By Sean Geary
Chinese internet firm Tencent Holdings (OTCPK:TCEHY) dropped almost 7% in Hong Kong trading Thursday after the company reported quarterly earnings and guidance.
In a rough day on the Hang Seng, Tencent’s performance on Thursday was particularly poor. While the broad index dropped 333 points, or 1.55%, as a result of festering concerns over the U.S. fiscal cliff and the European economy, the company that owns China’s preeminent social networking internet platform dropped 6.95%.
Although Tencent’s quarterly earnings demonstrated substantial growth, traders hammered the stock due to the company’s negative outlook going forward.
Tencent actually saw its third quarter growth increase by 32% thanks to a jump in gaming and advertising revenues. As well, gaming revenues more than doubled from a year earlier.
However, these positives were not enough to prevent the stock from moving substantially lower stemming from warnings from the company pertaining to advertising growth. Tencent informed shareholders that growth in advertising revenues was likely to slow down.
While the warning was, on the surface, somewhat innocuous, investors in names that generate substantial income from social networking are perhaps in a bit on edge after Facebook’s (FB) dismal post-IPO performance and concerns over companies in the sector’s ability to monetize their mobile offerings.
Juxtaposing Facebook and Tencent seems natural, however, comparisons between the two are largely superficial. The backbone of Tencent’s platform isn’t social networking per se, but rather its incredibly popular instant messaging service QQ. As well, Tencent’s larger, broader exposure to gaming with more sustainable titles like League of Legends in a country with a penchant for online gaming leaves it much better positioned than Facebook and the array of social media games like Farmville that it hosts.
On a valuation basis, Tencent offers a more compelling play than Facebook. Trading at 33x current earnings, the Chinese firm’s valuation is much more reasonable than Facebook’s 207 current P/E. Traders may consider a pair trade by going long Tencent and short Facebook to take advantage of the Chinese company’s advantageous position in the world’s largest internet market. While advertising revenues may slow in the near term, given the company’s growth prospects, Tencent remains a solid play on the Chinese middle class over the medium-to-long term.
Disclosure: Author is short Facebook