Is Tencent a Bargain Amid 51% Surge and AI Partnership Buzz in 2025?

Wondering whether to stick with Tencent Holdings or take a fresh look at its prospects? You are not alone. Tencent’s shares have been anything but dull recently, trading at 633.0 at the last close. Over the past year, the stock has surged by more than 51%, and is up a remarkable 52.2% since the start of the year. While there was a minor dip of 0.4% over the past month, the seven-day rise of 2.1% hints at changing sentiment. Looking further back, the three-year growth of 220.3% stands out, although five-year returns of 17.2% remind us that the journey has not been without its bumps.

What is behind these moves? Recently, investor optimism has picked up as Tencent’s core social media and gaming platforms have proven resilient despite ongoing regulatory overhang. In addition, Tencent’s investment portfolio and expanding fintech services have kept the company in tech headlines, even as the global market narrative has grown more cautious. Continued innovation and steady engagement in new business lines have suggested long-term growth potential while adding some potential risk into the mix.

But with a value score of 2 out of a possible 6, Tencent is currently considered undervalued on only two fronts. Does that mean the stock is getting ahead of itself, or are there hidden strengths the market has yet to price in? Let’s break down how Tencent stacks up across different valuation methods. Later, I will share an approach that could shed an even clearer light on whether the stock is truly a bargain.

Tencent Holdings scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Tencent Holdings Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model forecasts a company's future free cash flows and discounts them back to today’s value. The goal is to estimate the company’s intrinsic worth. DCF is a widely used valuation method because it attempts to focus on underlying business fundamentals, not just current market trends.

Tencent Holdings’ latest twelve months free cash flow stands at CN¥201.4 billion. Analysts project the company’s annual free cash flows to rise steadily, with forecasts suggesting these could reach approximately CN¥321.7 billion by the end of 2028. Looking further ahead, Simply Wall St extrapolates that by 2035, Tencent’s free cash flows may surpass CN¥474.6 billion. This indicates strong momentum in cash generation despite evolving digital landscapes.

This DCF calculation uses a two-stage model to estimate the equity value of the business. Based on these projections, the intrinsic value per share comes out to HK$754.73. Compared to Tencent’s current share price of HK$633.0, this suggests the stock is trading at a 16.1% discount to its estimated fair value.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Tencent Holdings.

Our Discounted Cash Flow (DCF) analysis suggests Tencent Holdings is undervalued by 16.1%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: Tencent Holdings Price vs Earnings (P/E)

The Price-to-Earnings (P/E) ratio is a popular valuation metric for profitable companies like Tencent Holdings because it relates a company’s share price to its earnings, giving investors a quick sense of how much they are paying for each dollar of profit. A higher P/E typically reflects optimism about future growth, while a lower one may suggest concerns about risk or limited growth prospects.

What qualifies as a “fair” P/E ratio, however, depends on expectations for factors such as earnings growth, competitive position, and the overall riskiness of the company or its industry. Growth companies with strong profit histories can often justify higher multiples. On the other hand, elevated risk or slowing momentum can pressure valuations lower.

Tencent’s current P/E stands at 25x, which is modestly above the interactive media and services industry average of roughly 22.7x and the peer group’s 23.3x. Simply Wall St’s proprietary “Fair Ratio” model, which considers factors like projected earnings growth, profit margins, industry norms, market capitalization, and business risks, sets a fair P/E specifically for Tencent at 34.6x. This tailored benchmark offers an improvement over plain comparisons with industry averages or peers because it is designed to reflect a company’s own earnings potential and risk profile.

At 25x, Tencent trades well below its calculated Fair Ratio. This suggests the stock is undervalued relative to its long-term growth prospects and risk-adjusted potential.

Result: UNDERVALUED

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Upgrade Your Decision Making: Choose your Tencent Holdings Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let’s introduce you to Narratives, which offer a smarter, more dynamic approach for making investment decisions.

Narratives allow investors to go beyond the raw financials by combining their unique perspective or "story" about a company with assumptions for fair value, future revenue, earnings, and margins. This story is then translated into a personal valuation.

Every Narrative links a company’s potential and risks (the story), a financial forecast (the numbers), and a resulting fair value to create a full and understandable investment case.

This approach is accessible and intuitive for anyone. It is used by millions on the Simply Wall St platform’s Community page, where you can see how your Narrative compares to others and adjust as new information emerges.

With Narratives, you can make buy or sell decisions by comparing your own Fair Value to the current market Price. As Narratives update dynamically with fresh news or results, your outlook always stays relevant.

For example, looking at Tencent Holdings, some investors see fair value above HK$800 due to innovations in AI and global partnerships. Others are more cautious, estimating below HK$510 because of regulatory and competitive risks.

For Tencent Holdings, we’ll make it really easy for you with previews of two leading Tencent Holdings Narratives:

🐂 Tencent Holdings Bull Case

Fair Value: HK$813.65

Undervalued by: 22.2%

Forecast Revenue Growth: 15%

• AI-powered enhancements across social, gaming, fintech, and SaaS are expected to drive strong top-line growth while boosting efficiency. Margins are projected to compress to 22% due to increased competition and marketing expenses.
• Key business drivers include elevated user engagement from Weixin Video Accounts and Mini Games, international expansion via WeBank Technology Services, and continued global partnerships (Tesla, Spotify, Snap Inc.).
• Main risks cited are US blacklist developments (with current overseas revenues at 9%), a rising cadre of Chinese tech competitors, and regulatory shifts such as new AI framework requirements. These risks are managed and factored into a 9% risk discount rate.

🐻 Tencent Holdings Bear Case

Fair Value: HK$508.40

Overvalued by: 24.5%

Forecast Revenue Growth: 12%

• Despite growth catalysts like Tencent Cloud, global fintech expansion, and gaming leadership, these may not fully offset heightened regulatory, geopolitical, and market risks in the years ahead.
• Tencent faces persistent challenges from domestic rivals (Alibaba, ByteDance), market saturation in China, and high dependence on gaming revenue. Further headwinds may arise from potential data privacy issues and global economic uncertainty.
• The narrative sets a more cautious fair value due to anticipated regulatory tightening, increased innovation costs (such as metaverse and AI), and ongoing US-China tensions that could constrain international operations and investments.

Do you think there's more to the story for Tencent Holdings? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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