Just How Fast Is Tencent Growing?

In this segment of MarketFoolery, host Mac Greer is joined by David Kretzmann and Aaron Bush of Motley Fool Rule Breakers and Supernova to talk about the outlook for Tencent (TCEHY 3.56%) in light of its latest outperformance. The Chinese internet powerhouse posted an impressive quarter powered higher by its smartphone games and payment services revenue. As big as it is, Tencent's expanding on many fronts at rates usually reserved for much smaller companies -- and it has a near-monopoly in a key market. But there are risks.

A full transcript follows the video.

This video was recorded on Nov. 15, 2017.

Mac Greer: Aaron, let's start with one of the world's 10 most valuable companies. Do I have you interested?

Aaron Bush: Oh, I'm interested! What is it?

Greer: That's just it, it's not a household name, at least in the U.S., for a lot of people. Tencent, the Chinese internet giant, reporting a 69% jump in its quarterly net profit, blowing past expectations thanks to strong growth in its smartphone games and payment services. Now, Aaron, I know you're a Tencent shareholder, so I have to ask, what do you think? I'm resisting the urge to ask for your two cents on Tencent, because that's --

David Kretzmann: Mac ...

Greer: No, that is beneath the dignity of the show. So, what do you think of Tencent?

Bush: Who said big companies can't grow, because Tencent is proving all of those doubters wrong. This was a company, this quarter, it grew revenue 61% year over year. It grew net profit 55% year over year. And it's not a one-trick pony. It's doing a lot of good in a lot of different ways. Its gaming business, which is the largest piece of the business -- and it happens to be the largest gaming company in the world, by the way -- is on fire, especially their mobile games. It's up over 80% year-over-year. So, taking share, making a lot of money there. They also happen to have pretty much a monopoly on social media in China through WeChat. This quarter, they reported now 980 million monthly active users --

Greer: Which is a lot.

Kretzmann: A good amount.

Bush: It's quite a few. And that's just a phenomenal business, because they actually don't make that much money on advertising. They make more money from transactions that go throughout the platform. And as more people spend money in more different ways, WeChat becomes both more relevant through merchants, but also it takes a larger cut of all the things that go through it. So, there's a lot going on here and there's a lot to like.

Greer: David, what do you think?

Kretzmann: An incredible company. Going off of what Aaron said, Tencent has just 14% market share in mobile advertising, so there's still room for them to grow that. Considering that they control 55% of all mobile internet traffic in China, and WeChat alone accounts for about 30% or so of all mobile traffic in China -- so, just the scale that they have with WeChat, let alone their video game business. And then, they have so many other investments in Tesla, JD.com, a big e-commerce player in China, Flipkart, an e-commerce company --

Bush: Recently IPO-ed.

Kretzmann: Yeah. They have their hands in so many different pieces here. The company is generating an insane amount of cash. I would say, the main risk that sticks out to me with Tencent, I think they have a solid competitive position, but last month there were discussions that Beijing was interested in the government taking a stake in Tencent and some of the other big tech companies in China and potentially having their hands in some of decisions going on with the company. So, we'll see where that goes. I think that's a similar risk to what we see being discussed more and more here in the U.S. with the big tech giants, where more politicians and regulators are whispering the word monopoly or, talking about, do we need to regulate some of these big tech players. I think there are similar risks there in China for Tencent and some of the other big players. So, if the government actually does go that route where they start to treat Tencent like a state-owned utility or monopoly, I might get a little less excited.

Greer: What about that, Aaron? How worried are you about the government regulations?

Bush: I think it's important to look at. It's kind of funny, because essentially what the government would be doing is saying, "Hey, we're going to advise you, and we're going to ask that you pay us a fee for us advising you. And you don't get any say in that, by the way." So, I do think that's a potential risk. But, for the most part, I actually think regulation works to the favor of someone like Tencent, because regulation is why Facebook isn't in China, it's why Google isn't in China, and it's basically giving a company like this free rein to dominate. So, I think there might be some risk of the government nitpicking some policies here and there, but for the most part, that's actually been the fuel to their fire.

Greer: You mentioned Facebook and Google. I want to talk market caps in terms of what these companies are worth, just to put it in a relative context. Right now, at the time of this taping, Tencent worth somewhere in the neighborhood of $464 billion. Facebook, $515 billion. Amazon, $541 billion. Alphabet, aka Google, $714 billion. And, of course, Apple, the leader in the clubhouse, $871 billion. How much bigger do you think Tencent can be?

Bush: That's kind of tough to say. I do think Tencent might have the opportunity to become bigger than maybe, the likes of Facebook or Alphabet, simply because it does more things. It does dominate social media. That's important. But, it's also a giant entertainment company through games. It's a giant player in social media. And it's been more aggressive in investing in so many different players that, I think that's a really powerful position to be in, especially in China and that Asian region in general. If they can scoop up a lot of the growing community of new start-ups, that puts them in a sort of unstoppable position where they can win no matter what. And I think that can keep their trajectory going for a really long time. I would not be surprised at all if this becomes a well over $1 trillion company.