Image source: WeChat.
Continue Reading Below
WeChat is rapidly closing in on 1 billion users. Last quarter, the messaging app owned by Tencent (NASDAQOTH: TCEHY) added 40 million new users to reach 846 million.
Tencent was once reliant on revenue from PC games and subscriptions to its social network QZone. With more and more mobile users, though, WeChat has become a central launch pad for Tencent's further revenue growth. WeChat is driving growth in all of Tencent's reported categories: online advertising, value-added services, and its catchall "others" segment, which includes payments.
Tencent reported third-quarter results on Nov. 16. In the quarter, Tencent's online advertising revenue grew 51%. Management said that performance-based advertising, in which users pay for the results they get, grew 83% year over year. Management attributed that growth primarily to advertisements within Weixin Moments and Weixin Official Accounts.
Weixin Moments is Tencent's answer to Facebook's (NASDAQ: FB) News Feed. Facebook is blocked in China, so Moments has much less competition. The functionality is extremely similar to News Feed, with users mostly sharing photos and links with their circle of friends.
Tencent opened advertising on Moments to big brands at the beginning of last year, and to all advertisers in August of last year. As such, Tencent may see a slowdown in the growth of its performance-based advertising now that it's lapped the advertising rollout. But with the relative infancy of its advertising program, Tencent likely still has some levers to pull to continue growing -- not to mention user growth is still fantastic.
That stands in contrast to Facebook's more mature advertising business. Facebook management recently warned that its ad load is nearly saturated, and it expects a meaningful slowdown in ad revenue growth because of that. At the same time, Facebook's growth over the last few years is exemplary of the potential in WeChat's Moments advertising.
On the flip side, Facebook is now trying to emulate WeChat's success with Official Accounts. Official Accounts are more like chatbots that have access to special functions of WeChat like payments or location data. Official Accounts can opt to send updates to users and pay an advertising fee if users click through to read full posts.
WeChat also monetizes the accounts by taking a cut of payments. Facebook has yet to monetize its 30,000-plus chatbots, but it recently opened its payments API to developers.
While WeChat isn't directly tied to Tencent's success with smartphone games, part of Tencent's strategy is to "deepen user stickiness via broadened product offering." If WeChat is the hub of users' smartphones, it presents an excellent launchpad from which to sell users into its mobile games and deepen brand recognition.
Smartphone game revenue climbed 87% year over year last quarter to 9.9 million RMB, accounting for more than one-third of Tencent's total value-added services revenue. Tencent's PC gaming revenue bookings increased just 10% year over year, and active users declined 9%.
Mobile gaming should continue to drive Tencent's VAS revenue for some time. It recently bought Clash of Clans developer Supercell, and it's porting popular PC titles to mobile. It's also investing in eSports tournaments to drive adoption of and engagement in its games.
Tencent's payments business is lumped in with its cloud computing and other businesses. The entire segment grew revenue a whopping 348% last quarter, and it now accounts for 12% of Tencent's total revenue.
WeChat is one of the biggest drivers of payments revenue, with more and more stores accepting payment through the app. Tencent operates the No. 2 online payment platform in China between Weixin Pay and QQWallet,but more and more bricks-and-mortar stores are starting to accept Weixin Pay as well. 700,000 merchants participated in Tencent's "Cash-Free Day" in August.
But Tencent doesn't expect to generate much of a profit off of payments. Instead, it sees payments as a way to increase the stickiness of its products. Management described it as an "infrastructure" for the entire Tencent ecosystem -- WeChat, games, etc.
With WeChat's steady user growth driving revenue growth across all of Tencent's main segments, total revenue increased 52% year over year. With plenty of room left in performance-based advertising, mobile gaming, and payments, investors should expect revenue growth to remain relatively strong despite a falloff in growth of its legacy PC gaming revenue.
10 stocks we like better than Tencent Holdings ADR When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now...and Tencent Holdings ADR wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of November 7, 2016.
Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook. 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.