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These Are Tencent's Fastest-Growing Businesses

By Billy Duberstein – Apr 8, 2018 at 2:08PM

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Tencent is a high-growth company, but which segments are growing the fastest?

By all accounts, 2017 was a terrific year for Chinese internet conglomerate Tencent (TCEHY 0.06%). The owner of both the largest video game franchise in the world and the one billion-user WeChat social network saw its stock rise 113% in 2017. In the recently reported fourth quarter, revenues grew at a blistering 51%, with non-GAAP earnings up a strong 42%, which was a slightly lower rate due to the company's heavy investments in its future.

But for a company that already has a market capitalization of $540 billion, how much can Tencent grow, and how different could the company look in the future? To peer into the crystal ball for Tencent, let's look at its fastest-growing businesses units (hint: they're not video games), and where they might take the company.

a stream of hundred dollar bills falls from the sky.

These businesses are powering Tencent's future growth. Image source: Getty Images.

Social media advertising

It may be argued that although Tencent receives the largest contribution to its revenues today from gaming, its WeChat all-in-one super-app is its real crown jewel. Tencent is still in the early days of monetizing WeChat, as the company held off showing ads on WeChat Moments -- the photo-sharing part of WeChat most similar to Facebook -- until 2015, a full four years after launching the app.

That growth may be starting to kick in, however. In the fourth quarter, "Social and others" advertising revenues, which comes mostly from WeChat Moments, increased by 68% to RMB 8,240 million, which is not only impressive, but marked an acceleration over the third quarter's 63% growth.

Besides WeChat Moments, opportunities to further boost digital advertising include mini-programs, WeChat Search, and the new premium "brand zone" advertising platform for businesses to reach non-followers. Mini-programs are especially exciting, as they are lightweight applications that can be run completely in WeChat and don't need to be downloaded on a phone. As of the end of 2017, there were over 580,000 mini-programs and 170 million daily active users -- not bad for a product that's only one year old!

For the full year, WeChat grew its overall monthly active users 11.2% to 988.6 million users and crossed the one billion mark more recently just after the Chinese New Year. With increasing usage and a higher customer count, Tencent could be well on its way to closing the gap with Facebook, which earns around 10 times more social media ad revenue than Tencent, despite having only about twice the users. 

Tencent Video

While WeChat may be a close comparison to Facebook, Tencent Video has become largest video streaming service in China, both in terms of daily active users for its ad-supported video service, as well as paid subscriptions for its premium content offerings. Paid subscribers skyrocketed 121% in 2017 to 56 million, which is already almost half the subscriber count of Netflix.

Another interesting angle on Tencent video is that it already has a large backlog of intellectual property from its China Literature and video games business, which it can use to make into original films and/or streaming television series. In that sense, it's not dissimilar to Disney's Marvel franchise, with its backlog of characters that Disney has made into series such as Jessica Jones, Daredevil, and Luke Cage for Netflix, and will soon be on Disney's upcoming direct-to-consumer offering.

Cloud Computing

Since Tencent is building out its own Facebook and Netflix-like offerings, why not add an Amazon Web Services to the mix? Yes, Tencent is getting into the cloud computing game, and in a big way. In the fourth quarter, Tencent's "Other" revenue -- which encompasses payment and cloud computing businesses -- grew 121% to RMB 14,084 million, or 21.2% of Tencent's fourth-quarter revenue. The company claims the majority of that growth came from cloud revenue.

Tencent faces off with rival Alibaba (BABA 3.29%) in the Chinese cloud computing race. And while Tencent's cloud revenue is relatively small now, it could grow rapidly. Since China is a less-developed economy, it could potentially "leapfrog" into cloud computing even faster than the big enterprises of the West, which have lots of infrastructure built in sophisticated private data centers (though even here, the cloud is rapidly taking share).

Tencent has about 15% cloud market share in China, behind leader Alibaba with over 30%, but that gap is projected to close in the next few years in a rapidly growing market.

Tencent of the future

Tencent currently dominates the global video gaming industry, but its future is much more diversified. As its social media ecosystem, streaming video content, and cloud computing divisions ramp up, the company will increasingly become more of a diversified tech-based conglomerate, and thus more of a proxy for China's rising and tech-savvy middle class.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Billy Duberstein owns shares of Amazon, Facebook, Netflix, Tencent Holdings, and Walt Disney. The Motley Fool owns shares of and recommends Alphabet (A shares), Amazon, Facebook, Netflix, Tencent Holdings, and Walt Disney. The Motley Fool has a disclosure policy.

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