Tencent Holdings (TCEHY 2.19%) and Alibaba Group Holding (BABA 0.59%) are two of the biggest tech companies in China. Tencent owns WeChat, the country's largest mobile-messaging platform and super app, and it's the world's largest video game publisher. Alibaba owns the country's largest e-commerce and cloud infrastructure platforms.
Tencent's WeChat Pay holds a near-duopoly in China's digital payments market along with AliPay, which is owned by Alibaba's fintech affiliate Ant Group. Tencent and Alibaba also each operate their own streaming-video and music platforms.
Image source: Getty Images. The Shanghai skyline.
Tencent and Alibaba were once considered conservative ways for overseas investors to profit from China's economic growth. But over the past three years, Tencent's stock has declined nearly 50%, while Alibaba's stock plunged more than 70%. Let's see why these two Chinese tech stalwarts lost their luster, and if either one is still worth buying today.
Tencent's high-growth days are over
Tencent's revenue rose 28% in 2020, but grew just 16% in 2021 and declined 1% in 2022. That slowdown was caused by three main headwinds.
First, its gaming business struggled as Chinese regulators froze new video game approvals for about nine months in 2020 and 2021. The regulators also further tightened their draconian playtime restrictions for minors. Those measures forced Tencent to rely on aging games like Honor of Kings in China while ramping up its expansion into overseas markets.
Second, its advertising segment suffered a slowdown as China's COVID lockdowns and other macro headwinds drove businesses to buy fewer ads. Competition from other platforms like ByteDance's TikTok worsened that pain.
Third, the headwinds drove consumers to make fewer purchases with WeChat Pay and led companies to rein in their spending on Tencent Cloud. The cloud segment also faced stiff competition from Alibaba Cloud, Huawei Cloud, and Baidu AI Cloud in China's crowded cloud infrastructure market.
At the same time, China's antitrust regulators curbed the company's ability to expand its ecosystem by closely scrutinizing its investments and acquisitions.
Analysts expect Tencent's revenue and adjusted earnings per share (EPS) to rise 7% and 24%, respectively, this year as some of the headwinds wane. Its high-growth days might be over, but its stock looks cheap at 16 times forward earnings.
Alibaba is rebooting its business
Alibaba's revenue rose 41% in fiscal 2021 (which ended in March 2021), but only grew 19% in fiscal 2022 and a mere 2% in fiscal 2023. That slowdown can be attributed to intense headwinds.
Alibaba's troubles started in late 2021, when China's antitrust regulators hit it with a record $2.8 billion fine and imposed new restrictions on its e-commerce business. Those new restrictions -- which barred it from locking in merchants with exclusive deals, using loss-leading promotions to gain new customers, and expanding its ecosystem with unapproved investments -- eroded its defenses against formidable competitors like JD.com and PDD Holdings.
At the same time, economic headwinds drove Alibaba's shoppers to make fewer purchases on its online marketplaces while causing businesses to spend less money on its cloud services.
The slowdown drove Alibaba to restructure its sprawling business into six new divisions earlier this year, which would allow each unit to operate independently, pursue its own funding from external investors, and potentially go public through an initial public offering (IPO). Alibaba plans to spin off the cloud division as a stand-alone company through an IPO before May 2024, with possible IPOs for its other units in the future.
That restructuring could allow each business to expand more efficiently and convince the antitrust regulators to back off, but won't resolve the company's most pressing issues. Analysts expect Alibaba's revenue and adjusted EPS to grow 8% and 19%, respectively, in fiscal 2024 as the macro environment improves. And shares still look dirt cheap at 9 times forward earnings.
The better buy: Alibaba
Tencent and Alibaba could both remain out of favor as long as Chinese stocks might be delisted from U.S. exchanges. The constant threat of government crackdowns and fines could make them even less appealing.
That said, I believe Alibaba is still a better buy than Tencent for four reasons: It isn't exposed to the sluggish Chinese video game market, it's better diversified, its upcoming IPOs could generate plenty of cash, and its stock is a lot cheaper relative to its long-term growth potential.
