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Bear of the Day: Tencent (TCEHY)

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Tencent Holdings (TCEHY - Free Report) is the giant Chinese Internet portal which provides mobile, telecom, entertainment, social media, and financial services to the largest middle class on the planet -- and monetizes most of these services with online advertising.
 
The stock first slipped to a Zacks #5 Rank on August 20, when it was trading above $44 per share, because analysts took EPS estimates down for this year and next as trouble in China's economy begins to surface. Since then, shares have slid 25%.
 
Before I give you the details about the decline in Tencent growth, let's set the context about the power of Internet companies in the brave new world of the World Wide Web.
 
In mid-September, a new S&P 500 Communication Services sector replaced the Telecoms sector, absorbing some of the biggest stocks from other sectors like Technology and Consumer Discretionary, with the big targets being Alphabet (GOOGL - Free Report) , Facebook (FB - Free Report) , Disney (DIS, and Netflix (NFLX - Free Report) . .
 
This "re-balance" of the structure among Tech/Media titans came at an interesting time as market volatility exploded this month and investors found themselves running from many of these market leaders.
 
As the stock market architects at S&P grapple with the "4th industrial revolution" we now so glibly take for granted and just call "the web" -- and its machine learning tentacles -- here's how one of those designers of the sector re-hab described the move...
 
"The lines among media, communications, and content are blurred," David Blitzer, chairman of the index committee at S&P Dow Jones Indices, said. "It is time to acknowledge this convergence and the overlapping services these companies provide."
 
Investing in the Web/Media Titans of China = No Brainer?
 
I last wrote a Bear of the Day article about Tencent on September 13 to highlight the continued drop in growth estimates since their late August quarterly report. Since the company's slight miss and subdued outlook, analysts took down both revenue and EPS targets in September.
 
But as China's stock market fall and economic tremors have escalated, the sales and profit revisions have gotten worse.
 
Here's the updated Zacks Detailed Estimates page...
 
 
To summarize, in the last 90 days, 2018 analyst EPS projections have fallen over 10% from $1.34 to $1.17 and 2019 estimates were cut a chunky 18% from $1.80 to $1.47.
 
More importantly, revenue projections have dropped significantly from about $49.5 billion to $46.8 billion for this year.
 
And the top line drop for next year was even faster from $65.4 billion to $60.6 billion, a -7.34% haircut.
 
Still, a true growth investor like me can't help but notice the sales trajectory remains near 30%.
 
As I explained in my last update in September, it's hard not to love 30%+ annual revenue growth, year after year -- especially for a $300 billion Internet behemoth.
 
And despite the downward estimate revisions, which may keep Tencent in the cellar of the Zacks Rank for some time, 11% and 25% EPS growth this year and next is nothing to complain about from a company on par with Alibaba (BABA - Free Report) , the so-called "Amazon of China."
 
But the fact remains that analysts are having to keep lowering their growth projections month after month. And if that trend persists, all future estimates remain in jeopardy.
 
It appears best to stand aside until more visibility about the Chinese economy and its dominant consumer companies comes into clearer view.
 
The Zacks Rank will let you know.
 
The Hottest Tech Mega-Trend of All
 
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
 


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