Tencent Holdings Limited (TCEHY)

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Is Tencent Stock a Buy?
By: Motley Fool | December 22, 2019

• The gaming business is starting to recover after last year's slowdown, but does that make the stock a buy?

Tencent Holdings (OTC:TCEHY) is not as widely followed as some American tech companies, but it deserves to be on investors' radar. The Chinese tech giant is a leader in social media, cloud computing, gaming, fintech, and video streaming. Even after a pullback in the share price last year, the stock has returned more than 200% for investors over the last five years.

The long-term growth opportunities in these markets is substantial, but the share price has been underwater since the beginning of 2018. Momentum in the gaming business, which makes up nearly a third of Tencent's revenue, came to a screeching halt when regulatory authorities in China halted new game approvals. Additionally, the weak economic environment in China has pressured growth in media advertising, which Tencent relies on to monetize its video streaming service (Tencent Video).

Tencent offers plenty of growth for investors, but as we've seen over the last year, the dependency on China is a real risk. However, a lot of this risk is already priced in, which could present an ideal to time invest in one of the leading tech companies in China.

Still growing
Tencent is still putting up good numbers despite the recent headwinds. Revenue increased by 21% year over year in the third quarter. For the full year, analysts expect Tencent to report revenue growth of 16%, while earnings should be up 15%. Next year, analysts expect Tencent to be back to full strength, with revenue improving to $64 billion, representing a growth rate of 22% over 2019. Earnings are expected to grow in tandem with revenue.

At the heart of Tencent's business is its ubiquitous WeChat social media app, where users can message friends and play games. The app is so entrenched in the lives of Chinese consumers that it would be nearly impossible to replace. Through WeChat Pay, the mobile payments service built-in to the app, users can schedule flights, book hotels, buy movie tickets, and even pay for doctor's visits. Tencent shares a duopoly with e-commerce giant Alibaba in China's digital payments market.

In addition to payments, Tencent monetizes its social networks with advertising, fees, and digital items sold in games. Tencent also develops in-house and licenses from other game companies more than 140 PC and smartphone games for distribution in China. These include some of the most popular titles in the video game industry, including battle royale shooter Playerunkown's Battlegrounds, Honour of Kings, and League of Legends.

Gaming revenue is included in Tencent's value-added services (VAS) segment, which also includes revenue from virtual items sold through minigames in WeChat and makes up most of the company's revenue.

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