Tencent income almost doubles – but costly investments weigh on share price
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Tencent income almost doubles – but costly investments weigh on share price

Chinese internet giant Tencent Holdings Ltd. reported quarterly earnings last week that easily beat expectations on net income. Nonetheless, the company announced that its commitment to costly investments would drag on its financials in the coming months. There is no doubt that this is a positive for Tencent’s long-term growth story, but investors are rarely pleased at the prospect of dampened returns – as a result, the share price traded down on the news. It nonetheless remains one of the world’s best-performing stocks over the past decade.

Despite a dip, Tencent’s share price is still up by 87% over the last 12 months

graph tencent 2603

SOURCE: Yahoo Finance

Tencent said that net income for the quarter almost doubled to 20.8 billion yuan ($3.3 billion). This easily overshot analysts’ expectations for 16.6 billion yuan. The company has already planned what it wants to do with this money – pump it back into soon-to-be-lucrative areas like artificial intelligence and video. Benjamin Wu, a Shanghai-based analyst for Pacific Epoch, said:

“Tencent needs to invest in new business, it would help the company build a better ecosystem infrastructure to support growth, but it will hurt margins in the short term.”

Tencent’s president Martin Lau agreed, saying at a press briefing: “That’s why for the year of 2018 we are planning to step up our investments in a number of key areas. These investments may negatively affect our near-term profitability, but will generate long term value and new growth opportunities for us.”

Meanwhile, the company’s revenue just missed the mark, rising by a nonetheless impressive 51%, year on year. That came in at 66.4 billion yuan – less than the 68.6 billion yuan analysts hoped for.

Tencent has a stable of incredibly successful social networking businesses (WeChat and QQ) and is the country’s mobile game leader (owning global phenomenon Honour of Kings). It’s plans for the future include video and music streaming, computing services and more.

Disclosure

Dominion holds Tencent in its Global Trends Ecommerce Fund.


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