Tencent 2018: Is Tencent Now a Mature Business?
With Tencent making headlines for its recent round of high-profile media investments in Spotify and Skydance Media, alongside recent concerns stemming from the Q4 2017 earnings released in March, investors are waiting with baited breath for the Q1 2018 earnings due on May 16. This will indicate if Tencent can continue its exponential rise further up the rankings of the top five most valuable companies worldwide, with Amazon, the next FANG in its sights.
Year-on-year (YoY) revenue growth was up 51%. However, what the results didn’t show was that this fell short of analyst estimates by 4%. This miss was compounded by the evident slide in gross margins, declining quarter-on-quarter (QoQ) since Q2 2015. Regardless of the revenue growth reported, Tencent’s costs of revenues have increased 51% since Q4 2014 and are now rising at a faster rate than revenue MIDiA Research has modelled in its report entitled ‘Tencent Has Outgrown China: Now Comes The Next Phase of Growth’. If this decline in margins continues, costs would overtake revenues in 2024. A seven-fold increase in other gains from Q4 2016, however, have somewhat helped bolster this slide. Tencent is committed to investing in technology and content to diversify and improve the ecosystem of services, which Tencent’s President Martin Lau confirmed:
“These investments may negatively affect our near-term profitability, but will generate long-term value and new growth opportunities for us”
Tencent through its earnings release tried to deflect attention away from the monthly active users (MAU) decline in QQ of -7% from Q3 – Q4 2017, now at 783 million. It showcased the quarter-on-quarter increase for smart device monthly active usage as an increase in conversions, whereas it is really a migration of the user base from PC’s to smartphones. Tencent’s earnings also obscured the fact that WeChat MAUs growth rate has slowed down significantly, having fallen from 10% QoQ growth between Q4 2014 – Q1 2015, right down to 0.9% for Q3 – Q4 2017. Instead, the company promoted the fact that it neared the one billion mark (which it passed in February). With China’s total population of 1.379 billion people, Tencent is evidently reaching its limit domestically as the market has become saturated. With the rise in Tencent’s overseas investments, will it be able to capture enough of the global user base to sustain this current growth?
The alternative is to adopt a monetisation strategy to increase the revenue generated per user, a model utilised by Facebook to great extent. Although Tencent’s advertising revenue has increased significantly, Facebook makes considerably more revenue in terms of advertising. Tencent’s WeChat has accrued over one billion users via smartphones in China alone and should now look to utilise its entertainment and gaming platforms within the instant messaging service to generate more advertising revenue in the long run. Raising prices for services, specifically for Tencent Video, could help strengthen revenue streams, which currently returns an annual average revenue per user (ARPU) 13.3 times smaller than the ARPU for Netflix. A lower price point in a flourishing market means there is ample potential for Tencent to monetise its users considerably going forward.
Tencent should now be viewed as a mature business, and, as such, will continue doubling down on investments in content to diversify the revenue stream and increase its service offerings. Increasing overseas investments into international tech companies allows Tencent to generate non-domestic income without having to compete directly with international opponents on foreign shores.