Key Points
- Investors are turning to Tencent as a safer bet amid fears of an AI stock bubble.
- Tencent is expected to be the only Chinese tech giant to report positive profit growth in its upcoming earnings.
- The company’s strong online games business is a key factor in its stable performance.
- Despite a 58% surge this year, Tencent’s stock is still considered cheap compared to global tech peers.
As worries grow about a potential bubble in artificial intelligence and the heavy concentration of tech stocks, investors are turning to Tencent Holdings Ltd. as a safer bet.
Tencent is one of the few Chinese tech giants expected to report positive profit growth in its upcoming earnings. This is a big contrast to its peers, who are seeing their profits dragged down by fierce price wars. A strong performance in its online games business could help continue the rally that has already added about $280 billion to Tencent’s market value this year.
The company’s stock is up 4.5% this month, reflecting this optimism, while rivals like Alibaba and JD.com have seen their Hong Kong-listed shares fall. “Tencent offers very defensive growth in this kind of environment because they have less competition,” said Elinor Leung, a managing director at CLSA Ltd. She considers Tencent her top pick.
Although Tencent’s shares have jumped 58% this year, they still trade at a big discount compared to global tech giants like Amazon and Nintendo. While Alibaba has seen bigger stock gains thanks to its AI headlines, Tencent has been making steady progress with its own Hunyuan AI model. It’s also using generative AI in game creation and other parts of its business.
Tencent’s popular games have strong player loyalty, enabling the company to maintain high prices. This is very different from Chinese online food-delivery and electric-vehicle companies, which are using steep discounts to attract customers.
For its September-ended quarter, Tencent is expected to post a 5% increase in earnings. In contrast, analysts estimate that peers such as Alibaba and JD.com will see earnings fall by more than 60% due to competition and China’s economic slowdown.
Analysts at Goldman Sachs expect total profits for China’s internet firms to drop by nearly a third, with Tencent the only exception among the mega-caps. Tencent’s advertising business is also a bright spot, likely boosted by AI-powered ad placements.
“I wouldn’t be surprised if they beat estimates again,” said Morningstar Inc. analyst Ivan Su. “The market hasn’t really factored in a lot of the AI upside to earnings.”
