Tencent Holdings Limited (TCEHY)

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Here's Why Investors Are Avoiding Tencent Stock
By: Motley Fool | August 13, 2022

• Tencent is facing multiple headwinds in the near term.

Once a bedrock of stability and growth, Tencent Holdings Limited (TCEHY -1.52%) stock has lost its appeal among investors. From their peak in early 2021, Tencent's shares have dropped by more than 55%. The stock lost over 30% of its value this year alone.

Confused (and frustrated) investors -- especially foreign investors -- want to know what caused the share price to plummet. Though we cannot pinpoint the exact reason, we can certainly make some educated guesses. Here are some of mine.

Tencent's recent financial performance has been disappointing

It is not without reason that Tencent has been a favorite among investors for many years. From its IPO in 2004 to 2021, the company grew its top and bottom lines by a compound annual growth rate (CAGR) of 44%. This impressive performance generated enormous returns for early investors who held on to the stock.

Lately, Tencent seems to have lost its Midas touch. In the fourth quarter of 2021, revenue growth slowed to 8% year over year while profit fell 25% on a non-IFRS basis. The tech specialist followed that with another weak performance in the first quarter of 2022: Revenue came in flat while profit plunged 24%.

Tencent's recent performance was affected by the slowdown in gaming revenue growth and the decline in advertising income. The latter was severely impacted due to lower advertising income from online education and internet service industries amid the Chinese government crackdown. Moreover, the online advertising industry's regulatory changes further affected advertising revenue.

To address these challenges, Chairman and CEO Ma Huateng said that Tencent "has implemented cost control initiatives and rationalized certain non-core businesses, which would enable us to achieve a more optimized cost structure going forward."

I like that the management team is addressing its challenges head-on. Yet its decision also signaled that this downturn could last a while. At best, Tencent's good old days of high growth rates might take some time to resume. At worst, they might never...

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