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Tencent’s Hard Landing Is Stark Reminder Of Tech’s Fallibility

It's time to quote Howard Marks again...

Right, so Tencent’s rather stunning fall from grace took another turn for the worst on Wednesday.

Just to recap, Tencent is in the middle of a truly harrowing slide. In November, the company blew past Facebook in market value, making it the first Chinese tech name to join the ranks of the world’s five largest companies. Since its January peak though, it’s down something on the order of 30% and perhaps most tellingly, the shares have fallen in 9 of the last ten weeks.

Tencent

Headed into earnings on Wednesday, there were warnings that the picture might be set to darken. For instance, Goldman was still bullish, but less so, slashing their price target just hours ahead of results.

Well sure enough, they missed. Specifically, Q2 net income came in at RMB17.9 billion, well below estimates of RMB19.30, and very nearly missing the lowest end of the range. Q2 revenue was also a “big league” miss, coming in at RMB73.68 billion versus consensus of RMB77.66 billion. The company’s German traded shares plunged.

GermanTencent

This marks the first profit drop in ten years for the company and it apparently comes courtesy of Beijing’s decision to freeze approvals of game licenses, leading to bottlenecks in Tencent’s pipeline – I guess.

Whatever the specifics, the big picture here is that this is basically part deux of Facebook’s second quarter face plant, in terms of what it says about the perils inherent in assuming that the bottom can’t fall out entirely for these tech high fliers.

The Tencent news rippled across markets. Shares of multiple ETFs exposed to Tencent were hit in premarket trading including the IShares MSCI China ETF (16.2% exposure to Tencent), the IShares China Large-Cap ETF (8.6% exposure to Tencent), SPDR S&P China ETF (14.1% exposure to Tencent), Vanguard FTSE Emerging Markets ETF (Tencent is largest holding), and of course the IShares MSCI Emerging Markets ETF (Tencent is largest holding).

ByeBye

(Bloomberg)

As Bloomberg’s Luke Kawa notes, Tencent’s miss is apparently more important for emerging market equities than any turmoil in Turkey.

FutsEMMSCI

(Bloomberg)

“Tencent’s relatively soft 2Q result is not a big surprise to us, [as] the growth deceleration across the key business segments was partially due to a natural slowdown considering the company’s size,” Barclays explains, before noting that “some effects may linger beyond 2Q into the next couple of quarters, such as the payment revenue deceleration, as the reserve rate is expected to increase to 100% in early 2019 with a full year impact.”

These are your Nasdaq futs on a Tencent miss:

NasdaqFuts

I’m going to do it again – I’m going to quote Howard Marks…

Some of them doubtless will be the great companies of tomorrow.  But will they all?  Are they invincible, and is their success truly inevitable? There are clear reasons to be excited about their growth in the near term, but what about the durability of earnings over the long term?  The iPhone is just ten years old, and twenty years ago the Internet wasn’t in widespread use. That raises the question of whether investors in technology can really see the future.

 

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