Tencent Surges 4.8% on 62% Income Boost, Ad Sales Double

Tencent's stock rises 4.8% as net income surges 62%, driven by a doubling in ad sales and strategic focus on advertising and cloud services.

By Bill Bullington

5/15, 22:35 EDT

Key Takeaway

  • Tencent's shares surged up to 4.8% after a 62% net income increase, driven by doubled ad sales through its video service.
  • Strategic focus on advertising, cloud services, and cost-cutting led to Tencent's best gross margin since 2016 despite gaming challenges.
  • First-quarter revenue exceeded expectations at $22 billion, with a notable 26% rise in ad sales and positive market reactions.

Tencent's Earnings Surge

Tencent Holdings Ltd. experienced a notable increase in its stock value, rising by as much as 4.8% in Hong Kong, following the announcement of its quarterly earnings. The company reported a 62% surge in net income, attributed largely to a doubling of ad sales through its TikTok-style video accounts service. This performance not only surpassed expectations but also outshone its rival, Alibaba Group Holding Ltd., underscoring the growing divergence between these two giants in the Chinese internet sector. Tencent's success in this quarter is seen as a significant stride in its competition against ByteDance Ltd., with users spending 80% more time on WeChat’s video accounts.

Strategic Growth and Challenges

Tencent's strategic focus on advertising and cloud services, coupled with cost-cutting measures, contributed to its best gross margin since 2016. Despite a plateau in top-line growth, these efforts have paid off, showcasing the company's ability to navigate the volatile Chinese internet arena. However, Tencent faces challenges in its gaming division, which has historically been a major revenue driver. The company is in search of its next big hit amidst regulatory tightening and a competitive landscape that includes rivals like ByteDance and NetEase Inc. Additionally, Tencent's international gaming revenue saw growth, indicating a potential area for further expansion.

Financial Performance and Market Reaction

Tencent's first-quarter revenue rose 6% to 159.5 billion yuan ($22 billion), beating analyst expectations. This growth was driven by a 26% rise in ad sales and a strong performance in business services. The company's net income also exceeded forecasts, climbing a stronger-than-anticipated 62%. These results have led to positive reactions from investors and analysts alike, with JPMorgan Chase & Co. predicting a near-term stock catalyst due to stronger-than-expected domestic gaming revenue and ads revenue. Tencent's market valuation had reached $460 billion before these latest results, highlighting its significant presence in the global tech landscape.

Street Views

  • Vey-Sern Ling, Union Bancaire Privee (Bullish on Tencent):

    "Tencent is firing on all cylinders for sure, margins are improving and ad growth is strong. Online games is probably going to rebound in the second quarter... Tencent is able to build whatever monetization it wants around that core group of users, because those users will never leave."

  • Alex Yao, JPMorgan Chase & Co. (Bullish on Tencent):

    "We expect Tencent’s share price to react positively to the good results given stronger-than-expected domestic gaming revenue and ads revenue, and higher-than-expected margin and group profit... We believe the 1Q24 results will serve as a near-term stock catalyst, with likely positive earnings revisions and multiples’ expansion."