Tencent (OTCMKTS: TCEHY) reported a mixed set of 1st quarter results on Wednesday, with revenue missing despite low expectations, while earnings came out way ahead of estimates. Tencent’s ADRs, which initially traded as much as 4% lower, bounced back into the close, as investors digested the results.

Net income came in at 27.21 billion Yuan, well ahead of the 19.4 billion analysts expected, largely due to one-off gains of close to $1.5 billion on various investments – so perhaps investors shouldn’t read too much into the earnings beat. Basic EPS and diluted EPS were both around $0.30.

Sales grew 16% YoY, the company’s slowest growth since 2004, and this news initially spooked investors who were already nervous about the impact on the company of China’s economic slowdown, the trade war, and its government’s crackdown on online gaming.


Tencent’s New Target: Businesses

Revenue from Fintech and Business Services, a new category for the company, grew 44%, as the company’s management emphasized its increasingly diversified revenue streams. Online ad revenue also managed robust growth of 25%, and several newer products contributed to 34% growth in social ad revenues.

WeChat’s year-on-year MAU growth of 7% to 1.1B was solid when one considers the high base it is coming off. Tencent’s other platforms QQ, Weixin, and Qzone recorded low single-digit growth from the previous year.

Receipts from online gaming were up 10%, though revenue fell 1% as some transactions were deferred. This result was better than expected after the Chinese government stopped approving monetization for new games.

Net margins were flat at 33%, while gross margins fell to 47% from the previous year – though they rose from the previous quarter. This was largely due to lower marketing costs as fewer new games were launched.


Outlook: Don’t Expect A Smooth Road

Tencent is well positioned for the long term with investments paying off and its revenue streams becoming increasingly diversified.

Assessing the valuation is tricky given the number of moving parts and the uncertain environment. In the short term the share price will be driven by sentiment, and in the long term by earnings growth. Sentiment around the stock is mixed and could change quickly if the environment changes. In addition, there’s a good chance revenue streams could become lumpier than they have in the past.

In the long term, however, Tencent is well positioned. Investments the company made in the past are now paying off, and the investments it is making now will pay off in the future. Its revenue streams are also becoming increasingly diversified.

Tencent has proved that it is good at monetizing its products, though it sometimes appears to be a case of hit and miss. Perhaps most importantly, the company is very well positioned in the rapidly growing online gaming market, with a large portfolio of popular games and a pipeline of new games in development.

Investors shouldn’t expect a smooth road ahead — user growth may be mediocre given the very high base it has set for itself, while trade tensions and regulatory issues are likely to continue to weigh on sentiment. However, this may be just the volatility long-term investors need to build a position over the next year.

About Author

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.