Tencent's Tailwind From Fortnite Is Getting Stronger
Apr. 29, 2018 5:34 AM ET|
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About: Tencent Holding Ltd. ADR (TCEHY), TCTZF
Motek Moyen
Motek Moyen
Event-driven, tech, value, momentum
I Know First
(4,565 followers)
Summary
The PC and console versions of Tencent/Epic Games' free-to-play Fortnite Battle Royale game grossed $126 million in February.
SuperData Research estimated that the PC, console, and iOS versions of Fortnite grossed $223 million in March.
Tencent, as a 40% stake owner in Epic Games, will publish the Chinese version of Fortnite in China. Tencent will reportedly spend $15 million to market Fortnite in China.
I guesstimate that Tencent could rake in $30 to $50 million per month inside China from the PC, console, and mobile Chinese versions of Fortnite.
China is the biggest video games market. Chinese gamers spent 203.6 billion RMB or $30.9 billion on video games last year.
The sale of virtual goods inside video games is not going to be affected by the brewing trade war between the United States and China. Unlike real-world products, virtual goods in videos games cannot be imposed with higher government-mandated import tariffs. Investors of Tencent (OTCPK:TCEHY) (OTCPK:TCTZF) should, therefore, be delighted that it won the exclusive license to publish the China versions of Fortnite.
After the iOS version was released last month, SuperData estimated that the mobile, PC, and console versions of Fortnite grossed $223 million in March. Fortnite only grossed $126 million in February from PC and console players. Fortnite is free-to-play, but it makes tons of money selling character outfits to its players.
(Source: Epic Games/Motek Moyen)
The China release of Fortnite could inspire small and large investors to again rally behind Tencent. The stock has a 52-week high of $61, which it set in late January. However, the stock has since dropped to $49.44. This 19% decline in Tencent's valuation should turn into something positive after it starts making new money from Fortnite's release in China.
American firm Epic Games owns Fortnite. Tencent owns 40% of Epic Games. Tencent is also the global publisher of the mobile versions of PlayerUnknown's Battlegrounds - the PC Battle Royale game that inspired Fortnite. Conflict of interest is not in the vocabulary of Tencent. Tencent is going to be the China publisher of the two competing, top-grossing Battle Royale games in the world today.
This invidious flexibility is why Tencent is a strong buy for long-term investors. Tencent can make money off competing games made by rival companies. This business approach is why Tencent's revenue grew from $9.84 billion in 2013 to $35.18 billion last year. Tencent's online games segment raked in $15.6 billion in revenue last year.
Tencent doesn't discriminate; it will publish any successful international games which it believes can also become successful in China. The polygamous decision to publish both Fortnite and PlayerUnknown's Battlegrounds in China has earlier precedents. Tencent is publisher/owner of League of Legends, and it publishes the competing MOBA game, Heroes of Newerth, in China.
(Source: Seeking Alpha)
Why Tencent Is The Undisputed Champion of Video Games
Based on the chart below, Tencent owns/publishes the majority of the world's top-grossing video games. Dungeon Fighter Online, League of Legends, CrossFire, Far Cry 5, Fortnite: Battle Royale, Honor of Kings, QQ Speed, Clash Royale, PlayerUnknown's Battlegrounds, Call of Duty, Clash of Clans, and Tom Clancy's Rainbow Six: Siege are made by companies partly or wholly owned by Tencent.
(Source: SuperData Research)
Obtaining the China publishing rights for Fortnite is an important tailwind for Tencent. China is the largest market for video games. The video games industry in the Middle Kingdom was worth 203.6 billion RMB (around $30.9 billion) last year. More than half of that amount was from mobile games.
The international iOS version of Fortnite is earning $1 million per day from in-app purchases. We can guesstimate that Tencent can earn at least $500k per day in China just from the iOS/Android versions of Fortnite. China has 582 million mobile gamers. Getting 1% of that population to repeatedly spend on China's Android/iOS versions of Fortnite is a healthy boost for Tencent's online games business.
My guesstimate is Fortnite can possibly attract 5.8 million hardcore, paying Chinese mobile gamers. Each of them can spend an average of $4 a month on Fortnite. This can result in $23.2 million new monthly revenue (for Tencent).
China's mobile games industry touts higher monthly Average Revenue Per User (ARPU) than the United States and South Korea. It makes perfect sense that Fortnite's mobile versions in China could feasibly generate more revenue than the U.S. versions.
China also touts a large population of hardcore PC gamers who play 42 hours per week. Like what happened in America and the rest of the world, many Chinese gamers will also embrace Fortnite as their go-to PC shooter game. Inclusive of PC, console, and mobile versions, I guesstimate that Fortnite's China release can add $30 million to $50 million in additional monthly revenue for Tencent.
Conclusion
Tencent has a strong tailwind from Fortnite's phenomenal success. I predict that Fortnite could beat the $2.1 billion sales that Tencent made from its League of Legends PC MOBA game last year. The international versions of Fortnite can already do $223 million in monthly sales. Add another $30-50 million in potential monthly sales from China and Fortnite could possibly produce total global annual sales of $3 billion or more.
This $3 billion guesstimate will probably be split between Epic Games and Tencent. Because Tencent owns 40% of Epic Games, it will indirectly receive another $600 million. As per my own guesstimate, Fortnite could feasibly add $2.1 billion to the $15.6 billion/year online games business of Tencent.
Disclosure: I am/we are long TCEHY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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