Should Tencent Worry About This Rival's Meteoric Growth?

Shares of Tencent (NASDAQOTH: TCEHY) have tumbled roughly 20% this year due to ongoing concerns about trade tensions and the weakness of its video game business. Despite those headwinds, many investors believe that Tencent's social networking business remains well-protected.

After all, it owns WeChat, the top mobile messaging app in China, with over a billion monthly active users (MAUs). It also owns the older QQ messaging platform and the Qzone social network. But it looks like Tencent could be losing its edge to a fierce new rival.

That rival is ByteDance Technology's Jinri Toutiao ("Today's Headlines"), a personalized news app that aggregates and curates stories with an AI algorithm. Chinese data analytics firm QuestMobile reports that Toutiao's share of China's communications app market hit 10.1% in June, up from just 3.9% a year earlier.

During the same period, Tencent's share fell from 54.3% to 47.7%. Most of Toutiao's gains were made at Tencent's expense, since other apps from Baidu, Alibaba, and SINA (NASDAQ: SINA) didn't experience major year-over-year shifts.

One of the hottest start-ups in China

Toutiao was launched in 2012, and now reaches over 200 million MAUs. It has at least 120 million daily active users (DAUs) who reportedly spend an average of 76 minutes per day on the platform. In 2016, Toutiao's founder, Yiming Zhang, launched Douyin (also known as Tik Tok), a music video and social networking platform that now has over 166 million MAUs.

These two platforms are ByteDance's core growth engines, but the company also recently acquired the lip-syncing app, the video sharing platform Flipagram, and Cheetah Mobile's (NYSE: CMCM) News Republic news aggregator. It also invested in Cheetah's mobile streaming app and the Indian news app DailyHunt. It operates a Buzzfeed-like English app called TopBuzz, and even tried to buy Reddit last year.

Toutiao's ad revenues jumped 400% from 300 million RMB in 2014 to 1.5 billion RMB in 2015, then rose another 433% to 8 billion RMB ($1.2 billion) in 2016. Analysts estimate that its revenue more than doubled to $2.5 billion last year.

It's unclear how much revenue ByteDance generates from its secondary apps, but Zhang reportedly believes that the company's total ad revenues could eventually hit $10 billion and claim a fifth of China's online advertising market -- which would be bad news for Tencent and Baidu.

ByteDance's last funding round in 2017 gave it a valuation of $30 billion. Recent reports suggest that the company could go public soon in Hong Kong with a valuation topping $45 billion.

How Tencent is fighting back

Tencent is striking back at Toutiao with its own news app, Tiantian Kuaibao ("Daily News"), its QQ-based news feed feature, QQ Kandian, and investments in other news aggregators like India's NewsDog and the Chinese app Qutoutiao ("Fun Headlines").

Tencent and ByteDance are suing each other over claims of defamation and unfair competition. Tencent claims that ByteDance manipulated certain news headlines on Toutiao to harm its reputation, and started blocking content from Toutiao and Duoyin across its apps.

ByteDance claims that Tencent intentionally displayed false news stories and inappropriate content from Toutiao and Duoyin on its apps to support its claims, and that it was blocking its content to promote its own services.

This isn't the first time ByteDance clashed with China's older tech giants. Last year, SINA accused Toutiao users of reposting content from Weibo (NASDAQ: WB), its affiliated social network, without permission from either company. In response, Toutiao severed all content-sharing links with SINA and Weibo -- which sparked a debate about the ownership of social media posts.

Should Tencent investors worry?

Tencent's social media and advertising businesses are still generating healthy growth. Its WeChat MAUs rose 10% annually to 1.06 billion last quarter, value-added services revenue from its social networks jumped 30%, and its online advertising revenues soared 39% and accounted for nearly a fifth of its top line.

Toutiao's growth is troubling, but Tencent investors shouldn't panic and assume that it will keep growing like a weed. After all, Baidu lost market share to its search rivals before, but it remains the 800-pound gorilla of China's internet advertising market. I think WeChat might cede some market share to Toutiao, but it should remain China's top social networking platform for the foreseeable future.

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Leo Sun owns shares of Baidu, Sina, and Tencent Holdings. The Motley Fool owns shares of and recommends Baidu and Tencent Holdings. The Motley Fool recommends Sina and Weibo. The Motley Fool has a disclosure policy.