Tencent Profit Beats Estimates on its Gaming Business
Tencent announced first quarter profits on Wednesday that beat Wall Street estimates, buoyed by the strength of its gaming business and gains in its investment operations.
The results helped offset concerns about pressure on Tencent’s margins. It spends heavily in areas such as gaming, entertainment, retail, and e-commerce for growth. This came amid tough competition from Alibaba Group Holding and others. In result, those worries have weighed on Tencent’s shares this year.
However, better-than-expected earnings sent the internet giant’s market value surging by as much as $34 billion on Thursday.
The shares soared 7.1% to an intra-day high to HK$424.20, their biggest daily rise in nearly 3 years. But it lost gains to be up 5.1% in the afternoon, giving it a market value of about $504 billion. In addition, the day’s high sent its market capitalization to about $514 billion, surpassing Alibaba’s $507 billion. It’s shares settled at HK$411.00.
Moreover, Tencent reported a 48% year-on-year growth in revenues and a 61% year-on-year rise in net profit for the 1st quarter of 2018. Its gross margin was 50.4%, the 1st sequential rise since mid-2015.
Tencent’s investments were the biggest contributor to the bottomline. They generated 7.6 billion yuan in gains.
Additionally, the company made 120 deals in 2017 alone, according to Bernstein’s research. Those include US-based electric carmaker Tesla Inc and Snapchat owner Snap Inc.
Meanwhile, the company’s gaming, video streaming, and WeChat messaging businesses all performed solidly.
Smartphone games revenues alone were up 68% year-on-year to 21.7 billion yuan. This was thanks to titles such as “Honour of Kings.” The company said there was “double digit growth” in terms of daily active users for the game.
Further, two major hit games drove the company’s broader online game business. The first is called “PlayerUnknown’s Battlegrounds” or PUBG. Tencent has the rights to run the game in China. But it said that it is “yet to be monetized,” noting the potential future of the game.
“Fortnite” is the 2nd game driving the strong quarter. Epic games, which Tencent has a large stake in, developed the game.
The game has over 40 million monthly active users across PC and consoles, as well as on mobile. However, it is currently unavailable in China and will be launched within the next few months.
Tencent’s other earnings drivers are its video subscription service. Mobile daily video views were up over 60% year-on-year. Total video revenues were up 75% higher. The company’s investment in original content helped drive paid video subscriptions up 85% on the year.
Online advertising rose 55% year-on-year in terms of revenues.
Analysts’ Target Price for Tencent
Daiwa Securities called the quarter “a stellar set of results” and raised its target price on the stock to HK$530 from HK$490. Goldman Sachs also raised its target price to HK$546 from HK$535.
However, Jeffries cut its target price to HK$515 from HK$530. It noted that the push to grow revenues from its advertising and financial services business might continue to weigh on Tencent’s margins.
In addition, Credit Suisse lowered its target price for the stock to HK$523 from HK$540.
CICC analyst Natalie Wu maintained her target price for the stock at HK$540. This was due to the delays in earning revenues from games in China and heavy marketing expenses would hit mobile games revenue in the short term.
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