Key Morningstar Metrics for Tencent Holdings
- Fair Value Estimate: HKD 800
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: High
What We Thought of Tencent Holdings’ Earnings
Tencent 00700 delivered a strong third quarter, with revenue up 15% and recurring operating profit rising 18% year on year. Growth was driven by games and advertising, with continued AI investments contributing to performance. Management’s outlook remains encouraging.
Why it matters: Despite constraints on GPU purchases, advertising revenue growth accelerated to 21%, due to an upgraded advertising foundational model and new automated campaign tools that improved targeting and reach.
- This helps dispel concerns that US chip restrictions could derail Tencent’s AI roadmap. Management reiterated that it has sufficient chips for internal use and doesn’t prioritize external GPU rentals.
- International games revenue rose 43%. While some one-off factors contributed, the strength underscores Tencent’s progress in gaining market share outside China and its efforts to diversify away from Chinese regulatory risks.
The bottom line: We keep our fair value estimate for wide-moat Tencent at HKD 800. We view the shares as undervalued. Among its segments, we believe advertising offers the most significant growth potential, supported by our projected 14% five-year ad revenue compound annual growth rate.
- This growth is underpinned by more closed‑loop ads within the WeChat ecosystem, which command higher pricing. Additionally, advancements in large language models enhance understanding of ads, products, and users, resulting in better targeting and matching.
- Tencent’s new automated ad platform, AIM+, further strengthens its position. By automatically targeting high-value inventory and user profiles, AIM+ enables Tencent to attract more advertisers, increase budgets, and improve pricing and fill rates.
Between the lines: A Bloomberg report indicated that Tencent and Apple have agreed to a 15% fee on in‑app purchases in WeChat mini‑games on iOS. That would let Tencent start monetizing in‑game purchases beyond ads, creating a new, high‑margin revenue stream and potential upside to growth.
