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Tencent Earnings Show the Way to a $1 Trillion Valuation

Matt McCall and the InvestorPlace Research Staff
·5 min read

There’s simply so much to like about Tencent (OTCMKTS:TCEHY). And to some extent, the market gets that. But there’s still a longer-term opportunity for TCEHY stock.

Tencent (TCEHY) sign on Tencent headquarters in Shenzhen, China.
Tencent (TCEHY) sign on Tencent headquarters in Shenzhen, China.

Source: StreetVJ / Shutterstock.com

After all, it’s not as if investors aren’t paying attention to Tencent. Following yesterday’s third-quarter earnings report, Tencent currently has a market capitalization of about $745.5 billion.

That said, the stock doesn’t seem to get quite the investor attention of its Chinese peers. That may be because the stock isn’t yet listed on a U.S. exchange. Or it may be that Tencent simply is so good that investors take the company, and TCEHY stock, for granted.

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The latter sense seems to hold after the Q3 earnings release. Tencent just posted one of the most impressive quarters you’ll ever see. Investors haven’t exactly yawned; TCEHY stock is up 4.4% as I write this. But that doesn’t seem like quite enough.

These earnings — amid the lingering effects of the global novel coronavirus pandemic — show what a powerhouse Tencent is. And the release highlights what looks like an almost easy path to a $1 trillion valuation for Tencent, and continued upside for TCEHY stock.

Impressive Earnings for TCEHY Stock

Again, Tencent’s third quarter is as impressive as any report you will ever see.

Revenue rose 29% year-over-year. Granted, other companies in the market have higher growth rates. But they’re growing off a base of a few hundred million dollars in quarterly revenue. Tencent posted growth off a year-prior level of over $14 billion. There are only a handful of companies in the world with that kind of power (and those companies generally have already cleared the $1 trillion mark).

Tencent didn’t give up any profit margin, either. Adjusted earnings per share rose 30% year-over-year.

It bears repeating: this is the type of quarter posted by a smaller, younger company. Mature businesses don’t usually grow at this rate without giving up something (usually margins) in the process.

And it’s not as if Tencent’s growth has to end. Tencent closed the third quarter with $39 billion in cash. If it wants to build out its business further, it has plenty of capital with which to do so.

Breadth and Depth

As always, investors need to look beyond the headline numbers. But the news looks positive on that front as well.

Across the board, Tencent posted strong results. In its VAS (value-added services) segment, revenue rose 38%. That includes a 45% increase in online games. Tencent continues to dominate mobile gaming in China.

Online advertising rose 16%. FinTech and Business Services increased 24%. Those latter two numbers don’t seem quite as impressive, but, again, off a massive base, those growth rates are nothing to sneeze at.

And aside from the numbers, the results show how broad Tencent’s portfolio is. It’s a leader in mobile games, a massive and growing market. It’s a leader in online advertising. And it’s a leader in payments and even wealth management.

The way to think about Tencent is that it’s basically multiple companies combined under one roof. Any one of those companies on its own would be massively valuable. As a whole, the potential seems almost limitless.

TCEHY Stock Is Still Cheap

And yet, Tencent stock still looks reasonably cheap. On a trailing twelve-month basis, the stock trades at a little over 55x net earnings.

That’s not a low multiple, certainly. And it’s higher than those of other mega-cap Chinese stocks.

But that earnings figure includes a reasonably substantial hit from the pandemic, particularly in markets like online advertising. It includes growth in the company’s business. And it doesn’t include the company’s valuable stakes in multiple public and private companies.

And, of course, this is a business growing profits at a 30% clip. It doesn’t take long at that kind of growth rate for valuation to come in dramatically.

In fact, it shouldn’t take long for Tencent to hit a $1 trillion valuation. Even two years of decelerating growth and a modestly lower price-to-earnings multiple would get TCHEY stock comfortably over $1 trillion in two years. That’s roughly 20% return. Any growth acceleration or multiple stabilization, let alone expansion, suggests the stock does even better.

But there’s a broader case here as well. Something along the lines of “you know it when you see it.” There are simply a handful of companies in the world that can do what Tencent can and post the type of growth it has off the massive base of revenue and profits.

Those companies are either worth more than $1 trillion or will be soon. I don’t see why Tencent, and TCEHY stock, should be any different.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.

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