Why Tencent's revenue could reach all-time high in 2021

• Tencent Holdings Ltd (HK: 0700) share price falls to HK$588.50 a share
• Its first-quarter revenue slightly exceeded Wall Street estimates
• The firm’s increased investments may slow cash-flow growth, analysts say
• Bloomberg Intelligence forecasts Tencent’s full-year revenue to hit all-time highs
• Buy and sell Tencent stocks with an IG account

Tencent shares lose ground

Despite reporting robust quarterly revenue, Tencent Holdings’ Hong Kong-listed shares slid 3.4% to close at HK$588.50 on Friday (21 May 2021).

Shares of the Shenzhen-based company, which owns the ubiquitous WeChat super app, have lost nearly US$200 billion in market value since the January highs, as part of a broader sell-off in tech names, Bloomberg reported.

The gaming, music, social media, and fintech leader’s stock also tumbled amid concerns about margin erosion, which led CICC analysts to cut their earnings estimates. CICC rated Tencent shares ‘neutral’ alongside a HK$682 target price.

Research teams remained largely bullish on Tencent’s stock, with 63 analysts giving ‘buy’ calls, four recommending ‘hold’, and no ‘sell’ ratings. Their average target price was HK$769.37, Bloomberg data showed.

Tencent posts better-than-expected 1Q 2021 revenue

Last Thursday, the internet behemoth announced its revenue increased 25% year-on-year to RMB135.3 billion (US$20.6 billion) for the first quarter this year.

This slightly beat consensus by 1.2%, said Haitong International’s research team, which lowered its target price to HK$804 but maintained an ‘outperform’ call.

Although adjusted net profit grew 22% year-on-year to RMB33.1 billion, it missed analyst estimates by about 5%, affected by the shift in revenue mix towards lower gross-margin activities and more content releases, Haitong wrote.

Online gaming revenue increased 17% quarter-on-quarter, boosted by flagship titles including Honor of Kings and PUBG Mobile, and newer games like Moonlight Blade Mobile.

The firm’s operational diversity and ability to monetise its massive customer base could drive full-year 2021 revenue to all-time highs, exceeding US$90 billion, Bloomberg Intelligence (BI) analysts believe.

Why is Tencent going on a spending spree?

Tencent also pledged to ‘sharply increase’ its investments in 2021, joining competitors such as Alibaba Group and Meituan in a spending binge, Bloomberg reported.

The tech giant will pursue long-term social value, and inject a bigger portion of its incremental profits into new opportunities.

These will include business services, enterprise software, games with high production value, and short-form video, CMB International’s research team highlighted.

‘We expect new initiatives to boost longer-term growth and TAM (total addressable market) expansion, especially in global gaming and video gaming,’ CMB said, reiterating ‘buy’ and a HK$753 target price.

The increased spending comes amid intensifying competition in the industry and China’s antitrust crackdown.

Even though the spending spree will likely slow its cash-flow growth, Tencent’s credit profile ‘has never been stronger, as net leverage remains near zero’, BI analysts wrote on Saturday.

Also, organic growth will be supported by the customer base of more than one billion monthly active users, access to low-cost capital, and pro-forma cash exceeding US$40 billion, BI added.

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