Ten years ago, buying tech conglomerate Naspers was one of the most compelling investment opportunities available to South African investors. Through its stake in Chinese internet giant Tencent, Naspers offered exposure to a world-class tech business that few investors could access directly. That thesis worked extraordinarily well. Tencent became one of the world’s most successful tech companies and generated enormous wealth for shareholders.
Today’s investment landscape is very different.
It’s not that Tencent has become a poor business. Far from it. The real question is whether a single company remains the best way for investors to participate in the next decade of tech innovation. The answer, increasingly, might lie with the broader opportunities offered by the S&P 500, the key US stock market index.
When Naspers first invested in Tencent, owning one exceptional tech company was enough. Today’s technology network is far larger and more diverse. AI, cloud computing, semiconductors, digital advertising, software and digital infrastructure are creating value across hundreds of companies instead of a select few. The future of tech is no longer concentrated in one champion but is being built across an entire chain.
The Naspers drawback
Even if you remain positive on Tencent, another question cannot be ignored: is Prosus or Naspers still the best way to own it? The greatest concern might be the holding company structure itself.
Management has spent years attempting to narrow the discount to underlying value through buybacks, simplifications and other value-unlocking strategies. The buyback programme has retired a significant portion of the free float and increased NAV. Yet the discount remains stubbornly wide. At some point, investors need to acknowledge what the market is telling them.
The discount is no longer being treated as a temporary anomaly. Instead, it increasingly appears to be a structural feature. That does not mean that management has failed. It simply means that investors should be cautious about assuming that a discount that has persisted for more than a decade will suddenly disappear.
Importantly, switching from Naspers is not the same as becoming bearish on Tencent.
A year or two ago, there were concerns that Tencent was falling behind in AI. Today the picture looks far brighter. The company is investing heavily in AI infrastructure and integrating AI across WeChat, cloud services, gaming and advertising. It continues to leverage one of the most powerful digital distribution platforms in the world.
With 1.4-billion users across payments, messaging, gaming and cloud services, Tencent remains exceptionally well positioned to monetise AI applications. If the future of AI is in applications rather than foundation models, Tencent could emerge as one of the beneficiaries.
Assuming the holding company discount remains embedded, the real debate becomes Tencent vs the S&P 500.
Investors who own Naspers or Prosus are making a concentrated bet. They are relying heavily on Tencent, receiving a moderate contribution from a portfolio of other investments and hoping that management eventually succeeds in narrowing the discount.
But consider this: Tencent’s market capitalisation is about $500bn. The combined market value of the S&P 500 is roughly $70-trillion, making it about 140 times larger.
Perhaps more notable is that the 10 largest companies in the S&P 500 account for roughly 40% of the index. They include Nvidia, Microsoft, Alphabet, Amazon, Meta, Broadcom and other businesses at the centre of the AI revolution.
Many investors assume that buying an index means diluting exposure to tech. Not true.
Today almost 40c of every dollar invested in an S&P 500 tracker is automatically allocated to some of the world’s dominant AI, semiconductor, cloud computing and digital platform businesses. Viewed this way, investors are not comparing Tencent with the S&P 500. They are comparing one Chinese tech champion with an entire network of Western tech leaders.
If AI transforms the global economy over the next decade, investors don’t need to know whether Nvidia will be the biggest winner … or Microsoft, Amazon or Alphabet. The index owns them all. That diversification may prove to be one of its greatest strengths.
Sell low, buy high?
The obvious counterargument is that investors may be selling a relatively cheap asset and buying a more expensive one. Fair enough. Naspers and Prosus continue to trade at a substantial discount to their underlying asset value, while many of the largest constituents of the S&P 500 command elevated valuations because of investor enthusiasm surrounding AI.
But investing is not only about valuation multiples. Sometimes it is about positioning capital where the greatest long-term opportunities exist. The rationale for switching is strategic rather than valuation driven.
Using Tencent’s American depositary receipts vs the S&P 500 total return index over the past decade, Tencent generated an annual return of about 8.5%, while the S&P 500 delivered about 15.8% a year. A $100 investment in Tencent 10 years ago would today be worth $226. The same $100 invested in the S&P 500 would have grown to $434.
Owning a broad collection of winners often proves more rewarding than trying to identify a single champion. If Tencent becomes one of the major winners of the AI era, Naspers shareholders will benefit. But S&P investors can also win if Microsoft wins. Or Nvidia. Or Alphabet. Or Amazon. Or Meta. Or Broadcom. The S&P 500 is not a bet against Tencent. It is a bet that we simply don’t know who the ultimate winners of the AI revolution will be.
Shapiro is chief global equity strategist at Otto1890
