Shinsei Corporate Management Analysts have said that the Shenzhen-based Tencent could head to new highs in coming months, possibly overtaking records set in late January.
So far this year, its shares have shed $70 billion in value, a stronger bear run than the rest of the technology industry, as markets priced in the costs of the Tencent’s massive spending spree.
“We’ve yet to eclipse the high in the owner of WeChat, so I take current drop, which comes amid apparent profit-taking among heavyweights, as a short-term positive. We should be able to move up and break through the recent highs,” said Muranaka Ryushi, Head of Research at Shinsei Corporate Management.
Despite the challenges, the Chinese e-commerce company is still a consumer staple and the business of making it is largely recession-proof. Tencent is particularly attractive because of its bargain valuation and because its recent metrics were also led by the company’s forays into multiple markets.
The majority of analysts on Wall Street have a buy rating on Tencent and an average HK$455 price target, according to according to the average of 11 estimates compiled by Bloomberg. That target implies 6 percent upside to Tuesday’s close.
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There are some Tencent bears, though, including Citigroup Inc. and Deutsche Bank AG, which have lowered their sales or earnings expectations over the near and long term. The company’s fundamentals give some brokers a reason to feel bearish in 2018.
Specifically, recent reports suggest that rising costs and investments will hurt profitability at Asia’s biggest listed company, which has a market capitalization of roughly $560 billion.
Analysts at Shinsei Corporate Management are also concerned that Tencent could sacrifice margins in the next years to spur future growth, yet it won’t able to generate enough cash from its new ventures to offset a decline in its established segments.
“One thing I would caution though, is Tencent tends to be a short-term proxy for weak performance in PC games coupled with weaker ad seasonality,” says Michael Brooks, Head of Sales & Trading at Shinsei Corporate Management.
The Shenzhen-based firm, which is one of world’s most valuable technology giants, runs China’s most popular social-networking platforms, with more one billion million users, mostly in mainland.