AI-Powered Gamers' Paradise Fuels International Cloud Growth With Boosted Margins

Key Takeaways

• Robust revenue growth in the Games business and e-commerce strategy via Weixin Mini Shops could boost future revenue and margins.
  
• Expansion of AI and international cloud services could improve operational efficiencies and drive revenue and profit growth.
  
• Execution risks in international cloud expansion and increased competition in gaming may hamper revenue growth, while fluctuating investments could impact overall financial performance.

Catalysts

An investment holding company, offers value-added services (VAS), online advertising, fintech, and business services in the People’s Republic of China and internationally.

• Tencent's focus on delivering robust revenue growth in its Games business, driven by evergreen titles and new game launches, could significantly boost future revenue growth.
  
• The company's strategy to enhance its e-commerce offering through Weixin Mini Shops is expected to increase transaction volumes and improve gross margins.
  
• Investment in AI technology is poised to elevate operational efficiencies and service capabilities, enhancing net margins.
  
• Expansion in international markets for Tencent's cloud services, leveraging competitive pricing and domain expertise, is expected to drive revenue and gross profit growth.
  
• Continued share buybacks underscore management's commitment to boosting EPS, supporting shareholder returns.

Tencent Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tencent Holdings's revenue will grow by 8.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 26.4% today to 31.9% in 3 years time.
• Analysts expect earnings to reach CN¥262.2 billion (and earnings per share of CN¥29.61) by about November 2027, up from CN¥169.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CN¥194.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.8x on those 2027 earnings, up from 20.2x today. This future PE is lower than the current PE for the HK Interactive Media and Services industry at 22.3x.
• Analysts expect the number of shares outstanding to decline by 1.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.86%, as per the Simply Wall St company report.

Tencent Holdings Future Earnings Per Share Growth

Risks

• The presentation contains forward-looking statements that are subject to risks and uncertainties, indicating that future financial performance, including revenue and earnings, may be impacted if these risks materialize.
  
• Increased competition in key areas such as gaming and social networks could exert pressure on Tencent's revenue from these segments.
  
• Tencent's international expansion, particularly in cloud services, carries execution risks and could face geopolitical headwinds affecting revenue growth in these markets.
  
• Declining average value per transaction in the payment business suggests potential challenges in consumer spending, which could impact fintech segment revenue.
  
• Fluctuations in the value of Tencent's strategic investments and the costs associated with managing these investments could affect net margins and overall financial performance.

Valuation

• The analysts have a consensus price target of CN¥515.39 for Tencent Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CN¥702.18, and the most bearish reporting a price target of just CN¥314.19.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CN¥823.3 billion, earnings will come to CN¥262.2 billion, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 7.9%.
• Given the current share price of CN¥402.8, the analyst's price target of CN¥515.39 is 21.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.