Investors at Tencent are deliberating ways to potentially reach new highs with their share prices, capitalizing on low market valuations
Investor optimism surrounding Tencent Holdings Ltd. is on the rise, as the tech giant prepares to release its earnings on Wednesday. The cost of hedging against declines in Tencent's shares has dropped significantly from its peak in April, signaling a shift in investor sentiment.
Factors Driving Investor Confidence
Several key factors are contributing to this renewed optimism.
Positive Earnings Revisions and Strong Revenue Forecasts
Goldman Sachs has revised its revenue and earnings-per-share (EPS) forecasts for Tencent from 2025 to 2027 by 1-6%, boosting the target price significantly. This revision indicates expectations of continued growth for the company.
AI-Driven Advertising Performance
Tencent's share price recently experienced a surge of around 6% in a week, partly due to anticipated strong AI-enhanced ad revenue growth. Investors are optimistic that Tencent can replicate the successful AI-driven ad performance seen in some US tech peers.
Regulatory Clarity and Supportive Reforms
Regulatory reforms in China have transformed the tech sector, making it a strategic asset. This increased regulatory clarity, particularly for AI-related initiatives, contributes to a structural re-rating of the Hang Seng Tech Index, of which Tencent is a major component.
Record Southbound Capital Inflows
Strong capital inflows from mainland investors into Hong Kong tech stocks reflect confidence in high-growth Chinese tech companies, including Tencent, creating upward pressure on valuations.
Broader China Market Recovery and Stimulus
Recent Chinese government stimulus measures supporting consumption and the property market, as well as signs of macroeconomic stabilization, are creating more favorable conditions for consumer-focused stocks like Tencent.
Valuation Attractiveness Relative to Peers
Compared to global tech companies, Tencent and the Hang Seng Tech Index trade at a discount, implying upside potential if the company’s fundamentals and the sector’s sentiment continue to improve.
Looking Ahead
While Tencent's stock remains about 21% below its all-time high, analysts are optimistic about the company's future. Ronald Keung, for instance, believes that Delta Force could emerge as a potential franchise-level evergreen game.
The market is also looking forward to the launch of Valorant Mobile on Tuesday, a highly-anticipated shooting game. Analyst Ivan Su expects Tencent to return to historical levels and believes that the market isn't factoring in how much AI will help the company's advertising and gaming businesses.
Tencent's diversified business portfolio makes it more defensive against headwinds like tariffs and macroeconomic uncertainties. The company currently has 66 buy recommendations, the most in the region.
The expected earnings results show a 11% revenue increase in the three months ended June, marking the third-straight quarter of double-digit growth. The average estimate for Tencent's 12-month forward earnings per share has reached an all-time high.
Despite these positive indicators, it's important to note that Tencent hasn't benefited as much as peers such as Alibaba Group Holding Ltd. from this year's artificial intelligence boom. However, with its strong fundamentals, strategic positioning, and the factors outlined above, Tencent Holdings Ltd. remains a compelling investment opportunity for many.
- Goldman Sachs' positive revisions in Tencent's revenue and EPS forecasts for the years 2025 to 2027 indicative of continued growth have boosted investor optimism.
- Tencent's share price surge partly fueled by anticipated AI-enhanced ad revenue growth shows investors' faith in the company's ability to replicate successful AI-driven ad performance of US tech peers.
- The regulatory reforms in China providing increased clarity for AI-related initiatives and contributing to a re-rating of the Hang Seng Tech Index, of which Tencent is a major component, also drive investor confidence.
