As long-term investors, we can use Wall Street's short-term focus to our advantage. When nearsighted traders run for the exits based on overblown fears, we can calmly step in and buy shares of great businesses at attractive prices.
And today, I believe I've found one such opportunity in Tencent Holdings (TCEHY -0.06%).
Tencent's shares are down about 30% from the highs they set in January. Several of the company's most popular games failed to gain the necessary regulatory approvals in order to be monetized in China, and new regulations are denting profits in its burgeoning payments business. For these reasons and others, Tencent's margins are falling, and the company recently reported its first profit decline in a more than a decade.
Regulatory risk is a constant threat to companies based in China. The government in Beijing can take crippling action without warning, changing the rules of the game and destroying profits in the process. Bears argue that, because of this, Tencent doesn't deserve its premium valuation and should continue to underperform the market.
I respectfully disagree.
While there's no denying that regulatory risk should not be overlooked, Tencent has successfully navigated these waters for nearly two decades. The last thing China wants to do is cripple its homegrown tech heroes, and Tencent is one of the country's crown jewels.
Moreover, it may only be a short time until Tencent receives the approvals it needs to begin monetizing its tremendously popular games Fortnite and PlayerUnknown's Battlegrounds. That's because one of the primary reasons for the delay in approval is that the department tasked with reviewing and granting gaming licenses is currently being reorganized. Tencent President Martin Lau is optimistic that these issues will soon be resolved. "We do believe it's not a matter of whether these games will be approved for monetization, it's a matter of when," Lau said during a conference call with analysts.
So while those delays dinged Tencent's profits in the second quarter, they should not be viewed as an impairment to its gaming business. As such, the decline in Tencent's stock prices over the past few months presents long-term investors with an intriguing profit opportunity.
Many ways to win
Tencent remains the world's largest video game company at a time when video games are enjoying booming growth, fueled in part by the exploding popularity of esports.
Tencent is also the owner of WeChat, the most popular messaging app in China with more than 1 billion users. In fact, calling WeChat a messaging app doesn't do it justice. It's actually an app ecosystem within which users can make voice calls, send texts, share photos, play games, transfer money, and shop, among other things. Incredibly, almost 30% of all the time people in China spend on mobile apps is spent within the WeChat realm.
In addition, Tencent has fast-growing businesses in the cloud computing, digital payments, and streaming video spaces, among others. In all, revenue reported under its "other businesses" line soared 81% in the second quarter.
Finally, Tencent owns valuable stakes in a wide collection of businesses, many of which have tremendous growth potential. Major holdings include JD.com, Activision Blizzard, and Tesla, as well as dozens of Chinese tech start ups. These investments add even more potential upside to Tencent -- and are often overlooked by investors.
Great business, discounted price
Tencent shares are trading at about 28 times analysts' forward earnings estimates for 2019 -- arguably a bargain for a competitively dominant business that's projected to grow its earnings per share by more than 37% in the next year. And that stock price is an even better deal when we factor in the value of its impressive investment portfolio.
All told, Tencent has many ways win -- and for investors to profit -- in the years ahead. And today, we can take advantage of temporary market fears to establish long-term ownership stakes in this elite enterprise.