Tencent stock (OTC:TCEHY) appears to have additional upside potential after its recent gains. The Chinese social media and tech behemoth entered Fiscal 2024 on a high note. Particularly, its first-quarter earnings report was marked by strong sales growth and, more importantly, a significant margin expansion that meaningfully raised its profitability. Yet, despite the recent share price gains, Tencent stock remains attractively valued, indicating more room to run. Consequently, I am bullish on Tencent stock.
Q1: Strong Top and Bottom Line Growth Raises Investor Confidence
Tencent’s Q1 results showcased strong top and bottom-line growth, boosting investor confidence in its investment case. As a reminder, Tencent experienced a marginal drop in revenues in 2022, which led to steep share price declines. Then, while revenues rebounded in 2023, the share price didn’t quite pick up meaningfully. However, with the company sustaining strong growth entering 2024, the market seems more convinced about Tencent’s prospects.
Overall, for the quarter, total revenues rose by 6% to $22.5 billion, with the significant growth in Online Advertising and Fintech/Business Services more than offsetting the slight top-line decline in Value-Added Services (VAS). The table below provides a comprehensive overview.
Value-Added Services
Tencent’s Value-Added Services segment continued posting soft results, matching the underperformance seen in previous quarters. The segment includes the company’s video games and social network divisions, with its revenues declining by 0.9% in the quarter.
On the video games front, Tencent’s results were quite mixed. Internationally, the company performed well, with gross receipts growing by 34%. Note that the actual revenues were up 3% due to the lengthy revenue deferral cycle for Supercell’s games (Supercell is a mobile game development company). However, the underlying gross receipts suggest we will likely see a significant acceleration in this category, moving forward.
In contrast, while domestic games’ gross receipts grew by 3%, revenues decreased by 2% year-on-year. The Honor of Kings and Peacekeeper Elite games experienced revenue declines year-on-year, partially offset by new games like VALORANT and Lost Ark and the strong performance from Fight of the Golden Spatula. I believe that this decline can be attributed to Beijing’s crackdown on the video gaming industry, which began in 2021, aiming to limit playtime for people under 18 years of age.
Finally, revenues from social networks were also soft, decreasing by 2%. Gains in music and long-form video subscriptions, Video Accounts live streaming service, and Mini Games platform service fees were offset by lower sales from music-related and games-related live streaming services. Overall, the VAS segment’s results in the first quarter were quite muted.
Online Advertising
Tencent’s Online Advertising segment experienced a notable revival, powered by a general recovery in the industry. Revenues surged by 26% year-on-year, driven by increased engagement with Video Accounts, Mini Programs, Official Accounts, and Weixin Search. The segment’s growth was also supported by ongoing improvements to Tencent’s AI-driven advertising infrastructure.
Tencent’s revenue growth mirrors the broader industry rebound, aligning with performance metrics from industry leaders such as Meta Platforms (NASDAQ:META) over the same period. Advertising spending rose across nearly all major categories, with substantial growth seen in the gaming, Internet services, and consumer goods industries. The automotive industry remained an exception, showing softer spending.
FinTech and Business Services
Finally, FinTech and Business Services showed a decent performance, with revenues growing by 7% year-on-year. While Fintech’s growth was hampered by weaker growth in offline consumption spending and lower withdrawal fee revenues, wealth management services revenues posted solid growth. Regarding Business Services, it achieved a year-on-year revenue growth in the teens, driven by an increase in cloud services revenues and higher e-commerce technology service fees within Video Accounts.
Tencent’s Valuation Remains Reasonable
Tencent’s valuation seems quite reasonable following its Q1 results, as the quarter points toward robust full-year earnings growth potential. Specifically, Tencent’s operating margins rebounded from 25% last year to 33%, which, along with the top-line growth, led to earnings-per-share (EPS) growth of 55% to $0.62. Accordingly, Wall Street expects full-year EPS to land at $3.03, representing a year-over-year increase of 33.8%.
This estimate also implies that shares are currently trading at about 16.2x earnings, a multiple that I find quite attractive, given Tencent’s overall growth prospects and strong moat in China. In the meantime, the company continues to execute buybacks rapidly, repurchasing $8.0 billion worth of stock over the past four quarters. This suggests that management also finds shares quite undervalued at their current levels.
Is TCEHY Stock a Buy, According to Analysts?
On TipRanks, Tencent comes in as a Strong Buy, according to analysts. Tencent has gathered 16 Buys and one Hold rating in the past three months. At HK$453.98, the average Tencent Holdings stock forecast suggests 19.2% upside potential. In U.S. dollars, this translates to a share price of about $58 for the U.S.-listed TCEHY stock.
The Takeaway
In conclusion, Tencent’s first quarter results underscored a strong growth trajectory and a massive margin expansion, fueling confidence regarding its full-year earnings potential. Additionally, while the stock has rebounded substantially year-to-date, Tencent’s valuation seems to be hovering at quite attractive levels. Thus, I wouldn’t exclude the possibility of further upside potential in the short-to-medium term.
