Tencent Won't Be a Social-Media Company Anytime Soon

By Markets Fool.com


Image Source: Supercell

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WeChat is one of the largest social-media platforms in the world, with over 700 million monthly users. While it's seen as the prototype for monetizing a messaging app, its parent company, Tencent Holdings , is still very much a gaming company. Last quarter, the company generated $2.4 billion from online games, 52.5% of total revenue and more than twice as much as its social-network revenue.

That gaming revenue is about to get much bigger, now that a consortium led by Tencent has agreed to acquire an 84% stake in Supercell, the company behind the popular mobile games Clash of Clans and Boom Beach. The acquisition values the company at around $10.2 billion -- 73% more than Activision Blizzard paid for King Digital. Supercell reportedly generated $2.3 billion in revenue last year, producing $780 million in profits.

Tencent cements its global gaming lead

Tencent is already the global leader in gaming revenue, generating around $8.8 billion in game revenue last year. Comparatively, Activisionand King Digital combined to bring in $6.7 billion, according to data from Newzoo. With the addition of Supercell, Newzoo expects Tencent to capture 13% of global gaming revenue this year.

Tencent also owns Riot Games, the company behind League of Legends. Still, most of Tencent's revenue comes from within China. Just $1.3 billion of its games revenue came from outside its home country. The acquisition of Supercell provides significant international exposure.

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What's more, Tencent will be able to leverage its position in China to grow Supercell's games even more. Tencent will take over publishing duties for Supercell games in China from Kunlun. Tencent can use its gaming platform to promote Supercell games to its 300 million users, and it could even promote Supercell in its social networks like WeChat. More closely tied to gaming, it will be able to add its eSports platform to Supercell's newest title Clash Royale, which will help generate additional interest in the game.

It's getting a pretty good deal

Supercell is a quickly growing company, and it's already very profitable. With $780 million in profit last year, Tencent is paying just 13 times earnings. Comparatively, Activision paid $5.9 billion for King Digital, 10 times earnings. But consider that King was already seeing declining year-over-year revenue and earnings by the time Activision bought it, and Supercell is expected to grow its earnings 30% this year. On a forward basis, Tencent is paying closer to 10 times earnings and getting much better growth prospects.

Supercell has been able to consistently put out games that generate high amounts of revenue while King has been unable to match the success of Candy Crush Saga nor keep users interested. Activision says King experienced a sequential increase in active users and gross bookings in the first quarter, but the first quarter is generally stronger for King. Because of Activision's takeover mid-quarter, there's no apt comparable quarter for King's most recent results.

With the expected growth in Supercell's revenue and earnings, Tencent will effectively grow its biggest business with the Finnish company's $2.3 billion in revenue, adding 26% to the segment's top line overnight. Organic revenue growth has slowed in recent years, so this acquisition provides a nice shot in the arm for Tencent. Meanwhile, it can take its time improving the monetization of those 700 million WeChat users.

The article Tencent Won't Be a Social-Media Company Anytime Soon originally appeared on Fool.com.

Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.