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Soaring Or Sinking With A Super-App

China’s dominant messaging and social media app WeChat helped turn Tencent into a blockbuster stock. But the company’s reliance on WeChat could hurt investors down the road.

Adam Seessel

INVEST THE VALUE-INVESTING community, of which I am proud to be a part, is still trying to get its head around technology stocks. We have historically scorned businesses like Apple and Amazon as boom-and-bust miscreations of the millennium, but enough time has passed that it’s clear this scorn is misplaced. Indeed, companies like these are the General Motors and Coca-Cola of our generation. However, when we evaluate tech stocks we risk being seduced by a business’s rapid growth or by its management’s charisma unless we use the same old-school, value-based framework handed down by Warren Buffett and his teacher Ben Graham. This framework encompasses many variables, but it ultimately seeks to answer two questions: How good is the business I’m buying? And am I getting it at a price that will deliver a superior long-term return?

So how should a value investor assess Tencent Holdings? The company, No. 237 on this year’s Global 500, is a conglomerate with a $425 billion market capitalization. It’s a Chinese mashup of Facebook, PayPal, Spotify, and WhatsApp. As the comparisons suggest, the businesses it owns are excellent. Virtually everyone in China who owns a smartphone interacts with Tencent almost every day. Still, as much as I admire what Tencent has accomplished, I worry about it as a long-term investment. As Buffett said in this magazine in 1999, the key to investing lies in determining not only the competitive advantage of any given company but also “the durability of that advantage.” In Tencent’s case, it’s the durability factor that concerns me.

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August 2019