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1 Big Reason I’m Bullish on Tencent’s Gaming Business

Tencent Holdings Ltd (SEHK: 700) recently reported its fourth-quarter and full-year 2019 results. It was a solid year for the online gaming giant and WeChat “superapp” operator. However, there were also concerns surrounding the momentum of its gaming business.

Clearly, as coronavirus hit China, many people have been playing online games while stuck at home. This has benefitted Tencent as it’s a leading online games developer.

However, this spike in use (and associated revenue) is unlikely to continue as the country goes back to work. By no means does that automatically equate to slowing growth for its gaming business. In fact, Tencent’s gaming business could actually see a further boost in the coming months.

Here’s the main reason why I’m so optimistic on its gaming business going forward.

Tencent’s hidden gem

Tencent actually owns a burgeoning international gaming business. A lot of investors may not be aware of this fact but the company gets an increasing share of revenue from its overseas game releases.

Its overseas gaming revenue doubled year-on-year in the fourth quarter of 2019 to RMB 23 billion (US$3.23 billion).

Obviously, the Chinese gaming market still forms the bulk of its gaming revenues but investors should not ignore the growth of the international segment.

In fact, in the fourth quarter of 2019 there were already some positive signs for Tencent. Out of the top 10 games globally in the fourth quarter of 2019, in terms of daily average users (DAUs), Tencent developed five of them (see below).

Tencent international games

Source: Tencent Q4 2019 presentation slides

Coronavirus and “stay-at-home” gaming

Gaming has been one of the few winners in the stock market to have emerged from the Covid-19 outbreak. What’s more, Tencent has had a long-standing relationship with many developers – either through stakes or owning them outright.

For example, Tencent acquired a majority stake in Clash of Clans developer Supercell in 2016. Tencent also owns leading developer Riot Games, which is known for its League of Legends franchise.

With its fingers in many different global gaming markets, Tencent looks set to benefit as people social distance in both the US and Europe due to the coronavirus. Streaming online content (think Netflix) will be one way to pass the time but you can also expect an uptick in online gaming.

Earnings lag activity

Investors should remember that Tencent released its fourth-quarter results which means that the revenue investors see does not reflect the period when coronavirus really started to impact everyday life.

This should show up in first-quarter numbers for the company’s earnings. Indeed, Tencent’s deferred revenue for the fourth quarter was up 38% year-on-year at RMB 68.3 billion (US$9.62 billion).

That had accelerated from 30% year-on-year deferred revenue growth over the previous two quarters. Essentially, what this indicates is a rise in gaming revenue over the coming quarters.

Quality games developer

Tencent’s history as a successful games developer is not in doubt. With its multiple international collaborations in the gaming space, I really believe the tech giant can continue to expand revenues from outside of China.

For long-term investors who like its lucrative gaming business, that can only be a good thing.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Tim Phillips owns shares in Tencent Holdings Ltd.