Why Tencent Stock Is Up

In this episode of MarketFoolery, host Chris Hill chats with Fool.com contributor Dan Kline about the latest headlines and earnings reports from Wall Street. They go through Tencent's numbers to find out how some of its divisions have performed during the quarter and over the year. They also discuss a new phone launch, the restaurant industry, and the late Sumner Redstone.

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This video was recorded on Aug. 12, 2020.

Chris Hill: It's Wednesday, Aug. 12th. Welcome to MarketFoolery. I'm Chris Hill, with me today, our man in Florida, Dan Kline. Good to see you.

Dan Kline: Hey, there, Chris, nice to see you.

Hill: We've got the latest on Microsoft's (MSFT 0.37%) new phone, we've got some parting thoughts on the late Sumner Redstone, but we're going to start with earnings from Tencent, the Chinese conglomerate out with strong second-quarter results, profits and revenue both higher than expected. And I guess we shouldn't be surprised, that [laughs] Tencent's online gaming division grew big, they grew 40% year over year.

Kline: There are a lot of people stuck at home looking [laughs] for things to do, and that benefited Tencent. Their overall earnings were up 30%; the fastest growth since the second quarter of 2018. But their online gaming revenue was up 40% year over year. And once they have your information, that drives all their other businesses. So, yeah, the growth number is stellar right now, but the long-term potential for this, what this means going forward, is really positive for the company.

Hill: This is, obviously, an enormous company. And when people -- we get this question all the time, when people are thinking about investing in companies in China, Alibaba and Tencent are, I would say, two of the top five most commonly mentioned names when people are asking about this. I don't own shares of Tencent; I don't know if you do. This is a stock that's up 60% over the last year. I mean, assume all the caveats that come with investing in a company in China, and they don't have the SEC, [laughs] like we do here in the States, so there are always going to be questions about the accounting, but just from a business standpoint, they really seem well-diversified.

Kline: Let's talk about WeChat. And we'll move into some of the potential downside of WeChat, but I don't know this product very well, but I've talked about it with Ben Ra, who is one of our experts on Asian markets. And basically, WeChat functions as a chat, but also like PayPal, also like Venmo, also like Apple Pay. It's sort of an integral part of the economy there. There was a lot of talk that if WeChat couldn't be on an iPhone, then the iPhone simply wouldn't sell. It's kind of like saying, hey, Chris, you can have a phone, but you're no longer allowed to have any form of text messaging. You'd go like, well, I'm going to get a different phone. So, this is a company that in its core markets, it's become just like a default product. You know, we don't even think about what our email app is or what our text app is; WeChat, which is a Tencent-owned company, is a core part of the business.

Hill: When you look at the overall valuation of this company, does it look expensive to you or do you think because of everything, including by the way, the gaming division, do you look at that and think, no, this thing still has room to run?

Kline: So, gaming always scares me, because gaming, I don't want to say it's fad-driven, because obviously, we have some games that have just had a huge audience for release after release, game after game, but the next thing can come along, and maybe the growth slows there. Chris, I'm not sure when the last time you pulled out your Pokemon GO is, but it's probably been a while, you know. And I was the last guy who played, so I totally understand that. But trends change.

That said, how we use money does not. It is really hard to get people -- and we've seen this in the U.S. where the pandemic has forced a lot of people to consider Apple Pay or other contactless payments, but China has been well above. And there's a growing middle class there. And look, the pandemic is going to help that. All the issues that have forced us into those methods are helping there. I feel like there's some growth around the world for them with the caveat we're about to talk about, there's also [laughs] some growth in China. I don't think it's too expensive, but I don't own it, because I don't understand it at the level you need to. This is one that's new on my radar in the last, like, six months or so.

Hill: Well, with all of the talk recently about TikTok, I mean, how much geopolitical risk do you think there is with a company like Tencent?

Kline: So, not as much as you'd think. They don't have a ton of U.S. exposure. There's, obviously, American expats are using it, it's a communication tool. That part of their business is probably not material. I have a hard time believing the U.S. government can say to Apple, in a phone made in China, you cannot install this app, or maybe they can say you can't install it, but they can't prevent it from being installable. And that would really -- but everything I've read said, if that was the case, that would be bad for Apple, it wouldn't [laughs] necessarily be bad for Tencent.

Now, I'm not sure I fully believe that there aren't some iPhone loyalists that it would be a hit to Tencent, because 10% of the iPhone users would say iPhone or nothing. But I don't worry about it as much as TikTok, which is obviously a company driving a ton of revenue. You know, over 100 million users in the U.S. I don't know the U.S. user numbers for Tencent, but it is a tiny fraction of their business. And their expansion opportunities into other countries that don't follow the American model, there's a lot there.

And also, it's worth pointing out that we have an election coming up in November, and anything that's happening right now in terms of international politics is saber rattling. TikTok has said they're going to sue. Tencent, WeChat, they're going to sit back and watch to see what happens. And look, we have no idea who's running Congress, who's the president, any of those situations, whether any of this is legal and where it would go. So, it's a long-term think about it, it's not necessarily the short-term, they're going to turn off TikTok in 45 days that it's been reported as.

