Tencent Holdings Limited (TCEHY)

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Tencent's Investment Strategy Cools Off
By: Motley Fool | December 31, 2019

• The tech giant cut its investment spending in half in 2019. What are its plans for 2020?

Chinese tech giant Tencent (OTC:TCEHY) generates most of its revenue from the gaming, advertising, fintech, and cloud markets. However, it also generates over a quarter of its profits from its investments in public companies and private unicorns.

That massive portfolio, which had a fair value of 352.7 billion yuan ($50.5 billion) last quarter, includes stakes in over 700 companies. But at a company event in early 2018, Tencent president Martin Lau warned that its "hot summer" for investments in 2018 could be followed by a "cold winter" in 2019, due to "fewer opportunities in growing markets" and tougher competition in mature markets.

Therefore, it wasn't surprising that Tencent only invested in 108 companies in 2019, according to research firm IT Juzi, marking a 33% drop from its 162 investments in 2018. It also cut its annual investment spending by 53%, from 72.7 billion yuan ($10.4 billion) in 2018 to 34.3 billion yuan ($4.9 billion) in 2019. Let's see what this strategic shift means for Tencent's future.

A hot summer to a cold winter
Tencent made some solid investments in 2018, which partly offset the damage caused by a nine-month freeze on new gaming approvals in China. Sixteen of the companies it backed -- including the Gen Z-oriented digital platform Bilibili, the game streaming platform Huya and the music streaming giants Spotify and Tencent Music -- all went public.

But in 2019, Tencent reined in its spending as its revenue growth decelerated amid macro headwinds and tougher competition, and it prioritized the expansion of its rapidly growing fintech and business services unit, which housed WeChat Pay and Tencent Cloud. That strategic shift -- along with tighter cash flows caused by the slowdown in its gaming business -- likely caused Tencent to adopt a more cautious stance toward investments.

Meanwhile, the big gap between Tencent's GAAP earnings (which include its gains and losses from acquisitions and divestments) and non-GAAP earnings (which exclude those gains, losses, and other "one-time" charges) highlights the volatile nature of its ever-shifting investment portfolio:

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