Tencent Is Dangerously Close to Bear-Market Territory

Tencent Holdings Ltd. TCEHY -1.31% has gone from stock-market darling to the verge of bear-market territory.

Shares in the internet giant—still Asia’s most valuable listed company—tumbled 2.5% to 386.80 Hong Kong dollars on Wednesday, taking its total fall since its late January peak to 19%. A drop of at least 20% is commonly referred to as a bear market.

The slide comes as global investors re-calibrate their expectations for internet and social media stocks in the wake of Facebook Inc.’s data scandal. Tencent’s last bear market was in 2015, when it fell 27% over a four-month stretch.

The concern, at least in the U.S., surrounds how additional regulatory scrutiny might impact the business models of Facebook and other large internet companies such as Google parent Alphabet Inc., Amazon.com Inc. and Netflix Inc. These four so-called FANG stocks shed a combined $86 billion in market value on Tuesday, according to FactSet, after Alphabet’s quarterly results disappointed investors.

It might seem odd that Tencent, best known for its popular WeChat messaging app and the world’s largest videogame publisher by revenue, would be hurt by developments in the U.S.: The company earns the vast majority of its revenue in China.

But the selloff is part of a global phenomenon in which investors are questioning whether tech stocks can maintain their recent lofty valuations.

Tencent’s fall since January has even outpaced those of its major global tech peers, including Facebook and Alphabet. Shares of other large Chinese companies have been hit too. E-commerce titan Alibaba Group Holding Ltd. , internet search giant Baidu Inc. and Tencent, which together make up the so-called BAT stocks—along with online retailer JD.com Inc. —have fallen by double-digit percentages since then.

Tencent’s signage hangs during the World Internet Conference in Wuzhen, China,, in December. The company’s fortunes have since tumbled. Photo: Aly Song/Reuters

“It’s undeniable that there has been a coordinated correction in these stocks,” said Manishi Raychaudhuri, head of equity research, Asia Pacific, for BNP Paribas in Hong Kong.

While regulatory challenges in the U.S. may not have a direct impact on these Asian companies, “we’ve seen that if there’s a valuation correction in a prime segment of the market, it does tend to follow through in other parts of the same sector in other geographies,” he added.

Tencent has been hit by a confluence of bad news in recent weeks, marking a sudden turnaround in fortunes after it last year became the first Asian tech stock to achieve a market capitalization over $500 billion.

The company, now worth a still-huge $465 billion, reported disappointing quarterly earnings in March and signaled its profit margins could narrow this year.

One of its biggest shareholders, South African firm Naspers Ltd. , also disclosed last month that it was selling almost $10 billion worth of its position. Naspers hadn’t previously sold any of its Tencent stock since paying just $34 million in 2001 for its initial stake in the company, before Tencent went public.

Others are keeping the faith.

The average price target among the 45 equity analysts that cover Tencent is $523.28, according to FactSet. That marks the widest-ever divergence between the average analyst target relative to where the stock trades.

And some investors say the selloff could be a buying opportunity. Lumping the recent troubles of the FANG stocks with the BAT names is “an unfair comparison for the Chinese companies,” said Naomi Waistell, an emerging-market equities portfolio manager at Newton Investment Management, a London-based subsidiary of BNY Mellon Investment Management.

Ms. Waistell, who says her fund has owned Tencent since 2014, described the stock’s recent selloff as “a classic rotation” after more than doubling in 2017.

“It’s broadly healthy,” she added. “Tencent had very strong performance last year. That couldn’t continue in a straight line.”

Write to Steven Russolillo at steven.russolillo@wsj.com

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