Tencent Holdings (OTC 🙂 suffered a lot of pain last year. The lucrative gaming business was hit by Chinese government controls, the macroeconomic environment in which the company operates deteriorated and companies significantly delayed their spending, thereby damaging their advertising activities
The company, known as China & Facebook's (NASDAQ :), had much of that negativity ingrained on March 21. The net profit for the three months up to and including December decreased by 32% compared to the same period a year ago. That was the worst show since the first public offering in 2004, due to the effects of a government freeze on the approval of new games in 2018 due to rising levels of myopia among children and teenagers in China, & # 39; the world's largest gaming market.
But there are now signs that the worst can be over for Tencent and its investors. First, China began approving new games, a move that will improve business results because it allows Tencent to earn money from its blockbuster titles, such as "PlayerUnknown & # 39; s Battlegrounds" and "Fortnite." This is an important development: the company generates more than just 40% of sales and most profits from the gaming industry.
Tencent also relies on new games to attract and retain users on the WeChat messaging service, where it sells and advertises in-game items for a billion potential customers.
Improve macro environment
Encouraged by these positive developments, investors are investing the company's shares this year. Trading at $ 48 in New York in Tencent's closing stock rose 22% more this year, after losing about a quarter of its value in 2018.
The recovery of Tencent's shares also coincides with some positive developments in the macroeconomic field. The US and China are getting closer to a possible deal that could end the trade war between the two largest economies. And there are signs that the Chinese economy will respond positively to the government's stimulus package, aimed at stimulating growth through tax cuts and increasing lending to small and private companies.
Despite the disappointing quarterly results, the underlying business strength of the company is solid and management is well on track to diversify its revenue base from gaming. The operator of the popular WeChat app, with more than 1 billion monthly active users, has a dynamic online ecosystem that is unrivaled and difficult to match. With video blogging, instant messaging and a payment app that has all been merged into one, Tencent offers an attractive opportunity for investors who want some exposure to the Chinese internet economy.
According to a recent note from Nomura Securities, Tencent & # 39; s WeChat company has the potential to earn more from advertising revenue. "We believe WeChat continues to generate insufficient revenue in the advertising business," said Nomura analysts Jialong Shi, Carson Lo and Michael Tam in a note quoted by Reuters.
"The rising popularity of mini-programs should enable WeChat to obtain more advertising budgets from those service providers such as OTA (online travel agencies), e-commerce and educational advertisers, as soon as these service providers migrate part of their business or all through mini-programs & # 39; s in WeChat, "they wrote. Mini programs & # 39; s are applications within WeChat that offer consumers access to services ranging from banking to driving.
Tencent's investments to seize opportunities in what founder Pony Ma is the emergence of a & # 39; industrial internet & # 39; are further drivers for future growth. As part of its diversification strategy, the company set up a smart industries division in September to focus on artificial intelligence, cloud services, big data and security.
Bottom Line
Even after their strong recovery in 2019, the Tencent shares are still a good buy for long-term investors. The long-term outlook for the company is good after the temporary decline in the past year. The gaming pipeline is strong and well on track to broaden its revenue base. Tencent has a business model that turns out to be much more sustainable than many of its Western peers.
