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Tencent Delivers Accelerating Results Amid Coronavirus Scare

By Billy Duberstein - Mar 19, 2020 at 10:05AM

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The Chinese internet giant had an impressive fourth quarter and seems likely to weather the coronavirus better than most.

Chinese internet giant Tencent Holdings (TCEHY -0.03%) reported its fourth-quarter and full-year results for 2019 yesterday. The reporting period ended in December, so results didn't incorporate any headwinds -- or potential tailwinds -- from the COVID-19 outbreak for the online games, social media, fintech, and cloud giant.

Even without the coronavirus, Tencent was coming off of a challenging year. 2019 included a slow return to online games growth after a 2018 ban on new game approvals was lifted, an advertising recession due to the prolonged U.S.-China trade war, competition from short-video platform Bytedance, and an NBA controversy that led to the suspension of certain NBA broadcasts in China, to which Tencent had the exclusive streaming rights.

Yet even with all of these headwinds, Tencent delivered accelerating results in the fourth quarter -- a testament to its deep economic moat and top management.

A woman plays a PC game on her computer and smiles with blue lights flashing around her.

Tencent delivered accelerating growth in the fourth quarter. Image source: Getty Images.

The results

Tencent divides its business into several groups -- value-added services, or VAS, which incorporates its online video game empire, video and music subscriptions, and other services that consumers directly pay for; fintech & business services, which includes its Tenpay electronic payments and asset management business, as well as Tencent's cloud computing services; online advertising, which incorporates both WeChat social media advertising and online video advertising; and "others," which is just a tiny segment that incorporates film and TV investments for third parties and other content licensing.

As you can see, Tencent's fourth-quarter growth marked an acceleration over the growth for the entire year, which seems to indicate that the company was coming out of its slump with a vengeance before COVID-19 hit China in January.

Tencent Segment

Q4 2019 Revenue Growth (YOY)

FY 2019 Revenue Growth (YOY)

VAS

20%

13%

Fintech & business services

39%

39%

Online advertising

19%

18%

Others

27%

57%

Total

25%

21%

 Data source: Tencent annual filing. Chart by author. YOY = year over year. VAS = value-added services.

Of special note, Tencent was able to leverage WeChat and grow social media advertising by 37%, even as online video advertising declined. WeChat is a crown jewel for Tencent, and the social media platform grew users 6.1% year over year to 1.16 billion people. On top of this, Tencent management decided to add a fourth WeChat advertisement to users' daily news feed in the fourth quarter during a heavy promotional season, then kept the fourth daily ad from mid-February onward on a permanent basis. Previously, management had limited the daily ad load on WeChat to just three per user per day. That's still much less than other social media platforms, so WeChat has the potential to continue raising ad loads in the future without alienating users.

Another important development is that Tencent seems to have gained traction with its new short-form video app Weishi. Weishi looks to be Tencent's answer to the challenge from Bytedance's short-video app TikTok, which burst onto the scene two years ago. Many had thought Bytedance would pose a threat to WeChat's ad dominance, but apparently that isn't the case yet. Meanwhile, Tencent seems to have gotten its Weishi product in order, reporting 80% quarter-over-quarter growth in daily active users and 70% growth in video uploads.

Meanwhile, the rest of Tencent's business was relatively solid, with online games growing nicely, especially Tencent's non-China international online games revenue, which more than doubled year over year. International gaming revenue grew to 23% of online games revenue last quarter.

Management noted that Tencent gained market share in cloud computing and was also the highest-revenue and lowest-loss video streaming service in China, in an otherwise slow year for streaming video in the country overall.

What about COVID-19 effects?

Of course, these solid results came before COVID-19, which will affect Tencent's business in several ways in the first quarter. Management noted a particular drop-off in payments during the outbreak as many offline stores completely shuttered. In addition, management said some cloud implementations would be delayed -- though not lost -- due to the outbreak.

Nevertheless, management also noted it had cut back on marketing for the payments business, so the slowdown won't materially affect profitability. Management also said that its social media advertising was fairly resilient during the downturn.

Tencent also saw a surge in web-based enterprise apps such as Tencent Meeting, Tencent Health, and Tencent Education services during the first quarter, while people were quarantined. Of particular note was the company's Tencent Meeting app, which was just launched in December and almost immediately grew to 10 million daily active users. Finally, Tencent also helped its offline business customers redirect customers to its WeChat mini-apps in order to drive increased online traffic. And of course, Tencent reported a predictable increase in the online games, streaming video, and music consumption that it's known for.

Short-term delay, long-term gain?

While the COVID-19 virus is tragic and could likely slow Tencent's business in the current quarter, Tencent's online games, video, music, and literature businesses should probably buffer any slowdown in payments and business services.

However, the need for remote work capabilities and the need for offline businesses to have a robust online business via WeChat mini-apps could actually accelerate trends that will benefit Tencent over the long term. That makes Tencent one of the most compelling tech companies to invest in during the COVID-19 downturn.

Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Tencent Holdings. The Motley Fool has a disclosure policy.

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