Tencent, the world’s largest gaming company and one of the biggest social media service owners, saw its stock plummet in 2018, costing investors as much as $271 billion in losses. Tencent shares are now seeing a massive recovery fueled by opportunities from "Fortnite" and "Apex Legends" in China’s booming gaming sector and improving sentiment in the domestic stock market.
Tencent Stock Rebounds 50% Compared to Last October
Tencent’s share price has pumped over 8% this week alone. According to Bloomberg reporting and exchange data, Asian investors poured $304 million into Tencent stock on Monday. This compared to a dramatic low in October 2018 which saw the company plunge from being the world’s 5th-largest company by market value, right out of the top ten.
That said, Sinolink Securities analysts have urged investors to be cautious due to the magnitude of the rally and concern that Tencent stock might not be out of the 2018 woods just yet.
Indeed, Tencent’s booming share price may be partly attributed to a surprisingly-buoyant Chinese stock market. Despite data out of China pointing to an economic downturn severe enough to impact other global economies, China’s stock market is rallying to a three-year high. Driven by optimism over US-China trade dispute resolution, China’s core markets have seen a $1 trillion-dollar rally. Just days ago, the Shanghai Composite Index had its best day of trading since as far back as June 2015.
Are Tencent Speculators Waiting for a 'Fortnite' License?
Last year, Chinese regulators imposed an almost year-long freeze on new gaming title approvals, a move that weighed heavily on gaming stocks.
January 2019 saw the first new game approvals, though Tencent had to wait until February to see two of its own titles authorized for official release. China’s new Online Games Ethics Committee has now approved 352 games since its creation. However, Tencent-backed Epic Games’ "Fortnite" and Bluehole’s "PlayerUnknown’s Battlegrounds" are still not licensed to make money in China.
Tencent owns/co-owns four of the world's 10 top-grossing video games including Fortnite - which my son is absolutely addicted to! $TCEHY - Why I'm Raising My Bet On Tencent https://t.co/MDsHIGKsNi https://t.co/mqzUoDSQa9
— Marissa J Weeks (@MarissaJWeeks) February 27, 2019
"Fortnite: Battle Royale’s" truly breathtaking take-off saw Epic Games achieve a company valuation of $15 billion by October 2018. Not only has "Fortnite" has become potentially the world’s most popular online game, but Epic also raised $1.25 billion from its investors in 2018.
The global gaming market was worth around $115 billion in 2018. New Zoo data says Chinese gamers, a significant portion of this total, spent $34 billion on video games last year. With the absence of revenue from "Fortnite" and "PUBG," game publishers like Tencent missed out. This, combined with global market woes, may have impacted Tencent’s share price free-fall.
Tencent actually restricted gameplay in China this week in a bid to get back in the good graces of regulators. It added new rules for young players, even those as old as 13, requiring parental approval and evidence of identification for young players to access certain titles. It’s unlikely that this is affecting Tencent’s recovery, but another gaming play might be.
Or is it the Potential of 'Apex Legends?'
Tencent’s gaming domination and the potential of a Chinese license for "Fortnite" could be inspiring investors. But "Fortnite" still sits in regulatory limbo. Tencent could try to bring up-and-coming Electronic Arts and Respawn Entertainment’s new title "Apex Legends" to China instead.
Looked at Cross Platform Play for 4 Battle Royale games
If Apex Legends wants to dethrone Fortnite + fuel their rapid player growth trajectory even more, they will have to quickly enable cross platform play + launch on mobile (Tencent or Netease are the only viable options here) pic.twitter.com/A9rrI10C3x
— Jeff "SuiJeneris" Chau (@SJeneris) March 4, 2019
"Apex Legends" launched in February and quickly achieved 25 million players, leading some to speculate it could overtake "Fortnite." Either title’s approval in China could boost Tencent’s profits this year. Tencent’s gaming revenues fell from 48% growth in quarter three of 2017 to 4% decline by the third quarter of 2018. Critically, a third of the company's revenue comes from online gaming.
Though China’s new gaming regulator appeared set to grant up to 3,000 new licenses this year, new reporting by Variety suggests the body has ceased accepting new applications while it deals with a 7,000 title backlog.
Music, Social Media Ventures Continue to Impress
Another boost for the company comes from the stock of its majority-owned spin-off Tencent Music, the largest music platform in China. Its IPO raised $1 billion in December 2018, and the stock has also jumped by over 30% this year. Tencent Music’s revenue is expected to grow from $2.8 billion in 2018 to $10.5 billion by 2022.
Tencent’s not done with its social media arm, either. It invested $150 million in Reddit in February, pushing the company's value up to $3 billion. As the owner of China’s predominant WeChat and QQ platforms, it has plenty of markets and an aggressive wider investment strategy that could be inspiring shareholders.
That said, China’s gaming market and the country’s overall stock market performance could still make or break Tencent's current share price rally.