Tencent Q2 Earnings Release Should Show Gaming Revival Boosting Sales

Tencent Q2 Earnings Release Should Show Gaming Revival Boosting Sales

Reports Q2 2019 results on Wednesday, Aug. 14, before the open
Revenue expectation: $13.51 billion
EPS expectation: $0.32

Tencent Holdings (OTC:TCEHY), China’s Facebook (NASDAQ:FB), experienced a world of pain during 2018–and the agony doesn’t look set to end any time soon.

Last year, the Shenzhen-based internet services company’s lucrative gaming business was hit by Chinese government controls, the macro environment in which it operates worsened and companies markedly slowed their spending, hurting its advertising business. Unfortunately, many macro factors that would support the company’s recovery are still absent.

The U.S. and China remain embroiled in a trade war that’s hampering growth in China and forcing global companies to cancel or restrict spending plans.

Gaming Resurgence

For the previous earnings season, Tencent reported the slowest pace of sales growth since it went public in 2004. Nevertheless, even with this gloomy macro backdrop there is one bright spot which could prove bears wrong. That’s a revival in the company’s gaming business which brings in more than 40% of total revenue.

The company’s shares, which closed yesterday at $42.77, were hit hard last year after a nine-month freeze on new game approvals in China–a move that choked this important source of income. But this year, videogames are expected to support Tencent’s bottom line again as the government began approving new games.

The mobile title “Game for Peace” has been a big hit in China after its May launch. The game, which is also known as “Peacekeeper Elite,” is a revamped version of “PlayerUnknown’s Battlegrounds.” To get through the approval process, the company has made many changes, especially reducing the violence in “Game for Peace” and adding patriotic imagery.

In its first 60 days, “Game for Peace” raked in $241 million on Apple (NASDAQ:AAPL) iOS devices in China, according to research firm Sensor Tower.

Resurgence in gaming means Tencent will also make more money from its WeChat messaging service, over which it sells in-game items and advertising to a billion-plus potential customers. The company is also investing in video and news to win users back from upstarts like Bytedance Ltd.

In addition to its gaming division, analysts will also be zeroing in on efforts to diversify its revenue base by bringing in more sales from its WeChat Pay service, cloud computing and wealth management. The unit that includes these businesses saw a 44% surge in sales in the March quarter, becoming one of its fastest-growing divisions.

Bottom Line

Right now, Tencent stock doesn’t seem to be this year’s best bet. The stock is up just 9%, underperforming other tech giants and the broader market.

Still, we see Tencent as a solid stock with lots of potential. It’s a good way to gain exposure to the world’s second-largest economy. And despite the headwinds coming from the U.S.-China trade dispute, long-term prospects are bright.

Tencent’s gaming pipeline is strong and it’s well on track to broaden its revenue base. The company has a business model that’s proving much more durable versus many of its western peers.