Hill: Shares of Brinker International (EAT -0.85%) up 7% this morning. The parent company of Chili's and Maggiano's Little Italy restaurant chains wrapped up the fiscal year with same-store sales [laughs] falling nearly 37%. And yet, Dan, Brinker's loss was not as bad as Wall Street was expecting. And I think that, along with some optimistic guidance is why we're seeing the rise in the stock today.

Kline: Yeah, it's really interesting here. So, Chili's sales, which is their much bigger brand, were only down 10.9%, so really 11%. Maggiano's sales were down 44.6%. Let me dig into why that's true. So, I follow the restaurant industry. There've been a lot of supply chain issues, and Maggiano's is an Italian restaurant. And my son is a big fan of Carrabba's, a very similar Italian restaurant, and the Carrabba's menu was devastated by supply chain issues. Chili's, where I've ordered from a few times in the past few months, has not been. Their core items were readily available. I'm not entirely sure why there is that, sort of, disparity and shortage. There's also, perhaps, a little bit of travel-ability for ribs from Chili's; those are going to heat up better than some of your foods.

What they've also done, they created a ghost kitchen, they created a brand called, I believe it's called, It's Just Wings. And that is a brand that operates separately on ordering apps that's in the Chili's kitchen and it counts toward the Chili's same-store sales. So, I know I haven't done it yet, but my son has been needling me to order Just Wings. And I said, but we could just get Chili's and they have wings too, and I could get ribs. But, no, there's more flavors at Just Wings, so that might happen. These numbers weren't good, but they were better than many companies. And their outlook for the future was pretty strong, and I believe that, because I think the low-end go-out-to-dinner experience at Chili's or Maggiano's is going to be more affordable for people than necessarily -- you know, you might not spend your anniversary at Ruth's Chris this year, you might go to a [laughs] Maggiano's.

Hill: Yeah. A few weeks back when David Henkes from Technomic was on a Motley Fool Money, one of the things we had talked about was, all of these restaurants that weren't really doing chicken wings in a big way were investing heavily in it, because that was something that people were, as you said, you know, wings travel. And so that was something where people and businesses like Chili's were like, great, let's just start pouring money into this.

Were you surprised by how many Chili's there are? I was just, sort of, looking [laughs] through. And I don't know what number I had in my mind of how many Chili's locations there are, but it wasn't closing in on 900, that surprised me that there are that many Chili's in America.

Kline: Chris, I feel like there's at least 80 of them in Orlando. So, living here in Florida, I get a skewed -- I don't know if you've ever done this, but if you drive, sort of, the local road away from Disney, 192, you'll pass, like, a Chili's, an Applebee's, a Smokey Bones and then another couple of chains, and then like a mile later, you'll pass [laughs] all the same things again. So, it didn't surprise me. I've always thought of Chili's as like a restaurant that's kind of everywhere. And they've really struggled in recent years. They haven't figured out how to get past being the baby back ribs commercial, they tried a lot of discounting that basically cut the value of their product. I feel like right now they're actually doing something that's not my favorite. They no longer sell you a half rack or a full rack of ribs, they sell you a half portion or full portion of ribs, which is about two-thirds what the portion used to be. And the price is a little lower, but that's not generally [laughs] how we sell ribs. And I know that sounds silly, but as a regular customer that actually got me to see what the ribs at Ruby Tuesday were like, last week when we ordered, because those are pretty similar restaurants. And by the way, you get the full rack at Ruby Tuesday, which gets you leftovers and I'm a big fan of leftovers on this day of being stuck -- these are minor points, but they are execution points.

And it's the same thing with the wings, I'm going to be really curious, because wings can be done badly, they could be soggy, they could be scrawny wings. So, if their wings are good, that's great, if they're not, you know what's like a quarter mile from the Chili's near me? A Buffalo Wild Wings, and they do wings reasonably well. So, I'm curious to see it, it's a good idea.

I think ghost kitchens and running multiple brands from one location are going to be a thing. But that said, we have a lot to see how this is going to turn out. And optimistic CEOs are kind of a bad reason to invest.

Hill: Microsoft's new Android phone, the Surface Duo, is going to be launching on Sept. 10th, it is a phone with two screens split by a 360-degree hinge, and it can be yours for the low, low price of $1,400. What do you think, like, gut reaction to this story, what was the first thing you thought when you saw it?

Kline: I want it, I want it, I want it! And, Chris, I recognize I am being a fool, when I [laughs] say this, because it's a $1,400 phone. But it's two screens, it looks really cool. The way you can prop it up to watch stuff, the way I could have Slack open while I'm watching Netflix, or things like, you have your email up, and the email queue is on one side, the messages is on the other. I imagine that the ability to have a larger keyboard on one of the screens. I actually give Microsoft a lot of benefit of the doubt when it comes to phones, because -- and I know I'm a contrarian when I say this, but Windows Phones were excellent. [laughs] They did a really good job for business productivity.

