Chinese internet giant Tencent (OTC:TCEH.Y) reported its second-quarter earnings on Wednesday, Aug. 12, delivering strong results and seeing its stock rise over 3.1% in the aftermath, adding to its already hefty year-to-date gains.
Tencent bounced back after its stock sold off in early August, after the Trump administration targeted the company's wildly popular social media platform, WeChat. However, a ban in the U.S. wouldn't really affect much of Tencent's revenue, which comes predominantly from China.
Meanwhile, while WeChat delivered solid growth in the second quarter, Tencent's overall results were powered by its dominant online games segment, as much of the world was holed up in quarantine through June. Going forward, Tencent expects continued strength in online games, with a little bit of help from an unlikely source: Tesla (NASDAQ:TSLA).
Tesla skins are a winner on Peacekeeper Elite
Tencent has been very well positioned for the pandemic, given its dominance in online games. During the second quarter, the company's overall 29.3% revenue growth was underpinned by a whopping 40.2% growth in online games. Within online games, mobile games shot up an even higher 62%. Helping matters was Tencent's international games growth, as countries outside of China mostly went into lockdown mode during the second quarter even as China began to open back up.
Tencent's mobile games are often free to play, but users are charged small fees for in-game extras such as new weapons, tools, and skins. Last quarter, Tencent's first-person-shooter mobile game, Peacekeeper Elite, celebrated its one-year anniversary and delivered solid results. To mark the occasion, Tencent offered players the chance to buy a Tesla "skin" for their avatar's vehicles. The skin was called out by Tencent as "highly popular" in its recent report. However, the skin wasn't even offered until July, so Tencent's sterling second-quarter games performance didn't even include this boost.
What's good for Tesla is good for Tencent
A partnership to exploit the Tesla brand in China is a win-win for both parties. That's especially true since Tencent owns roughly a 4% stake in Tesla today. As such, if Tencent enters into a revenue-sharing model with Tesla for exploiting its brand, Tencent also benefits.
Of course, Tesla likely benefits even more, and in multiple ways. The rising EV-maker is just at the beginning of its China launch, as the company's Shanghai facility began production at the start of this year. China was actually the only region where Tesla grew sales in the second quarter, and with nearly 1.5 billion people, it's a critically important region for the electric vehicle-maker. Launching an in-game skin is just one small way Tesla can market its brand in China to fend off local EV rivals amid U.S.-China tensions.
Finally, it's unclear if Tesla gets a licensing "cut" of every in-game skin bought on Peacekeeper Elite, or if Tencent gets to keep all Tesla "skin revenue" as a courtesy for free advertising. If Tencent does pay Tesla a small cut of revenue, Tencent's gaming volume is so large that it could actually make a nice ancillary stream of non-automotive revenue for Tesla. Tesla bears have pointed out that Tesla's auto production didn't actually make money last quarter, as the company's $428 million in regulatory credits sales to other polluters exceeded last quarter's entire operating income of $327 million.
While the amounts from any licensing revenue are likely relatively small, every little bit could help Tesla stay cash flow positive while also investing in its ambitious expansion plans. Maintaining a four-quarter streak of positive net earnings is also a requirement for joining the S&P 500 index, which Tesla qualified for after its small second-quarter profit, but which it may need to continue doing until a spot opens up.
Speaking of Tencent's investees...
Meanwhile, Tesla surged 13.1% on Wednesday after the company announced a 5-for-1 stock split, and its stock is up a ridiculous 230% on the year.
Tesla's rise has certainly helped Tencent's valuation at the margins as well. In fact, Tencent also revealed in its report that its portfolio of listed investee companies reached a whopping 726.2 billion renminbi, or $105 billion, as of June 30. That compares to just RMB329.02 billion, or $47.4 billion, one year ago.
In other words, Tencent's investments have more than doubled in value in just one year, proving again that this Chinese tech giant isn't only a great operator, but a great investor as well. Tencent's ability to identify and partner with great entrepreneurs outside of its own circle of competence is another reason it should be atop any Chinese buy list today.