Better buy: Tencent vs. Alibaba
Tencent (OTC: TCEHY) and Ali Baba (NYSE: BABA), two of China’s biggest tech companies, both recently released quarterly earnings reports that beat analysts’ expectations. Tencent’s revenue and adjusted profit increased by 29% and 28%, respectively. Alibaba’s revenue grew 34% per year while its adjusted profits grew 18%.
These impressive growth rates have not gone unnoticed: Tencent’s stock has risen by more than 50% in the past 12 months, while Alibaba’s stock has risen by more than 40%. So, is either stock still worth buying near its all-time high?
How does Tencent make money?
Tencent generates its revenue from four main businesses: online gaming, social media, digital advertising, and its fintech and business services unit.
The online gaming unit, which generated 34% of its revenue in the last quarter, is home to the world’s largest video game publishing company. His best games include Honor of kings, Elite Peacekeepers, and PUBG Mobile.
The Social Media Unit – which includes China’s leading messaging platform Weixin (known as WeChat overseas), its social media QQ, the video game streaming platform Huya (NYSE: HUYA), and other multimedia services – generated 23% of Tencent’s revenue from value-added services. Combined monthly active users of Weixin and WeChat grew 6% annually to 1.21 billion.
Tencent’s online advertising segment, which generated 16% of its revenue, sells ads on Weixin / WeChat, QQ, its media platforms and its mobile advertising network. The fintech and business services segment, which generated 26% of its revenue, is home to WeChat Pay, one of the two largest payment platforms in China alongside Alipay supported by Alibaba; and Tencent Cloud, which ranks second among cloud infrastructure market after Alibaba Cloud.
How does Alibaba make money?
Alibaba generates its revenue from four main activities: its main business segment, Alibaba Cloud, digital media and entertainment, and innovation initiatives.
Alibaba’s main business unit, which generated 87% of its revenue and all profits in the last quarter, houses its Chinese e-commerce markets Taobao and Tmall; its cross-border markets (AliExpress, Tmall Global and Kaola); its business-to-business marketplace Alibaba.com; its Southeast Asian market Lazada; and its Hema supermarkets. The total number of annual active consumers in its Chinese markets increased 2% to 742 million in the quarter.
Alibaba Cloud, which generated 8% of its revenue, is Asia’s largest cloud platform. Its digital media and entertainment unit – which houses its music and video streaming services, mobile apps and film production unit – generated 4% of its revenue. The innovation initiatives segment, which produces side projects such as smart speakers and experimental applications, generated the remaining 1% of its revenue.
Which business is growing the fastest?
Tencent delivered double-digit revenue growth in its four segments in the last quarter, driven by a 40% increase in gaming revenue.
Its fintech and enterprise revenue grew 29%, with WeChat Pay, its related wealth management services, and Tencent Cloud all blocking more users. Its turnover on social networks also increased by 29%, benefiting from its takeover of Huya in April, Tencent Musicgrowth in the number of subscriptions and robust sales of virtual items in its social media-based games.
In particular, Tencent’s growth accelerated in all of its activities, with the exception of online advertising, which again generated 13% growth while older platforms such as Baidu struggled to attract advertisers. Tencent gave no indication, but analysts expect its revenue to grow 29% with profit growth of 31% for the full year.
Alibaba’s core commerce revenue grew 34% per year in the last quarter, as it benefited from a “strong recovery” in e-commerce sales after the COVID-19 crisis, and its cloud revenue grew. increased by 59% as it secured more public and hybrid cloud clients. The growth of both companies accelerated compared to the previous quarter.
The digital multimedia entertainment unit’s revenue increased 9%, up from a 5% growth in the previous quarter, but it included the mobile games business, which was previously included in its initiatives segment. ‘innovation. This change reduced revenue from its innovation initiatives by 6%.
Alibaba reiterated its earlier forecast of at least 28% revenue growth for the full year, while analysts expect 32% revenue growth, with earnings growth of 16%.
Valuations and potential issues
Tencent and Alibaba are trading at nearly 40 times and 30 times forward earnings, respectively. Neither valuation is cheap, but investors seem willing to pay a premium for their growing companies and large moats.
But the two companies also face regulatory hurdles. Tencent and Alibaba both face a new US Senate bill that could force the Chinese companies to be deregistered their stocks listed in the United States if they do not comply with the new regulations.
Tencent’s WeChat could also be banned in the United States due to national security concerns, and Alibaba’s Taobao remains on the US Trade Representative’s blacklist of “notorious” counterfeit markets. However, only a small percentage of WeChat users are in the United States, and the commerce blacklist has yet to significantly affect Alibaba’s e-commerce business.
The winner: Tencent
Tencent and Alibaba both remain strong long-term investments in China’s growth. However, Tencent’s more diversified business, higher operating margins (34% vs. 23% in their last quarters), and stronger profit growth make it a better overall investment, even though it is trading at. a higher multiple than Alibaba.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.