Chinese tech giant Tencent (OTC:TCEHY) generates most of its revenue from the gaming, advertising, fintech, and cloud markets. However, it also generates over a quarter of its profits from its investments in public companies and private unicorns.

That massive portfolio, which had a fair value of 352.7 billion yuan ($50.5 billion) last quarter, includes stakes in over 700 companies. But at a company event in early 2018, Tencent president Martin Lau warned that its "hot summer" for investments in 2018 could be followed by a "cold winter" in 2019, due to "fewer opportunities in growing markets" and tougher competition in mature markets.

Therefore, it wasn't surprising that Tencent only invested in 108 companies in 2019, according to research firm IT Juzi, marking a 33% drop from its 162 investments in 2018. It also cut its annual investment spending by 53%, from 72.7 billion yuan ($10.4 billion) in 2018 to 34.3 billion yuan ($4.9 billion) in 2019. Let's see what this strategic shift means for Tencent's future.

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A hot summer to a cold winter

Tencent made some solid investments in 2018, which partly offset the damage caused by a nine-month freeze on new gaming approvals in China. Sixteen of the companies it backed -- including the Gen Z-oriented digital platform Bilibili, the game streaming platform Huya and the music streaming giants Spotify and Tencent Music -- all went public.

But in 2019, Tencent reined in its spending as its revenue growth decelerated amid macro headwinds and tougher competition, and it prioritized the expansion of its rapidly growing fintech and business services unit, which housed WeChat Pay and Tencent Cloud. That strategic shift -- along with tighter cash flows caused by the slowdown in its gaming business -- likely caused Tencent to adopt a more cautious stance toward investments.

Meanwhile, the big gap between Tencent's GAAP earnings (which include its gains and losses from acquisitions and divestments) and non-GAAP earnings (which exclude those gains, losses, and other "one-time" charges) highlights the volatile nature of its ever-shifting investment portfolio:

EPS growth

Q3 2018

Q4 2018

Q1 2019

Q2 2019

Q3 2019













Note: Growth is year-over-year. Source: Tencent quarterly reports.

This tells us that Tencent's core businesses are consistently profitable, but its investments generate inconsistent gains.

Tencent mostly invested in healthcare, finance, and e-commerce companies throughout 2019. About one-fifth of its investments were focused on enterprise services, which complement the growth of its business services and fintech unit. Notable investments this year included stakes in Chinese e-commerce service provider Youzan, which runs third-party e-commerce stores on Tencent's WeChat, and Indian digital banking company NiYO, which complements Tencent's overseas expansion.

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A possible acceleration in 2020

The U.S.-China trade war and the economic slowdown in China caused other companies to rein in their investments in 2019. Tencent's rival Alibaba (NYSE:BABA) invested 71 billion yuan ($10.2 billion) in 37 deals throughout the year, compared to 80 billion yuan ($11.5 billion) on 62 deals in 2018. Chinese companies raised $93.4 billion in 2,795 funding rounds in 2018, according to Crunchbase, but that figure plunged to just $35.6 billion in 2,047 funding rounds between January and mid-November in 2018.

However, three strong catalysts could cause Tencent to increase its investments again in 2020. First, the "phase one" trade deal between the U.S. and China could reduce some pressure on the Chinese economy, which would strengthen Tencent's advertising, fintech, and enterprise businesses.

Second, its video game business is recovering, thanks to new gaming approvals and the strength of flagship titles like Honor of Kings. That recovery contributed to a 28% annual jump in Tencent's operating cash flows in the first nine months of 2019.

Lastly, Tencent needs to feed the growth of its business and fintech services business -- which posted a slight slowdown last quarter -- with fresh investments and partnerships. Doing so would strengthen its ecosystem and widen its moat against ecosystem rivals like Alibaba and ByteDance. Simply put, 2019 was likely just a speed bump for Tencent's investment portfolio, and it should invest in a growing number of companies as its core businesses improve.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.