Why Tencent Stock Dropped Today

What happened

Tencent Holdings (OTC: TCEHY) fell 7.5% Wednesday after its largest shareholder announced plans to sell as much as $15 billion worth of its stock.

So what

Prosus (OTC: PROSY) said it will sell up to 191.89 million Tencent shares, or roughly 2% of the Chinese tech titan’s total share count. The sale will take Prosus’s massive stake in Tencent down from 30.9% to 28.9%.

Image source: Getty Images.

Prosus will use the cash it raises to diversify its portfolio. The Netherlands-based investment company promised to hold off selling any more of its Tencent shares for the next three years.

Now what

Prosus’s parent company, Naspers (OTC: NPSNY), made one of the most lucrative investments in corporate history. In 2001, it purchased a roughly 33% stake in Tencent for $32 million. The video game and financial services leader has grown into one of China’s largest and most powerful companies in the two decades since then — and the value of Naspers’s stake has skyrocketed.

Yet Prosus, which was created by Naspers in 2019 to house its Tencent stake, has long traded at a significant discount to the value of its investment assets. The company’s market capitalization stands at roughly $180 billion, according to Yahoo Finance!, while its stake in the $745 billion Tencent alone should theoretically be valued closer to $230 billion. Monetizing a portion of its holdings could help to remind investors of the value of its portfolio — and potentially help to close this valuation gap.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tencent Holdings. The Motley Fool has a disclosure policy.

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