Twelve days after Alibaba Group (BABA) reported impressive top-line figures that calmed worries about its heavy spending, fellow Chinese Internet giant Tencent Holdings (TCEHY) has done the same. And between the company's various gaming, payments and content opportunities, there's clearly plenty of room to keep growing.
Tencent reported first-quarter revenue of RMB73.53 billion ($11.69 billion) and non-GAAP earnings per share of RMB1.92 ($0.30). Revenue rose 48% in RMB and 63% in dollars, and beat an RMB71.09 billion consensus. EPS rose 29% in RMB and 36% in dollars, and slightly missed an RMB1.95 consensus.
The report came after Tencent's shares had finished Wednesday trading in Hong Kong. Going into earnings, the company sported a $480 billion market cap (just slightly below Alibaba's $513 billion market cap).
- RMB-based revenue growth came close to hitting fourth-quarter's 51% rate, and was driven both by Tencent's mobile gaming momentum and the various services layered on top of its WeChat platform (calling it a mobile messaging app really doesn't do it justice anymore). Smartphone gaming revenue (now about two-thirds of all gaming revenue) rose 68% with the help of the blockbuster hit Honour of Kings; that easily overshadowed flat PC gaming revenue. Overall, games still account for close to half of Tencent's revenue.
- Aside from gaming, Tencent's "value-added service" (VAS) revenue got a healthy boost from video and music subscription services. VAS subscriptions rose by another 12 million sequentially to 147.1 million. The disclosure comes as Tencent Music (majority-owned by Tencent) reportedly preps an IPO that could feature a $25 billion-plus valuation.
- Online ad revenue (15% of revenue) advanced 55%, an improvement from the fourth-quater's 49%. Helping out: Higher ad sales for the WeChat Moments social media service (built into the WeChat app), rising video ad sales (mobile video views rose 60%) and higher ad prices for Tencent's mobile ad network. On the earnings call, Tencent noted it recently upped WeChat Moments' ad load, while noting it still remains "extremely conservative" relative to that of global peers (presumably a reference to Facebook (FB) ).
- "Other" revenue (22% of revenue) rose 111%, after having grown 121% in the fourth quarter. The runaway momentum of Tencent's WeChat Pay service appears to be the biggest driver -- Tencent is still hesitant to provide a lot of stats about WeChat Pay, which remains locked in fierce combat with Alibaba/Ant Financial's Alipay in both the offline and online payment realms. In addition to WeChat Pay, a triple-digit increase in cloud services revenue contributed to Other revenue growth.
- Another 15 million WeChat monthly active users (MAUs) were added in the first quarter, raising the total count to 1.04 billion. The platform's sky-high Chinese penetration rate (and limited traction in many other parts of the world) is limiting MAU growth. At the same time, there's still a lot of room to grow individual services running on top of WeChat. On the call, Tencent was eager to talk up adoption of Mini Programs (apps that are embedded within WeChat), noting their strong uptake among game developers and retailers and stressing that they're only in the early stages of being monetized.
- Tencent's QQ and Qzone social platforms are showing their age a bit, but still have tremendous reach. QQ MAUs fell 6% annually to 805.5 million; Qzone MAUs fell 11% to 562.3 million. Tencent did, however, add that QQ's KanDian news feed service saw strong growth, with DAUs surpassing 80 million and video views rising three-fold.
- On the call, management suggested global hits PUBG and Fortnite will provide a lift to its 2018 gaming revenue. Tencent plans to publish Chinese versions of PUBG and Fortnite, and has teamed with PUBG developer Bluehole to launch mobile versions of the game elsewhere. In addition, the company owns nearly half of Fortnite developer Epic Games.
- As the EPS print indicates, Tencent isn't shy about spending aggressively in the name of pursuing its payments, gaming and content growth opportunities. Non-GAAP operating margin fell 3 percentage points annually to 34.4%, thanks in large part to a 76% increase in sales/marketing spend. R&D spend grew 39%. EPS was also pressured a bit by a 0.9 percentage point drop in gross margin to 50.4%, the result of a mix shift toward Other revenue.
The Big Picture
Tencent's stock isn't exactly cheap: The company's Hong Kong-listed shares went into earnings trading for 34 times their 2019 adjusted EPS consensus estimate. But it's hard to expect otherwise for a company that's posting 40%-plus revenue growth, has many untapped or lightly-tapped growth opportunities and controls the most important mobile platform in the world's second-biggest economy.
The first-quarter report certainly doesn't feature much that would make Tencent investors question this narrative. And it arguably gives Facebook investors more reason to feel that Facebook Messenger and WhatsApp, both of which now claim over 1.3 billion MAUs, have enormous untapped potential. Though Facebook's messaging apps will probably never be embedded into the lives of consumers in their biggest markets to the degree that WeChat has become embedded into the lives of Chinese consumers, getting even halfway there would make the apps incredibly valuable.