Given that China's COVID-19 lockdowns began in January and eased up in March, some of the things that Tencent has reported seeing over the last few months could be a sign of things to come for U.S. tech companies.
The good news: With Chinese consumers spending a lot of time at home and in front of screens during lockdowns and their immediate aftermath, Tencent soundly beat Q1 estimates on the back of 26% annual revenue growth. Moreover, the company reported a pickup in revenue growth rates for several key businesses.
Tencent's massive gaming unit saw revenue growth improve to 31% from Q4's 26%, with a 64% increase in smartphone gaming revenue more than offsetting a 15% drop in PC gaming revenue. Online ad sales growth improved to 32% from 19%, with ad sales for Tencent's mobile ad network and WeChat Moments service especially doing well. And "social networks" revenue growth improved to 23% from 13%, thanks to both in-game transaction growth and strong subscription growth for Tencent's music and video streaming services.
Tencent's "FinTech and Business Services" segment, which covers (among other things) its highly popular WeChat Pay service and the Tencent Cloud platform, was the only soft spot in Q1. Growth slowed to 22% from a Q4 clip of 39%, as lockdowns affected both offline payments and cloud deal activity.
These disclosures, it's worth noting, have helped Tencent's stock rise nearly 4% in over-the-counter Wednesday trading and make new 52-week highs, in spite of a 2%-plus drop for the Nasdaq.
But while Q1 was pretty strong, Tencent's earnings call commentary about its expectations for Q2 and the rest of 2020 was more mixed.
On one hand, management predicted that COVID-19 would bring about "structural changes" in areas such as e-commerce activity by retailers and brands, tech infrastructure investments by governments, the adoption of online education services and interest in online healthcare services.
On the other hand, Tencent admitted that usage of gaming, video and internet services by Chinese consumers began "normalizing" in March, and continued to do so in April and early May. The company forecast that this normalization will affect both "in-game consumption activities" and ad sales going forward.
In addition, Tencent forecast that brand ad purchases by multinationals will be under pressure as these companies cut their global ad-spending budgets. Those comments fit with what companies such as Alphabet (GOOGL) and Facebook (FB) have shared about brand ad spend (direct response spending, which tries to drive activities such as e-commerce transactions and app installs, has held up better).
Admittedly, there are a couple of differences between China and the U.S. and Europe that could lead U.S. gaming, social media and streaming players to see somewhat different trends over the next few months. First, whereas Chinese digital content consumption kept skewing heavily towards smartphones during lockdowns, PC usage has spiked over the last couple of months in Western countries.
Secondly, and perhaps more importantly, with the U.S. still seeing a substantial number of new COVID-19 cases, lockdowns might still take a while to fully end in some parts of the country. And even in those regions that are reopening, COVID-related fears could have a big influence for a while on how much many consumers choose to go out.But with that said, Tencent's commentary does highlight how a lot of the major behavior changes that have acted as tailwinds for many U.S. internet and gaming companies over the last two months are likely to diminish in the coming months -- even if things don't fully go back to the way they were.