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When Should Investors Consider Selling Tencent’s Stock?

Tencent Holdings Ltd (SEHK: 0700) is a leading internet company in China with businesses across online games, communication and social, digital entertainment, content, and more.

Tencent’s solid business performance has made it a favorite company among retail investors. Yet, one important aspect these investors should consider is when (if ever) should they sell Tencent stock?

Don’t get me wrong. I think investors should hold Tencent’s stocks for as long as possible. The company is strong and poised to benefit from growth opportunities ahead. That said, a smart investor always plans for the worst.

In this article, we will look at two scenarios that could weaken Tencent’s stock.

Weakening competitive advantage

One of the main reasons to invest in Tencent is its dominance across multiple business verticals.

In China, Tencent is the country’s largest social communication company (through QQ and Wechat), a leading payment company (through Wechat pay), the country’s biggest gaming company, a leading online video platform (through Tencent Video), and more. These services are highly valued by its customers, which grants Tencent a powerful position on the market.

That considered, if there are signs that Tencent’s influence in these areas is weakening, investors should consider selling the stock. For example, if a new social communication app emerges and becomes popular among the Chinese population, this may signal Tencent could lose control of an important market.  That said, Tencent has adapted well to changes in the technology industry so far, evolving from just a social communication app, QQ, to its current conglomerate structure. As investors, however, we should prepare for the worse.

Declining growth

Since its listing in 2004, Tencent has grown into a technology titan. Its initial investors saw their investment increase by over 4000%.

Such returns were made possible by Tencent’s steady growth over time.

And the company’s blockbuster growth streak is far from over.

For example, in the quarter ending 30 September 2019, revenue increased at 21% year-on-year. Net profit jumped 24% year-on-year. Today most investors expect the company to maintain its high growth rate for the foreseeable future.

But despite all that good news, there is a bit of bad news. No company will continue to grow at high rates forever. Eventually, a time will come when Tencent’s business performance succumbs to natural laws. When that happens, investors might want to reassess holding the company’s stock. So far, however, there is no sign the company will slow down anytime soon.

Foolish conclusion

Tencent is one of the best wealth creators in the last 15 years, delivering outstanding investment returns to its loyal investors.

Going forward, the company is well-positioned to grow its operations. Still, investors should keep a close eye on its competitive advantage and growth rates. Any signs of deterioration in those two areas should make investors reevaluate their holdings in the company.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Lawrence Nga doesn’t own shares in any companies mentioned.