Tencent (TCEHY 2.19%) posted its second-quarter report on Aug. 16. The Chinese tech giant's revenue rose 11% year over year to 149.2 billion yuan ($20.6 billion) but missed analysts' estimates by 2.5 billion yuan. Its net profit grew 41% to 26.2 billion yuan ($3.6 billion), but also missed the consensus forecast by 7.3 billion yuan. Tencent's stock dipped slightly after the report, but it remains up 3% for the year.
Let's review the key numbers and see if the bulls or bears are likely to gain the upper hand in the period ahead.
Image source: Getty Images.
The key numbers
During the second quarter, Tencent generated 50% of its revenue from its value-added services (VAS) business, which collects fees from its video games, social media apps, and streaming media platforms. Nearly 33% of its revenue came from its fintech and business services division, which houses its WeChat Pay digital payments platform, Tencent Cloud platform, and other enterprise-oriented services. The remaining 17% came from its online advertising business, which sells ads across all of its websites, apps, and streaming services. Here's how its three core businesses fared over the past year.
|
Revenue Growth (YOY) |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
Q2 2023 |
|---|---|---|---|---|---|
|
Value-Added Services |
0% |
(3%) |
(2%) |
9% |
4% |
|
Fintech and Business Services |
1% |
4% |
(1%) |
14% |
15% |
|
Online Advertising |
(18%) |
(5%) |
15% |
17% |
34% |
|
Total |
(3%) |
(2%) |
0.5% |
11% |
11% |
Data source: Tencent. YOY = Year-over-year.
What the bulls will tell you
The bulls will note that the company's fintech and business services unit and its online advertising unit are generating accelerating growth again. Last year, the macro headwinds and China's COVID lockdowns curbed the growth of its fintech and business services unit by curbing consumer spending on WeChat Pay and forcing companies to rein in their software spending. Those challenges also prompted businesses to buy fewer ads on WeChat, the super app that served 1.33 billion monthly active users at the end of the second quarter, as well as its other platforms.
But those pressures eased after China ended its draconian "zero COVID" policies this January. Its fintech business expanded as its daily active users and transactions per user for its commercial payments rose year over year. Its wealth management business also experienced "healthy growth" in users and total assets under management, while its business services unit returned to a "low-double-digit" growth rate again as it collected more fees for hosting e-commerce streaming videos on its cloud platform. The booming demand for video-based ads also boosted its advertising revenue again.
Tencent's total adjusted operating margin also expanded seven percentage points year over year to 34% as it cut costs and streamlined its sprawling business. As a result, its free cash flow (FCF) rose 34% to 29.9 billion yuan ($4.1 billion).
For the full year, analysts expect Tencent's revenue and earnings to grow 9% and 28%, respectively. Based on those forecasts, Tencent's stock still looks cheap at 19 times forward earnings.
What the bears will tell you
The bears will point out that Tencent's VAS revenue growth decelerated again in the second quarter after briefly bouncing back in the first quarter. Its domestic gaming revenue stayed nearly flat year over year as it released less content for its top games. That sluggish growth offset its 19% growth in international gaming revenue, which was primarily driven by new games like Valorant, Triple Match 3D, and Goddess of Victory: Nikke.
The Chinese government finally greenlit some of Tencent's games earlier this year after suspending its approvals of all new video game licenses throughout 2021 and 2022. However, Tencent still faces tight playtime restrictions for minors and intense competition across China's crowded gaming market. Tencent is trying to offset that domestic pressure by expanding beyond China and acquiring more overseas studios, but that expansion could also be disrupted by regulatory and antitrust headwinds.
The bears also expect Tencent to keep struggling in the fintech, cloud, and advertising markets as the Chinese economy stabilizes. Its WeChat Pay still faces lots of competition from Alipay, which is owned by Alibaba's fintech affiliate Ant Group. Tencent Cloud also only controlled 17% of China's cloud infrastructure market in the first quarter of 2023, according to Canalys, putting it in third place behind Huawei Cloud (20%) and Alibaba Cloud (34%). As for the advertising business, it still needs to pull advertisers away from formidable competitors like ByteDance's Douyin (known as TikTok overseas) and Alibaba's Taobao and Tmall marketplaces.
Even if Tencent overcomes those challenges, overseas investors could continue to shun its shares as long as U.S. regulators threaten to de-list all U.S.-listed Chinese stocks (including OTC ones like Tencent).
Which thesis makes more sense?
Tencent is still growing, but the bulls would do well to stay away until its gaming business stabilizes and the regulatory issues in the U.S. and China are fully resolved. For now, investors should stick with other tech stocks instead of betting on Tencent's recovery.
