Tencent to break 14-year record

With Tencent forecast to report a drop in sales for the first time since 2008, will there be anything in Q2 earnings to provide hopes for a rebound?
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Baked in the cake

The drop in revenue is not surprising, considering the second quarter was the height of the covid lockdowns in China, which hampered consumer demand and productivity. But consumer sentiment has been improving - potentially helped by the PBOC cutting rates last week – and this might be an early indication that things could be about to turn around. The fact of the matter is, though, that Chinese tech firms weren't as able to capitalise on the stay-at-home market, likely because of cultural differences.

Investors might be keen on the outlook section of the report, particularly the cost control measures. At the last earnings, the company vowed to terminate or sell non-core assets to streamline the business. The question is whether more sales can be expected, or whether executives think the business climate is improving enough to provide more concrete guidance.

What about the stock price?

Last Friday it was revealed that Tencent provided information on its algorithm to regulators, as part of China's crackdown on the tech sector. However, this wasn't seen as an important step to help right-side the regulatory issues. The looming threat of delisting from US indices hasn't been addressed, so the stock price started the week on the back foot.

Aside from the regulatory issues, the other factors in focus are likely to be gaming revenue, particularly following China's regulatory crackdown on what it calls "excess" gaming. Of note is the addressing of rumours of potential layoffs, which might help margins in the near term, but could make investors worry about the long-term outlook.

Tencent price near 4-year low

The Tencent stock price has recently fallen to $36 per share, a level not seen since the November of 2018. The move ensued after bulls failed to return above the range low at $41. Maintaining a bearish position below the resistance could see further downside movement towards the round $30 level.

On the opposite side of the range at $51, bulls are likely to receive firm resistance due to a confluence with the 200-day average. If bulls break the top, however, $55 and $63 are medium-to-long term levels to keep a close eye on, with the former being the bottom of a larger range. In the short-term, the 50-day average at $43 must weaken first, though.

Key takeaways

Tencent is expected to report a revenue drop for the first time since 2008 due to hampered demand and productivity amidst the height of the covid lockdowns in China. So, investors might be keener on the cost control measures the company will provide guidance on since in its last quarterly report it vowed to terminate or sell non-core assets to streamline the business.

If executives provide more concrete guidance, the stock price might be supported in the short term. However, that doesn’t mean the issues of delisting from US indices and China’s regulatory crackdown are going to disappear. So, on top of potential layoffs, the long-term outlook remains worriesome.