Tencent falls over 5% after hitting an all-time high that pushed it close to a $1 trillion valuation

GUANGZHOU, China — Tencent shares dropped more than 5% on Tuesday — one day after a huge rally pushed its valuation to nearly $1 trillion for the first time.

The Chinese internet giant saw its shares hit as high as 767.5 Hong Kong dollars on Monday, rallying 11% at one point. That pushed the company’s market capitalization to 7.35 trillion Hong Kong dollars ($949 billion) on Monday.

Monday’s rally appeared to be propelled by bullish calls by two investment banks. In a research note, Citi raised its target price to 876 Hong Kong dollars from 734 Hong Kong dollars, a 14% rise from Monday’s close.

UBS also upped its price target on Tencent from 700 Hong Kong dollars to 830 Hong Kong dollars — that’s a more than 8% rise from Monday’s close.

But investors took profit on Tuesday, driving Tencent shares lower by around 5.48% to 724.50 Hong Kong dollars at 2.45 p.m. local time. The stock was down over 6% earlier in the day but pared some losses.

Investors are waiting for Tencent’s 2020 results for the fourth quarter and full year, which will be released in March.

Analysts are expecting revenue to come in at 131.83 billion yuan (about $20.36 billion) for the December quarter, a 24.6% year-on-year rise, according to Refinitiv estimates. Net income is expected to grow nearly 29% to 32.85 billion yuan.

Tencent is known for its huge gaming business which analysts expect to have performed well in the fourth quarter. Revenue from smartphone games in particular are expected to grow 46% year-on-year to 38 billion yuan, helped by new title releases, according to a recent note from Jefferies.

Other analysts have also backed that up.

“We expect solid results in upcoming 4Q20, with strength in the game business overall,” Macquarie analyst Han Joon Kim said in a note published Jan. 19.

But Tencent has also been growing other areas of its business including advertising, cloud computing and financial technology via its WeChat Pay mobile payment system.

WeChat, in particular, has been a focus of investors.

Last week, Tencent announced that transactions on its WeChat Mini Programs rose more than 100% in 2020 from 800 billion yuan in 2019. The company did not reveal the 2020 figure. But it highlights the way that Tencent is trying to monetize and increase the stickiness of its messaging app WeChat, which is used by over a billion people.

Mini Programs are apps people can use within WeChat without having to leave the messaging app. They have been a key part of the growth of WeChat.

Though the monetization efforts of WeChat are still in the early stages, analysts see this as a long-term effort.

“We continue to find stronger emphasis on improving accessibility and functionality than monetization. We think lack of monetization of mini programs in 2021 is fine, as there is limited expectation of such embedded in earnings expectation anyways,” Macquarie’s Kim said.

“Rather, Tencent’s growing influence in on-line commerce activity will strengthen the stock’s long-term narrative and support its valuation multiple.”