With a mission to “construct connections,” Tencent Holdings Ltd. (HKSE:00700) is the world’s largest gaming firm, China’s largest social media platform (primarily consisting of QQ and WeChat), one of many world’s largest web firms and considered one of its largest funding firms. The corporate is really a expertise conglomerate, proudly owning a whole bunch of merchandise that span throughout numerous classes, together with social networks (23% of third-quarter 2019 income), on-line video games (29%), internet marketing (19%), fintech and enterprise companies (28%) and others (1%).
Admittedly, Tencent is without doubt one of the most profitable Chinese language firms listed exterior of the mainland, with a stable observe document of delivering large worth to each shareholders and its customers. The corporate was based in 1998 by legendary Chinese language entrepreneur Huateng Ma, who nonetheless holds the function of chairman and CEO with an over 8% fairness stake. Whereas we do have a number of respect for the longtime success of the enterprise and its founder, we stay involved with a number of aspects shifting ahead.
At the beginning, the acquisition and investment-driven progress technique worries us. A number of the firm’s most outstanding offers lately embrace Pinduoduo (NASDAQ:PDD), Snap (NYSE:SNAP), Meituan Dianping (HKSE:03690) and JD.com (NASDAQ:JD). These companies fluctuate when it comes to verticals, from e-commerce to life companies, social media and even ride-hailing companies. However they do have one factor in widespread – they’re all loss-making companies. Per the chart beneath, not one of the firms talked about above are producing any revenue in the intervening time. One might argue that that is generally how the internet-based enterprise mannequin works in its early phases, however why hassle sticking with these ventures, particularly when options with cash-rich operations and higher predictability can be found in different areas?
Within the meantime, we see an absence of considerable moat to guard nearly all of Tencent’s companies. In all probability essentially the most sustainable aggressive edge comes from the one-sided community impact by means of social networks (i.e., WeChat and QQ) the corporate owns. In gentle of the extremely intense competitors in China’s expertise sector, nevertheless, any sort of moat seems conquerable. We’ve noticed how ByteDance retains disrupting one vertical after one other and stealing market share quickly from as soon as unshakable Baidu (NASDAQ:BIDU). Peter Thiel one mentioned, “Competitors is for losers.” In our opinion, Chinese language expertise conglomerates like to diversify and compete, which appears to make nearly everybody a “loser” ultimately.
Tencent’s different enterprise segments, we see that on-line gaming is essentially the most important contributor to the highest line. As with our earlier evaluation on Evolution Gaming (OSTO:EVO), we really feel a bit speculative for this area. That’s, there’s little long-term predictability that future video games can harvest the identical success as their predecessors.
Additionally, The fintech and enterprise companies phase is a rising star inside Tencent, rising at greater than 30% per the newest submitting. Nonetheless, we are going to proceed to fastidiously watch the developments on this area because the business-to-business mannequin principally falls exterior of the corporate’s core competency with a business-to-consumer product gene, not to mention the unending competitors from Alibaba (NYSE:BABA).
By way of financials, serial acquisitions and a narrowing moat that needs to be constantly rebuilt can imply a deteriorating money return on capital with surging goodwill on the steadiness sheet, which is illustrated within the chart beneath.
Disclosure: The point out of any safety on this article doesn’t represent an funding advice. Buyers ought to at all times conduct cautious evaluation themselves or seek the advice of with their funding advisors earlier than appearing within the monetary market. We personal shares of Evolution Gaming.
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