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Why Tencent Investors Shouldn't Fear Trump's WeChat Spat

By Leo Sun – Aug 13, 2020 at 1:49PM

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Investors should focus on the tech giant’s big earnings beat instead of WeChat’s issues in the U.S.

Chinese tech giant Tencent (TCEHY 2.11%) recently dazzled investors with a big second-quarter earnings beat. Its revenue rose 29% annually to 114.9 billion yuan ($16.2 billion), beating estimates by 2.2 billion yuan.

Its profit surged 37% to 33.1 billion yuan ($4.7 billion), clearing expectations by 5.5 billion yuan. Its adjusted profit, which excludes its investments and other one-time transactions, rose 28% to 30.1 billion yuan ($4.3 billion).

Those impressive growth rates indicate Tencent's businesses are still firing on all cylinders. They also suggest that President Trump's recent threat to ban WeChat in the U.S. -- which will only impact a small percentage of its users -- won't meaningfully hurt its business. Let's see how Tencent's four core businesses fared during the quarter, and if its stock still has room to run after rallying nearly 60% over the past 12 months.

Stock prices in a window.

Image source: Getty Images.

1. Gaming business accelerates

Tencent's online gaming revenue rose 40% annually and accounted for 34% of its top line. That marked an acceleration from the unit's 31% revenue growth in the first quarter, which already benefited from more people playing games throughout the COVID-19 lockdowns.

Tencent attributed the unit's continued growth to robust sales from its top smartphone games, including Peacekeeper Elite and Honor of Kings, which easily offset the ongoing decline in its PC gaming business. It also continues to gain overseas gamers with hit games like PUBG Mobile and Activision Blizzard's Call of Duty Mobile.

2. Social networking business expands

Tencent's social networking revenue, which mainly comes from value-added services across WeChat (known as Weixin in China), QQ, Tencent Music (TME 7.61%), and Huya (HUYA -3.74%), rose 29% annually and accounted for 23% of its top line.

A group of friends use smartphones in a circle.

Image source: Getty Images.

That marked an acceleration from its 23% growth in the first quarter. Tencent attributed that growth to its takeover of Huya in April, Tencent Music's growth in music subscriptions, and higher sales of virtual items in its social network-based games.

WeChat's monthly active users (MAUs) rose 6.5% year-over-year to 1.21 billion. QQ's MAUs declined 8.4% to 648 million, but that decline was expected as more users transitioned toward WeChat.

During the conference call, Tencent declared Weixin and WeChat were separate apps, and that the Trump administration's order could only impact the U.S. version of WeChat. Based on Apptopia's estimates, fewer than 2% of WeChat's daily active users (DAUs) are located in the U.S. Those overseas users likely generate less revenue than Weixin's Chinese users, since the overseas version of WeChat displays fewer ads and offers access to fewer Mini Programs.

3. Online advertising business saw a slight downturn

Tencent's online advertising business, which sells ads across its social networks, mobile apps, and streaming media services, grew its revenue 13% annually and accounted for 16% of the company's top line.

That marked a steep slowdown from the unit's 32% growth in the first quarter, when it benefited from surging sales of ads for video games, e-commerce platforms, and online education services during the COVID-19 lockdowns. Demand for Tencent's social network ads remained robust throughout the second quarter, but that growth was offset by declining ad revenue from Tencent Video.

That slowdown was disappointing, but Tencent's advertising business is still growing at a much faster rate than that of older advertising platforms like Baidu, SINA, and Weibo.

4. The fintech and cloud businesses are perking up again

Tencent's fintech and business services revenue -- which mainly comes from WeChat Pay, its integrated wealth management services, and Tencent Cloud -- rose 30% annually and accounted for 26% of its revenue. That marked an acceleration from the unit's 22% growth in the first quarter.

Tencent noted its payment and fintech services were generating more daily transactions, as well as higher values for each transaction. Tencent Cloud also gained more internet and public-sector customers during the quarter, but it didn't disclose any exact growth rates. That expansion could spell trouble for Alibaba (BABA 0.50%), which competes against Tencent in both digital payments (via its affiliate Alipay) and China's cloud infrastructure market.

The key takeaways

Tencent didn't offer any guidance for the full year, but analysts expect its revenue to rise 28%, with 29% earnings growth. The stock isn't cheap at nearly 40 times this year's earnings, but the impressive growth of its four core businesses arguably justifies that premium. For now, investors shouldn't worry too much about the Trump administration's threats against WeChat. Instead, they should ignore the near-term noise and focus on the tech giant's long-term growth potential.

Leo Sun owns shares of Baidu, Sina, and Tencent Holdings. The Motley Fool owns shares of and recommends Activision Blizzard, Alibaba Group Holding Ltd., Baidu, and Tencent Holdings. The Motley Fool recommends HUYA Inc., Sina, and Weibo and recommends the following options: long January 2022 $75 calls on Activision Blizzard and short January 2022 $75 puts on Activision Blizzard. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Tencent Holdings Stock Quote
Tencent Holdings
$35.31 (2.11%) $0.73
Alibaba Group Holding Ltd. Stock Quote
Alibaba Group Holding Ltd.
$75.88 (0.50%) $0.38
HUYA Inc. Stock Quote
$2.06 (-3.74%) $0.08
Tencent Music Entertainment Group Stock Quote
Tencent Music Entertainment Group
$6.22 (7.61%) $0.44

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