This Chinese Social Media Giant Is Making Huge Investments in the Future

In this segment from Industry Focus: Tech, Dylan Lewis is joined by contributor Danny Vena to discuss Chinese tech conglomerate Tencent (NASDAQOTH: TCEHY) and its sizable investments in a number of well-known companies.

A full transcript follows the video.

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This video was recorded on May 18, 2018.

Dylan Lewis: Beyond the gaming and social media stuff, though, I think something that makes Tencent a very interesting business is, they also have a pretty sizable investment arm.

Danny Vena: They do. And you would be surprised, I read some statistics on this, and they were pretty fascinating. According to the Wall Street Journal, Tencent has stakes in 277 start-ups just since 2013, and it has invested in 80 public and private companies just in the last year alone. Now, you hear a lot about big companies like, say, Google, investing in a lot of start-ups. But, in this particular case, you would be surprised to know that Tencent has substantial stakes in some very well-known U.S.-based companies. It has a 5% stake in Activision Blizzard, a 5% stake in Tesla. It's done a 10% share swap with Spotify, owns 12% of Snap. These are big companies. Estimates are that the company has spent probably $25 billion acquiring stakes in other companies.

Lewis: And it's kind of an interesting offshoot for their business. If you think about it, they're a large company at around a $500 billion market cap, so these investments are a relatively small portion of the overall company. But, you think of the sheer breadth of the number of start-ups they've invested in, it kind of has that Google feel to it, where it's like, "We're putting our money into a whole bunch of different baskets here, almost like a venture capital fund. And if any of these take off, they could become really significant segments of our business." Or, the investments side of their business could become a lot more interesting.

Looking at a company this size, often, you don't expect them to be putting up really impressive growth rates. And yet, Tencent just continues to grow. Last quarter, they grew revenue at 48%, and the other numbers were even more impressive. Operating profit was up 59%, net profit was up 61%. A year ago, the company posted 54% year over year growth. So, this isn't a business that growth is slowing meaningfully. It's still posting pretty impressive results. It's not like anything is falling off a cliff as it gets bigger.

Vena: It isn't. Because it has the combination of your social media and video games -- and as I started to say earlier, this is the everything app in China. Rather than having separate apps for all these different things, using this app, it's social media, you can play games, you can order food, ride-hailing, do flight ticket check-in, all without ever leaving the app. So, it has a huge advertising business within all of this social media and gaming.

It's ridiculous, their online games revenue grew 26% year over year to $4.5 billion. Their social media revenue was up 47% to about $2.9 billion. But, then, they have several other really quickly growing sidearms, most notably cloud computing and digital payments, which both doubled in the last quarter year over year to a total of about $2.5 billion for the segment.

Lewis: And we talked about streaming video in China last week. They also have a streaming video business. In the most recent quarter, their video customer base grew 85% year over year. So, that's growing, too. This looks like a company that's seeming to do everything pretty much right. They just posted earnings, I think, yesterday or two days ago, and the market was very pleased with these results. They're up, I think. 7-8% since they posted.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Danny Vena owns shares of ATVI, GOOGL, and TSLA. Dylan Lewis owns shares of GOOGL and TSLA. The Motley Fool owns shares of and recommends ATVI, GOOGL, GOOG, Tencent Holdings, and TSLA. The Motley Fool has a disclosure policy.