Abstract

The case is about the troubles faced by Tencent Holdings Limited (Tencent), once the most valuable company in China by market capitalization. Tencent, one of the world’s largest internet companies, had become the most powerful mobile ecosystem in China. It became the first Chinese technology company to join the elite US$500 billion market capital club, backed by its huge revenue from video games, advertising, and social media businesses. Climbing on the growth drivers, Tencent’s stock price reached its peak in January 2018, but investor sentiments soured after a series of troubles cropped up for the company including a drop in its profits and a regulatory crackdown on gaming in China. Additionally, Tencent’s growing debt position, massive investments, overseas marketing strategy, and trade war fears all contributed to the decline in its stock price value. Investors voiced doubts about the firm’s declining profit margins and its ability to keep innovating. Amid regulatory hurdles, the company went in for a strategic reorganization, took global expansion initiatives, and introduced anti-addiction measures to limit play time for vulnerable segments. Analysts were optimistic about Tencent’s future and hoped that its strong long-term growth prospects would help the company bounce back in the coming days. However, with competition growing in the market and some segments facing saturation, can Tencent maintain its stock price valuation?

Learning Objectives

The case is structured to achieve the following Learning Objectives:

• Understand the reasons for Tencent’s growth as an internet technology player in China’s digital ecosystem.
• Understand the reasons for Tencent’s high market valuation and subsequent fall of its stock prices in 2018.
• Discuss and debate whether Tencent’s stock can bounce back from its fall.
• Explore future strategies for Tencent to re-establish itself and gain positive market sentiment.
• Understand how an investor can value Tencent’s stock price.

Keywords

Game monetization; Market capitalization; Strategic investment Catalyst-driven v/s Fantastic investment Sustainable earnings growth; Stock valuation; Profitability analysis DuPont Analysis; SWOT Analysis DCF Valuation; Discounted Cash Flow Analysis; Free Cash Flow Valuation Model; Perpetuity Growth Method; EBITDA Multiple Method; Break-even Analysis