Tencent Holdings Limited (TCEHY)

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Tencent's Margins Are Going Down, and That's Great News for Shareholders
By: Motley Fool | May 23, 2021

• Tencent is investing more of its profits this year into big growth opportunities.

Shares of Chinese internet giant Tencent (OTC:TCEHY) traded down after it reported its first-quarter numbers last week. Although results were strong, with revenue up 25% and net profit up 22% by non-International Financial Reporting Standards, investors wary of China's recent anti-monopoly crackdown probably needed a bigger beat to assuage those fears.

In addition, Tencent's management forecast heavy stepped-up spending this year, which means the company's margins will edge down and profit growth will be somewhere between zero and that 22% seen last quarter, according to management.

However, instead of fearing this scenario for the highly profitable Tencent, shareholders should be celebrating the news.

New opportunities lead to more investment
Tencent has the world's largest video game empire, its 1.242 billion-user WeChat social media platform is the largest in China, and it's also the owner of the largest Chinese video and music streaming platforms. Tencent is also one of the two major digital-payment and cloud platforms in the country, neck-and-neck with Alibaba (NYSE: BABA). It's already so large, that some may think it may be hard to keep up top-line growth.

However, that view may be short-sighted. China's rising middle class creates a formidable tailwind, and Tencent's deliberate approach to monetization has allowed it to keep up consistent strong growth for a sustained period...

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