What will Tencent shares look like in five years?
Tencent (TCEHY -0.32%) At one time, it seemed like a promising long-term strategy for China’s burgeoning tech sector. The company is the world’s largest video game publisher, and its top games dominate the Chinese games market. The company owns one of China’s leading “superapps”, WeChat (aka Weixin), which brings together mobile messaging, social networking tools, digital payments, online purchases, integrated games and other features in a walled garden. ing.
Tencent owns the third largest cloud infrastructure platform in China. Alibaba Cloud, Huawei Cloud and WeChat Pay have a near monopoly in China’s digital payments market with Ant Group’s AliPay. It also owns streaming video platform Tencent Video and streaming music reader. tencent music (TME -2.69%).
Over the past five years, however, Tencent’s stock has fallen nearly 20%. The tech leader lost its luster as Chinese regulators scrutinized the company’s past and planned acquisitions while cracking down on the video game sector. The pandemic, subsequent lockdowns in China, and macro headwinds have all exacerbated the slowdown.
Should investors buy Tencent now and expect it to rebound over the next five years, or will the investment remain lackluster as its core business matures?
What happened to Tencent in the last five years?
Between 2017 and 2022, Tencent’s annual revenue showed a compound annual growth rate (CAGR) of 18%, and its adjusted net profit grew at a CAGR of 12%. These growth rates appear to be stable, but a closer look reveals an alarming slowdown.
Adjusted net income growth
Tencent’s growth has slowed over the past two years for three main reasons.
First, Chinese regulators have tightened restrictions on how long minors can play video games and curtailed the approval of new video games. China frozen the approval of all new video games in August 2021 and gradually resumed the process in April last year, but did not actually approve Tencent’s games until December last year.
Second, Tencent’s advertising business — which serves ads on WeChat, the former social networking platform QQ, media platforms and other websites and apps — faced macro and competitive headwinds. On the macro side, China’s intermittent COVID-19 lockdown has dampened new ad demand in the market. Government crackdowns on the gaming, e-commerce and online education markets have also contributed to a significant slowdown in advertising sales to these sectors.
When it comes to competition, Tencent’s ad platform has struggled to stay ahead of ByteDance’s Duoyin (known internationally as TikTok) and Gen Z-targeted platforms. Bilibili.
Finally, Tencent faced regulatory, competitive and macro challenges in expanding its “fintech and business services” through WeChat Pay and Tencent Cloud, which aims to diversify its business from games and advertising.
WeChat Pay has struggled with sluggish consumer spending and tightening restrictions on digital payments. Tencent Cloud struggled as macro headwinds forced businesses to curb spending on large-scale cloud upgrades. Fierce competition from the likes of Alibaba and Huawei has forced Tencent Cloud to cut prices and abandon some of its loss-making strategies.
What will happen in the next five years?
The past few years have been tough for Tencent, but the next five years could be better. Chinese regulators are now consistently re-approving Tencent’s new games, and it continues to diversify its gaming business away from China with overseas hits such as: Valorant, league of legends, triple match 3d, Goddess of Victory: Nikkeand Warhammer 40,000: Dark Tides.
Tencent’s advertising business still faces a lot of competition, but WeChat, with 1.32 billion monthly active users, will remain China’s leading super app for the foreseeable future. Tencent Video and Tencent Music should also continue to dominate their respective markets.
Tencent’s total ad revenue should therefore increase as the Chinese economy experiences post-coronavirus recovery. This upward trend should also increase consumer spending on WeChat Pay, encouraging more businesses to return to Tencent Cloud. As these headwinds dissipate, analysts expect Tencent’s revenue to grow at a CAGR of 12% between 2022 and 2025. However, they expect net profit CAGR to increase by less than 1% as they ramp up investment in new games. advertising and services.
If Tencent achieves these targets and grows revenue at a CAGR of 10% from 2025 to 2028, Might be so It is expected to generate 1.3 trillion yuan ($150 billion) in revenue by the final year, almost double the 555 billion yuan in revenue in 2022.
These longer-term estimates should be taken with a grain of salt, as China’s post-COVID-19 recovery remains fragile and competitive and regulatory challenges are unpredictable. However, assuming Tencent’s sales still quadruple in 2028, the company’s stock could double over the next five years, so it might be a good time to revisit this Chinese stock. .