTok styled WeChat video feed is expected to boost ad sales and revenue for the company.  Last year, the number of views of the WeChat video feed tripled, and executives forecast 1 billion yuan ($135 million) of ad sales through the feature in Q4. Analysts also expect that the post-Covid recovery in China will boost consumer and corporation spending on entertainment and advertising.

An easing of China’s regulatory crackdown on online video games is also helping to push shares of Tencent Holdings higher.  The company’s new blockbuster video games Valorant and Pokemon Unite are in the pipeline after Tencent received approval from China’s regulators for new video games in December.  On Monday, China’s online gaming regulator approved 27 more games, a positive factor for the online gaming industry.  The optimism over the new games has boosted earnings estimates for Tencent Holdings. According to Bloomberg data, forward earnings estimates have risen by more than +5% this year, while analysts’ targets suggest a +29% increase in the company’s stock price over the next 12 months.

Some analysts are concerned that China may once again tighten scrutiny of major internet companies should the economy return to its pre-Covid pace of growth.  Also, Chinese regulators last month said they are studying measures to curb addiction among Chinese youths of watching short videos. However, CMB International Capital said, “there are still a lot of bright spots that may bring upside surprises” for Tencent Holdings.  “Also, the company could resume share buybacks after earnings.”

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.