Tencent full year and 4Q results

Yesterday the big news on the company front was the 4Q and full year results from Tencent. Given the high multiple that the stock trades on the results always lead to big moves of the share price; it is always hard to price a company that grows at 50% a year and then try to forecast what the company will look like in one or two years time.

Here are the numbers: Revenue is up 31% YoY to U$ 12.899 billion (4Q up 24% to U$973), operating profit is up 59% YoY to U$ 4.991 billion (4Q up 51%) and margins grew YoY from 32% to 39%! These numbers are generated from their huge user base across their different platforms, QQ has 815 million Monthly Active users (MAU) up 1% YoY. The big growth for QQ came from a 33% increase in MAU on smartphones and tablets, these users are the "next generation" and are the users that you want. WeChat grew its MAU by 41% to 500 million and Q-zone grew its MAU by 5% to 654 million. All in, across those three platforms they have a whopping 1.969 billion users or customers! Granted there will be over laps between users but even if you have the same user across the 3 platforms, you still have them looking at their smartphone for 3 different apps (more eyeball time).

Tencent are an e-commerce company but their current revenue breakdown puts them more into the entertainment/ gaming category, with 82% of their revenue coming form online gaming and only 13% from advertising. The remaining 5% comes from other divisions like their mobile banking operations or online retail. In the 4Q their online gaming revenue grew by 41% mostly driven by smartphones, which shows the value in the growth from the smartphone user base. There was bigger growth from online advertising, with growth of 75% for the 4Q, showing the bigger push to get advertising to the current users.

Going forward there is going to be a bigger push to increase advertising, which is still small given the size of their user base. The danger of course is that as you increase adverts your user base starts to drop because adverts decreases the user experience. I don't think that they have to reinvent the wheel when it comes to advertising though because over the last few years we have seen how Facebook, Snapchat, Twitter and other big social network companies have been able to include adverts but not diminish the user experience. The company has huge growth potential and as long as the Chinese government keeps the likes of Facebook out of China, there will be very little competition.

This morning the company was up 5% on the results which puts their P/E at a solid 44. When a company is growing profit by 50%, I don't think that P/E is the correct measurement of the cost of the stock. Another year of 50% growth (which isn't hard to imagine) puts the P/E at 22 forward. Looking forward two years it is completely possible that the stock will have a P/E in the teens, using todays share price. As a Naspers shareholder you get access to the stock at a discount! An update on the value of Naspers stake in Tencent works out to around R 711 billion, which when compared to Naspers market cap of R753 billion, either values Naspers' other businesses at almost nothing or you get a discount on the Tencent share price! Either way I think that Naspers still has legs both from growth in Tencent and from the growth in their other businesses. Definitely still a buy as it crosses the R 1 800 mark this morning.