The shine is off Asia’s tech darling.
Tencent Holdings Ltd. TCEHY 3.49% shares fell as much as 5% on Thursday in Hong Kong after the Chinese internet giant reported its first year-over-year quarterly profit drop in more than a decade. The selloff extended a rout that has wiped out more than $ 175 billion of the company’s market value since January.
The underwhelming performance by the world’s largest videogame publisher by revenue left many Wall Street analysts red-faced. Nearly all the equity research analysts that cover Tencent have buy-related recommendations on the stock, which recently traded 32% below its average price target, according to FactSet.
“We have been entirely blindsided by these most recent results, for which we apologize,” Douglas Morton, head of research for Asia at brokerage Northern Trust Capital Markets, said in a note after the company fell far short of his profit estimates.
Calling Tencent’s results the “worst in recent memory,” Mr. Morton said the poor numbers could even be the catalyst for a further selloff across emerging markets, despite Tencent having little to do with the Turkish currency-related turmoil that has roiled riskier markets around the world this month.
Tencent, which owns China’s highly popular social-messaging app WeChat, a day earlier reported a 2% decline in second-quarter income to 17.9 billion yuan ($ 2.6 billion). Its revenue rose 30% to 73.7 billion yuan, but that also missed most analysts’ forecasts. The company said its games business has been hindered by a regulatory restructuring of two Chinese government agencies that oversee videogame content, leading to delays in game approvals.
The shares, which closed Thursday at 325.80 Hong Kong dollars ($ 41.51), are now down by nearly a third from their record high in January, when Tencent’s market capitalization climbed to $ 572 billion and surpassed that of U.S. social-media giant Facebook Inc.
The selloff has sparked fears of whether there will be broader contagion for tech stocks around the world. U.S.-listed Chinese tech giants such as Alibaba Group Holding Ltd. and Baidu Inc. also fell on Wednesday, pushing deeper into negative territory for the year.
Investors have long bet on technology transforming people’s lives around the world, with the largest companies being the biggest beneficiaries of this trend. For years this has been a winning trade. A fund-manager survey released earlier this week by Bank of America Merrill Lynch found that the so-called FAANG quintet of Facebook, Apple Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc. as well as Baidu, Alibaba and Tencent remained the most crowded trade in August for a seventh straight month.
But tech has wobbled of late, including Facebook’s sour earnings report last month, which prompted the biggest-ever one-day loss in market value for a U.S.-listed company.
The NYSE FANG+ Index, a closely watched tech index which includes Alibaba and Baidu as well as several U.S. tech giants, fell 1.6% on Wednesday, its worst one-day decline so far this month. The MSCI Emerging Markets Index is on the verge of a bear market, down nearly 20% from a Jan. 26 high.
Tencent and its biggest shareholder, South African media and internet firm Naspers Ltd. , are also large components of the MSCI Emerging Markets index. Naspers fell 8.2% on Wednesday, its worst one-day drop since December 2007.
Although analysts are starting to dampen their optimism on Tencent, many still have rosy outlooks and are keeping their buy recommendations and lofty price targets on what remains the most valuable company listed in Asia.
Mr. Morton of Northern Trust, who has on multiple occasions this year advised clients to buy Tencent shares when they were tumbling, said he thinks the long-term outlook for the stock is still positive. “We remain buyers (albeit with humility),” he said.
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