Given the recent bout of market volatility, it’s a good time to revisit some businesses and/or explore new ones.
One of the ones on my list is Tencent (700 HK), China’s leading social network and digital entertainment player. Tencent has been a phenomenal performer over the long run. Despite rising close to 9x in the last 5 years, Tencent’s best days still seem to be far, far ahead of it. The stock is off ~15% in recent weeks, which seems short-sighted for a business that is likely to sustain double digit growth for a long time.
Last August, in my post Tencent vs Alibaba on the Quest to Go Global, I argued that Alibaba potentially has a more attractive long-term story given that ecommerce has an easier path out of China. Although there are sizable ecommerce players globally such as Amazon and Mercadolibre, ecommerce penetration remains very low in a global context meaning most of the future pie is still up for grabs.
I argued that Tencent would have a much tougher time growing beyond China since the most attractive asset (WeChat) would need to compete directly with the global juggernaut, Facebook. Facebook is already quite well penetrated globally with 2 billion users out of the world’s 7 billion people (6 billion excluding China). Facebook has likely nearly penetrated essentially all internet users in the world ex-China, and social networks are not easy to dislodge.
But recently I realized that even if I am right about the challenges for WeChat, I arrived at the wrong conclusion for Tencent as a whole. Tencent has a very credible path out of China through games.
Although WeChat is clearly the most distinctive asset with an incredible moat in China, Tencent is still largely a gaming company with approximately half of revenues coming from games.
Tencent is already the world’s largest game publisher, and what I neglected to consider is that games are quite fungible across geographies and cultures and very easily adapted for local languages.
Tencent’s gaming business should continue to grow and become ever more global as gaming becomes ever more prevalent in all countries. The world’s youth are growing up with games and continue to play into adulthood.
Tencent today already owns or controls some of the top global gaming studios and IP such as Riot (owner of League of Legend franchise) and Supercell (developer behind Clash of Clans). Tencent also owns significant stakes in Epic, Pocket Gems, Glu Mobile, among many others.
Through games, Tencent already has a bridge to the world. Perhaps one day that bridge can be utilized as a trojan horse to introduce the world to WeChat. But that would just be icing on the cake.