Tim Cohen Senior editor: Business Day

You can’t say there isn’t a certain irony investing in tech stocks. Naspers, SA’s biggest locally listed company and tech leader, delivered a positive set of results for the year to end-March, with its operating loss halving, and the share price promptly went down.

A lot.

Naspers’s share price is down about 19% over the past three months and is trading at levels it reached this time last year. It’s miles off its high of R3,800 last year, and the company is now such a dominant force on the JSE that investors of all types are taking a hit.

It’s almost as though shareholders, who have been happy to see Naspers racking up losses for years, have suddenly got a fright at the prospect of the company making an actual profit (outside of its investment in Tencent).

Such are the vagaries of tech investing.

As it happens, Naspers is in good company, with Facebook, Tencent and Alibaba all trailing each other downwards by similar proportions over the past few months. Of the big tech stocks, the only exception is Alphabet, holders of Google, but even the sector monster is down almost 10%.

What is happening here?

Apparently, several things simultaneously.

First, according to Philip Short of Old Mutual Equities, a little apprehension is creeping in about the state of the global economy, and particularly about the US economy. US bond yields are rising and the Vix, the volatility index, is higher too.

In combination, these two numbers suggest investors are becoming just a smidgen more cautious. The consequence for tech stocks is large, says Short, because they are typically the most highly leveraged in terms of valuations, and hence even small changes in expectations are felt profoundly.

Second, says Vestact fund manager Byron Lotter, is that the Chinese economy is slowing — though it is still enormous relative to most of the rest of the world — and this affects Naspers particularly.

It still closely tracks its biggest and most successful investment, Hong Kong-based Chinese company Tencent, in which it now has a slightly reduced 31% stake.

Byron Lotter: It’s about looking at the bigger picture, and investing where you think the future is
Byron Lotter: It’s about looking at the bigger picture, and investing where you think the future is

The third and perhaps most significant reason is that Chinese regulators have put some of Tencent’s games on hold. It seems trivial, but gaming is a huge earner for Tencent and constitutes about 60% of its revenue.

Tencent’s share price, and Naspers’s with it, got thumped when Tencent missed analyst expectations in its results in August, and the extent of the approval hold-up became apparent.

Short says he recently returned from China and his sense is that the hold-up is temporary.

There was a ministry rotation and new people were appointed, so they froze the process of approving games, which the Chinese government monitors for excessive violence and negative messaging.

Short says the process will probably resume early next year, and until then Tencent will not be able to release in China a game called Fortnite, for example, which has been a huge success around the world with 125-million players joining it in its first year. Tencent is also restricted by unofficial Chinese sanctions against Seoul — it has distribution rights for another enormously popular game, PlayerUnknown’s BattleGrounds, but because the game was developed by a South Korean company, Tencent can’t make money from it in its home market.

"I think they [the Chinese regulators] are just finding their feet," Short says.

Yet behind this trail of digital destruction, there is also some good news: the discount between the value of Naspers and the implicit value of Naspers’s share of Tencent has narrowed substantially.

"We are starting to see good traction in the businesses outside of Tencent," Short says.

Naspers investments are difficult to track. They span a wide range of countries, some small, some very big. The businesses themselves don’t have a single brand name that spans all geographies; they are in various sectors; some are minority equity holdings and others are wholly owned; some are listed, some are not. It’s a real mixed bag.

In its most recent results, announced in June, revenue in its e-commerce sectors jumped 25%. This was totally dwarfed by the 60% revenue jump achieved by Tencent, which delivered a profit of $3.7bn to Naspers.

The dominance of Tencent has served to obscure the gains other investments are making, with revenue in the e-commerce sectors, food delivery and travel really jumping.

The food-delivery business, similar to UberEats in SA, serves as a good example. Naspers has minority stakes in Delivery Hero, which operates in 42 countries, and Swiggy, which has about half the Indian market. iFood has 98% of the market in South America, and it more than doubled its revenue and orders last year.

So in that case, is the dip a buying opportunity?

Analysts certainly think so: not one of 14 analysts who cover the stock rate it anything other than a "buy" or "strong buy".

Short is confident about the the company over the medium term and sees the current share price as a good opportunity to buy the share.

The generally poor market conditions, the threat of rate hikes and currency lopsidedness could continue for some time, he says.

Lotter is more confident, saying Vestact has invested in Naspers and continues to do so. "It’s about looking at the bigger picture, and investing where you think the future is," he says.

*This article has been corrected to say that Short is not in fact unsure about the company’s medium-term prospects. He is confident about them and sees the current share price as a good opportunity to buy the share.