Over the last two years, it has been difficult for Chinese companies. The continuous COVID-19 pandemic lockdown, tightening regulatory grip on major companies, among other headwinds, have impacted growth companies like Tencent Holdings Limited (TCEHY 2.19%).
But despite these issues, there are good reasons to believe that Tencent can continue to grow in the long run. Here are two things that Tencent has at its disposal to keep its growth machine spinning.
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1. Tencent still has several growth levers to pull
Tencent is one of the best growth companies of our time. From its 2004 IPO to 2021, the tech company grew its revenue and net profit by a compound annual growth rate (CAGR) of 44%.
However, the long streak of solid growth performance ended in 2022, when it reported its first decline in annual revenue of 1%. Operating profit also fell 13% year over year.
Still, there are good reasons to think that 2022 was an anomaly rather than a "new normal" for Tencent. As the dominant social networking company in China with over 1.3 billion monthly active users (MAU) on its flagship WeChat service, it has plenty of monetization opportunities. It is already making money from advertising and other value-added services like fintech, gaming, entertainment, and e-commerce, and it can add even more income streams over time.
Another up-and-coming business within Tencent that doesn't get much attention is its cloud and business services. This segment provides cloud solutions -- such as cloud computing, Internet of Things (IoT), and artificial intelligence (AI) -- that help enterprises leverage the latest technology to improve their business operations.
In short, Tencent still has multiple levers to pull to grow its operations in the coming years. Its first-quarter 2023 results support this argument, with revenue up 11% year over year. Besides, even if it has exhausted all the growth opportunities within its operations, it can still grow by leveraging external investments.
2. Tencent benefits from the strength of its partners
It's rare to find a remarkable growth company like Tencent. It's even rarer that it has been profitable almost every year since it went public. Being hugely profitable has been an important aspect that Tencent has used to its advantage, mainly by reinvesting in growing new businesses.
But Tencent has had plenty of cash left over after investing in its growth, which it has directed externally via equity investments. The idea is simple. By investing in its partners -- like Pinduoduo and Meituan -- the tech conglomerate can participate in emerging industries like e-commerce and food delivery. Of course, Tencent also helps these partners by opening up its massive user base to help them grow. The result has been a win-win for both parties.
Such investments, however, have not been limited to Tencent's partners. Over the years, Tencent has operated like a stock investor, buying up small stakes in growth companies like Snap and Tesla. It also has not limited itself to public companies, holding huge stakes in private companies like EPIC games. Think of it as the "Warren Buffett of technology companies."
So as these investees become successful, Tencent's ownership in these companies naturally grows in value. To put it into perspective, it had 13 billion yuan of investments on its balance sheet in 2012, which ballooned to 820 billion yuan in 2022.
What does it mean for investors?
The bulls and bears have debated whether Tencent's growth days are over.
I would lean toward the bulls since there are still plenty of opportunities for Tencent to grow its operations. Even if its own operations falter, it could reallocate its profits into external investments via its investing arm.
Tencent is playing the patient game, and investors should do the same with the company.
