Apple is one of the best companies ever. It has been a front-runner in the technology sector ever since its early days and its products have helped propel its stock price, making it one of the largest companies in the world by market cap.
Despite its already massive size, Apple continues to report growth. Still, Apple's size is weighing down on its growth rate and if the recent growth trend continues, it's unlikely that Apple's share price performance for the next decade can match the past.
The rise of a major tech company
Tencent is the No. 1 player in China across multiple business segments: online games, mobile messaging, online video, online payment, and music, just to mention a few. Its flagship social media app, WeChat, has 1.2 billion monthly active users (MAUs), behind only Facebook, which has 2.7 billion MAUs.
It didn't begin as a sure-win business. It started as a one-product company focusing on QQ -- an instant messaging software -- in the late 1990s and early 2000s. The product became a hit among users, making it the de facto instant messaging software in China during the PC era. Tencent then went on to provide additional services -- online games, entertainment, news, and more -- to delight its hundreds of millions of users. Its crown jewel, WeChat, came much later, and in many ways is an evolved version of QQ tailored for the mobile era.
Why is Tencent so successful
Among all the things that have contributed to Tencent's success, two stand out: its massive user base and its diversified business model.
The former is a result of Tencent's leadership in social messaging tools, which are extremely popular among Chinese users thanks to the strong network effect -- where every additional user will make its network more valuable to all existing users.
Unlike its peers such as WhatsApp, which remains mainly a messaging app, WeChat went further by offering all kinds of other services, including e-commerce, online food ordering, payments, blogging, games, and music. These additional services not only make WeChat extremely sticky among its users, but they also became new income streams for Tencent.
The result? A diversified and profitable technology conglomerate. Between 2004, the year of its IPO, and 2019, Tencent grew revenue and net profit by a compound annual growth rate (CAGR) of 47%, and 43%, respectively. It might seem that its business model runs the risk of making it a jack-of-all-trades and a master of none, but instead of doing everything on its own, Tencent has extensive partnerships (including holding stakes) with other companies in areas including e-commerce and online food delivery. These relationships help solidify its ecosystem.
A strength you may be overlooking
Many investors don't know that Tencent is probably one of the best (if not the best) capital allocators in the world. According to South China Morning Post, Tencent had invested in about 700 companies for the decade ended in 2019, many of which have either gone public or become unicorns, private companies with a valuation of more than $1 billion.
Some of its better-known investments are Pinduoduo, Meituan, JD, Sea Ltd, EPIC games, and Didi. Tencent owns more than 10% of each of those companies. It also owns minority stakes in leading companies like Tesla, Snap, Spotify, and Uber. As of June 30, these investments had a value of about $77 billion.
These companies are leaders in their respective fields, and Tencent stands to benefit as they continue to grow. With its streams of cash coming in each year, Tencent will likely continue its investments in other companies to create value for its shareholders.
Nonetheless, there's a risk that future investments might not be as successful. Hence, investors should look out for potential misallocation of capital, especially if it ventures into industries far beyond its core competence.
Tencent as a long-term investment
Tencent is a rare combination of a great business operator and a successful capital allocator.
I think Tencent's future is equally bright, if not brighter, than its past. It has huge potential to grow its existing businesses in advertising, fintech, and healthcare, and also expand its younger, enterprise-facing businesses such as cloud computing.
At around a $745 billion market cap, Tencent is already a gigantic company. But a decade from now, it could be worth much more. It has a good chance to outperform Apple thanks to its smaller size and its proven capital allocation strategies.