Tencent’s Latest Earnings: Strong Q2 Numbers But Already Priced In

Tencent Holdings Ltd (SEHK: 700) recently reported its second-quarter earnings. Here’s what investors need to know. – Tencent stock

Tencent Holdings Ltd (SEHK: 700), the online gaming and Internet giant, announced its second-quarter results on Wednesday (12 August).

The results were strong, amid all the concerns of the escalating tensions between the US and China, where WeChat was targeted lately.

In this article, I’ll take a look at Tencent’s Q2 results and their implications.

Overview of results

Tencent achieved strong growth in all business segments during the second quarter, which was in line with its first-quarter results. Both total revenue and net profit increased by almost 30% year-on-year.

Online gaming (including both PC and mobile games) revenue increased by 40% year-on-year, driven by smartphone game revenue as key titles in both mainland China and overseas markets had robust performance.

The monthly active users (MAU) of the overseas online games have also increased significantly year-on-year.

This was due to new game launches and more time being spent by players staying at home in overseas markets during the second quarter.

Online advertising revenue grew by 13% year-on-year. Although media advertising revenue has dropped by 25% year-on-year as companies cut their advertising budgets, this was offset by the 27% year-on-year increase in social and other advertising revenue.

The increase in social and other advertising revenue was because as people spent more time on Tencent apps (especially WeChat), it drew more companies (such as e-commerce and education companies) to put their ads and campaigns on Tencent’s social network and digital platforms.

FinTech and business services revenue also increased by 30% year-on-year. On the Fintech side, SME merchants’ needs to digitise their businesses led to an increase in the adoption of Tencent’s commercial payments business.

The wealth management platform also gained traction as it’s proving convenient for users to manage their assets and investments through Tencent’s platform.

On the cloud side, although offline deployment has been delayed and not fully resumed yet, its revenue grew thanks to the increase in services usage by Internet companies and the public sector.

Strong results being priced in

Since the announcement of Tencent’s first-quarter results in May, its share price has already increased by 19%.

Such a gain, in addition to its solid results in May, has mostly been fuelled by market expectations that the development of the tech sector would be accelerated by Covid-19.

Given this, to a certain extent, the positive results for the second quarter have already been priced in, as its share price broke through HK$500 and reached an historic high a few months ago.

With the lack of a clear catalyst or an achievement of a key milestone, it’s going to be difficult for Tencent’s share price to hit an even higher level. Besides, WeChat has been the latest target by the US government.

Although the potential ban on WeChat in the US will likely have a minimal impact on Tencent’s business, the market awaits more clarity or confirmation on whether such a ban will be further extended to Tencent’s other business areas.

The business impact will be much more severe if the ban extends to its gaming business since Tencent has a few significant investments in the US.

There will likely be an overhang in its share price in the short term.

Foolish takeaway

Overall, Tencent reported strong second-quarter results that were in line with market expectations.

Its muted share price performance after the results announcement is likely due to the overhang in the market from the US ban and its current valuation having priced in the solid results.

More reading

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Alec Tseung owns shares of Tencent Holdings Ltd.

The Motley Fool Hong Kong Limited( 2020

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