When I worked at Microsoft, and I spent a year as a vendor there, the year Windows 8 came out, they didn't force us to get Microsoft phones. They also supported the iPhone. But I quite happily had a Windows Phone. Now, this is running on Android; it's not running on Windows, and that gives me pause, because I've never enjoyed [laughs] any Android phone I've ever had to use. But that said, I don't know who the market is for a $1,400 phone. I think that price is too high, but you could have said the same thing about the Surface Book or the Surface, both of which have been pretty solid sellers. But I'm going to buy this when the Surface Duo Phone 2 comes out, and I could get it for $600, because it does feel like a fun gadget to play with.

Hill: It also feels like, for all of Microsoft's success, one of the things it has afforded the company is the ability to do something like this and not feel the pressure of this needs to be a hit right out of the gate. And this is, you know, probably not the best direct comparison, but one of my thoughts when I was reading through this was when the first Apple Watch came out. And there were some pretty so-so reviews, but you know, Apple was making so much money off of the iPhone that they could afford to take literally years to iterate and make versions better and better to the point where now the Apple Watch is contributing meaningful revenue [laughs] to the bottom line. So, that's sort of how I look at this. I'll be interested to see, sort of, what the reviews are, the extent to which Microsoft comes out with initial sales figures. But they can afford to take two, three years with a device like this.

Kline: Chris, can I throw one more thought?

Hill: Absolutely.

Kline: So, this diverges from Microsoft's device strategy, and I'm kind of looking forward to an answer on that, when they introduced the Surface and the Surface Book, those run Windows, and part of their goal wasn't necessarily to make a ton of money selling hardware, it was to show their OEM partners what was possible. And if you go to a Best Buy right now, you can find all sorts of combination, you know, keyboard-tablet, you know, flaptops -- I don't know what to call them, it's kind of a tablet, it's kind of a laptop -- that mirror the Surface. And this doesn't do that, because it doesn't run Windows. So, this is like a stand-alone, Microsoft is making a phone. And maybe it's a business productivity play, maybe it's something that they think they can sell through their enterprise channels, but you're not going to see -- or if you do -- let's say, Samsung copies this model, it's going to run Android, it's not [laughs] going to run Windows, so. I don't know, that's a strategy change that I don't like. I would have preferred to see this stay in the Microsoft universe. Now, the problem, of course, is that none of your apps will work, and [laughs] that's why they can't do it.

Hill: Sumner Redstone, the billionaire mogul who oversaw a media empire, including CBS, Viacom, and Paramount Pictures, has died at the age of 97. He led an incredible life, a legitimate rags-to-riches story fueled in no small part by his intelligence and his tenacity.

In the 1990s, the head of a rival movie studio said, being a competitor of Sumner Redstone's is a fate worse than death, he never lets up, he's relentless. He really was relentless. And the fact that he continued to lead businesses well into his 80s, as much as anything, is a testament to the success in his life.

Kline: This is a man who never slowed down, he took drive-in movie theaters and turned that into what was eventually a CBS, Viacom; which are now once again one company. He said he would live forever, he wasn't right about that, [laughs] we learned that today. But this was a man who lived life really hard. And he has famously talked about how he has no patience. Not a guy I'd want to work for, but in terms of creating value for shareholders, creating a life, you know, there's going to be books and movies about the life he lived. A man of very strong -- you know, a force of nature; I don't even know how else to describe it. And a lasting legacy. CBS and Viacom are still major players.

And, Chris, how many entertainment companies make it through those transitions, through those years? Like, they're not the strongest company right now, but they're still in pretty good shape.

Hill: Absolutely. You know, for all of his business success, the most interesting thing, to me, about Sumner Redstone's life is, how hard he worked in school. You know, grew up poor in Boston, got into Harvard, finished Harvard in three years, and then, during World War II, because of his intellect, because of his skill with languages, he worked as a codebreaker. I mean, just that alone is fascinating to me, and then to follow -- you know, there's another version of Sumner Redstone's life where he just stays a lawyer, you know, he is a very successful lawyer, but the fact that he went back into the business world after being a lawyer for years and had the life that he had is really just incredible.

Kline: It's a life well lived. It's also -- Chris, I don't think he could have just stayed a lawyer. I think when you have that in you, you're always going to be, you know -- the business he started, it could have been something else, I agree with that, but I'm not sure someone who has that drive can confine himself to just one thing. That's why we created multiple companies, that's why he -- look, he tried to maintain control as recently as 2017, you know, while ailing, while having trouble communicating, he fought to control those companies. This was not someone who gave in easily, if ever.

Hill: Dan Kline, always good talking to you, thanks for being here.

Kline: Thanks for having me.

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Austin Morgan, I'm Chris Hill, thanks for listening, we'll see you tomorrow.