After the giddy heights of January when its shares hit an all-time high, Tencent Holdings has shed $77 billion in value as investors price in the costs of the Internet giant\u2019s massive spending spree.<\/p>\n
Results on Wednesday are expected to show that rising costs and investments will hurt profitability at Asia\u2019s biggest listed company.<\/p>\n
While Tencent has said sacrificing margins in the short-term is necessary to anchor future growth, analysts are concerned that the company isn\u2019t yet able to make enough money from its mobile games to offset a decline in the desktop unit, its most profitable platform.<\/p>\n
Shenzhen-based Tencent has been expanding into new businesses such as cloud computing and paying for fresh content, a strategy that contributed to a 72% surge in costs in the fourth quarter.<\/p>\n
Analysts predict gross margin in the latest period dipped below 47% for the first time since 2003, the earliest figures available, according to the average of 11 estimates compiled by Bloomberg.<\/p>\n
While they remain bullish on the stock, Citigroup Inc. and Deutsche Bank AG are among brokerages that have lowered their sales or earnings expectations in 2018.<\/p>\n
\u201cThe short-term weak performance in PC games coupled with larger payment-related subsidies and weaker ad seasonality may affect the company\u2019s margin,\u201d China International Capital Corp. analyst Natalie Yue Wu wrote in a May 8 note.<\/p>\n
\u201cWe see a period of share price weakness due to game business.\u201d<\/p>\n
Shares of Tencent have slipped 13% since its high on Jan. 23, declining more than twice as much as Hong Kong\u2019s benchmark index.<\/p>\n
Tencent rose for a fifth day on Monday, following tech gains in Hong Kong and China after US President Donald Trump\u2019s reversal on ZTE Corp.<\/p>\n
Tencent ramped up spending this year as it competes with e-commerce rival Alibaba Group Holding Ltd on most fronts, including online entertainment, payments, cloud computing and even retail, Alibaba\u2019s home turf.<\/p>\n
Tencent\u2019s retail-related deals this year include its backing of Carrefour SA\u2019s China unit and leading a $5.4 billion investment in Wanda Commercial Properties Co.<\/p>\n
It\u2019s also been pumping money into its hottest online games, and fending off competitors in the mobile-streaming and content business.<\/p>\n
The battle has been a drag on margins at both Chinese companies. For Tencent, a stake sale from a major holder and a decline in the shares of some of its largest investments have put more pressure on the stock.<\/p>\n
The options market is implying a daily move of 2.4% either way after the results, which would be the biggest earnings-day reaction in more than two years.<\/p>\n
1Q 2018 estimates: <\/strong>Gross margin: 46.96% (11 estimates) Revenue: 70.77 billion yuan (15 estimates) Net income (GAAP): 17.74 billion yuan (11 estimates) Operating profit: 22.66 billion yuan (13 estimates).<\/p>\n
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