Key points
- Now that Nvidia has been ousted from the Chinese market, other names in the nation are circling a potential $7 billion gap to fill.
- Tencent is at the top of the list to take over its new artificial intelligence model, reportedly among the best in the world.
- The stock is well ahead of its peers, a triple-digit rise could be ahead for investors.
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The United States and China have long been at odds over technology. Every week seems to bring a new ban on what China can and cannot use in terms of chip and semiconductor technology. In an effort to control potential national security risks and technological advances from China, Nvidia Co. NASDAQ:NVDA was asked to stay out of the Chinese market.
This leaves a potential $7 billion gap that will need to be filled by other players in the nation. Companies like Huawei are starting to take responsibility for bringing China’s AI capabilities up to international standards. However, top players like it Tencent Holdings Ltd. OTCMKTS: TCEHY could bear most of the weight.
At least, that’s what Wall Street thinks today, as investors soon find out what expectations are for this stock. Price targets and earnings per share (EPS) projections suggest Tencent could outperform similar peers Alibaba Group NYSE: CHILD.
China is not alone
After hitting a five-year low, the CSI 300 Index (China’s S&P 500) has attracted some US investors to look for opportunities in Chinese stocks. Among these, Ray Dalio and Michael Burry are grabbing some more typical names.
As a macro investor, Dalio took the path of exchange-traded funds (ETFs). iShares MSCI China ETF NASDAQ:MCHI. This ETF offers investors an annual dividend yield of 3.6%, higher than the 10-year Chinese government bond yield of 2.3%.
Historically, whenever stocks pay a higher yield than “risk-free” government bonds, investors around the world flock to buy potentially undervalued stocks. This is the case today, as Burry has found its value proposition in Alibaba and JD.com Inc. NASDAQ:JD.
Left to its own devices, the Asian powerhouse must now find a way to keep up with the AI race. And if Nvidia’s chips can’t fill it, then it looks like a 469% upside to Tencent’s consensus price target of $210 might.
Other roads are not the same
Investors who feel that investing in Chinese stocks is too risky may have to leave some money on the table. Micron Technology Inc. NASDAQ:MU it’s a US name with high exposure to the Chinese chip market, but the market doesn’t think it has what Tencent can bring to the table.
Analysts at Bank of America Co. NYSE:BAC I think Micron stock could go as high as $120 per share, which is barely a single-digit upside from today’s prices. Investors can also look at this by investing in Alibaba. However, that stock has close ties to Huawei, which could pose a threat to those investing from the United States
Tencent, trading at 74% of its 52-week high, represents a potentially better opportunity than Micron stock, which trades at 96% of its 52-week high. Additionally, forward P/E ratios show Tencent trading at a 38% discount to Micron. A forward P/E of 10.4x versus a valuation of 16.8x is just the beginning.
On a sales price (P/S) basis, Tencent is once again the obvious discount. A multiple of 3.8x falls 41% below Micron’s 6.4x, implying that the market has yet to realize the value of Tencent’s potential revenue increases from cloud computing and artificial intelligence capabilities.
In fact, Tencent’s Hunyuan LLM AI model is now reportedly among the best in the world. As China seeks to close the technology gap with the United States, Tencent could become the go-to platform for building this much-needed infrastructure.
Tencent’s ceiling is much higher
The stock appears cheap enough for management to purchase in large quantities. Tencent announced a $12.8 billion share buyback program, representing up to 4% of the company’s market capitalization.
Typically, a vote of confidence and share buyback by management can be interpreted as a two-way message. By implying that the stock is cheap and expected to rally soon, Tencent management understands the opportunity to close Nvidia’s gap.
The stock’s all-time high of $97 per share was reached when the US Federal Reserve (the Fed) lowered interest rates in 2021. If history wants to repeat itself, a potential new round of interest rate cuts could bring Tencent back to its former glory. .
Since the tech stock mania hasn’t yet had a contagion effect on foreign markets, contrarian investors can find double- or even triple-digit upside by siding with China’s top pick for an AI revolution.
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