How Tencent’s big slide hurts Naspers and JSE
Tencent’s share slide since late January has done no favours for the JSE, whose fortunes are partly linked to the Chinese internet company
Since reaching a high on January 23, the Hong Kong-listed owner of WeChat and partial owner of the popular Fortnite game has lost a quarter of its value, or $143bn (R1.9-trillion).
Bloomberg data show that Tencent’s valuation decline tops Facebook’s $136bn rout in the three trading days that followed its lacklustre earnings call last week. Facebook’s warnings that margins and growth would shrink have precipitated a broader tech sell-off. Tencent’s decline, partly the result of analysts revising down their growth forecasts, has hurt its biggest investor, Naspers, whose shares have slipped 13% over the same period.
Since Naspers makes up about a fifth of the JSE, Tencent’s fall is being felt far beyond the Hang Seng Index, and SA’s largest bourse is feeling the pinch too. The top 40 index has lost 5% since the firm started retreating from its January high.
The FTSE World Index is down 4% over that time.
'Shares are expensive'
While Tencent had a strong core business and was growing fast, "they have always just been expensive and even with this correction in the share price, we still view the shares as expensive", said Anthony Campagna, a New York-based director at EVA Dimensions.
In the tech sector, profitability levels had nearly peaked as growth accelerated over the past 18 months, and this had pushed valuations up "too far, too fast", as was often the case. "So when we get a few reports that things may not be so rosy along the way, the corrections can happen," Campagna said, adding the sell-off might present buying opportunities.
Sasfin Securities portfolio manager Nesan Nair said the current tech sell-off related to some disappointing results. In addition to Facebook, Twitter missed analyst expectations, as did Netflix, which fell short on subscriber growth forecasts.
"In Netflix’s case, the stock has doubled this year — on anticipated subscriber growth — so any disappointment on this number was going to be punished. And Facebook is investing heavily in client privacy and data screening, which will only serve to widen its already considerable moat," Nair said.
Not all tech stocks had disappointed, with Google, Amazon and Microsoft beating expectations. Nair said the sector’s sharp decline could also be due to profit-taking, considering the tech-laden Nasdaq index’s significant outperformance over the past 18 months.
"The market is also growing increasingly concerned about a correction … and tech may experience the wrath of such a correction more than the defensives." But Nair said while tech valuations remained high, this was natural in a rapid growth environment, "so I’m happy to stay invested for the moment".
Elazar Advisors analyst Chaim Siegel said it was difficult to say whether the tech sell-off was overdone. "Watching stocks with good reports go down, like Amazon or Google, tells me investors have their finger on the trigger. We’re looking for a low to buy, but don’t see it yet."