The last two years have been awful for Tencent Holdings Limited (TCEHY -1.96%). Once a darling, the tech conglomerate's stock price almost halved from its peak of around $90 per share.
With its stock price much cheaper today, should investors take a bite of this leading Chinese tech company? Let's explore this further in the article.
Tencent's recent performance has been disappointing.
Tencent has arguably had one of the best long-term track records for growth. Since its initial public offering (IPO) in 2004, revenue and net profit have grown by an annualized rate of 44%.
Its flawless performance, however, fell short lately as it delivered its first-ever annual decline in revenue. Net profit for the year performed worse, down by 17% year over year. The weaker performance was across the board, except for the fintech and business services segment, which reported a slight revenue increase. The regulatory crackdown on online learning and internet industries in China, and the ongoing negative impact of COVID-19 were some of the main drivers behind its weak performance.
It did not help that one of the central themes from Tencent throughout 2022 was about improving efficiency and controlling costs. In a way, it signaled to investors that the company would unlikely resume the kind of growth it had experienced in the first 16 years since its IPO.
Don't get me wrong. There is nothing wrong with a company improving its cost structure and efficiency. On the contrary, such a move was necessary during a challenging environment. But for Tencent's diehard fans, it might be disheartening to think that the company's hyper-growth days might be over.
Tencent's long-term growth prospects remain attractive
Let's face it. No company can continue to grow at 44% forever. And at its size -- $80 billion annual revenue -- Tencent is already a giant, so it's natural that its growth slows down over time.
Still, there are good reasons to believe that the company can continue to grow -- albeit slower -- by leveraging its twin engine of the franchise business and external investments.
The former relies on its social media networking services (mainly WeChat and QQ) and 1.3 billion monthly active users (MAU). As the dominant messaging service in China, Tencent can leverage its user base to offer an ever-expanding catalog of services to improve monetization. It already provides services like payments, gaming, online video, e-commerce, and music and is well-positioned to add new products over time.
On top of that, Tencent can rely on its capital allocation skills to divert unused cash into external investments. JD.com, Pinduoduo, Meituan, and Sea Limited are examples of Tencent's successful past investments. The beauty of this strategy is that Tencent has the flexibility to invest anywhere globally that it sees fit and in any company -- both listed and private -- across multiple industries. Think of it as Berkshire Hathaway but for technology companies.
With its twin engine for growth, Tencent has plenty of opportunities to allocate capital to grow shareholder value in the coming years.
So is Tencent stock a buy?
Tencent faces short-term headwinds from the Chinese government crackdown and the generally weak external economy. However, the tech behemoth should resume its upward trajectory in the longer term by growing its internal businesses and investment portfolio.
On balance, I'm cautiously optimistic about the company's prospects over the next few years. And with the stock trading at a reasonable price-to-earnings (PE) ratio of 16, I don't think it's too irrational for long-term investors to buy stock in the company.
Still, investors should expect a volatile ride ahead.
