It is my suspicion that investors that claim to love Chinese tech stocks pass over Tencent Holdings Ltd (OTCMKTS:TCEHY). Tencent plays in the same massive Chinese mobile e-commerce field as Alibaba Group Holding Ltd (NYSE:BABA) and JD.Com Inc(ADR) (NASDAQ:JD), but those two get way more hype and press than TCEHY stock (note that Tencent is a minority shareholder in JD).
Tencent also happens to trade over-the-counter, perhaps fueling fears of it being a Chinese “fraud-cap” stock. That stigma keeps TCHEY stock a bit more under the radar and presents a compelling opportunity for investors.
It seems almost too obvious to say that internet usage worldwide will increase in our lifetimes. It’s a trend that not only seems unstoppable but also exponential in trajectory. Therefore, as a long-term investor, a lot of my thinking surrounds how to play this trend.
As internet usage increases, online/mobile advertisements, e-commerce, device-to-device direct payment and mobile games will also benefit. The “rising tide lifts all boats” logic works here. And guess what, all of the aforementioned is exactly TCHEY’s wheelhouse.
All eyes are on Wechat, Tencent’s messaging app with 938 million active users … that’s almost three times the entire population of the U.S.! And these users, likely nearing a billion by now with the 23% year-over-year growth rate, are addicted. According to the Kleiner Perkins internet trends report, “Approximately 900 million hours a day out of a total of roughly 3.1 billion hours of mobile app usage took place in WeChat.”
The product is almost its own rabbit hole of sorts, in a good way. Once you’re in the Wechat app, there are numerous functions from online shopping to messaging (personal and work groups) to making payments to ordering food to hailing cabs that the Kleiner Perkins numbers are frankly, not a surprise. The question then, is how TCHEY goes about leveraging Wechat.
Ads will go to the platform with the most engaged users that can be targeted. Tencent’s Wechat would be the place for not just Chinese advertisers, but any company wanting to advertise products to the Chinese middle class. Already, there are over 100 million subscribers to its news and entertainment platforms.
Then there’s commerce. In China, Wechat Pay is regularly used and linked up directly with local bank accounts. Payments and transfers can be made within a few taps. The ease of transacting and the frequency have turned Wechat Pay, with a backend partnership with Alibaba, into a major mobile payment platform. Last year alone, Wechat Pay processed $1.2 trillion.
On the merchant side, Wechat has been tinkering with Weidian, digital storefronts for individuals to sell their goods, but Tencent is still in the early stages of fully monetizing Wechat to capitalize on the ever-growing mobile e-commerce market. The pie is already massive, and Wechat only has a sliver.
Bottom Line on TCHEY Stock
Moats and self-reinforcing networks are a bit overused these days but 100% applicable to Tencent. It’s hard to imagine some new-comer replicating the scale and engagement that Wechat has.
Because of its size and scope, network effects are at play. Given the multi-functionality of Wechat, new users join, which in turn attracts their circle of acquaintances to download the app to communicate, which then gets the attention of advertisers and developers that want a portion of this vast sea of eyeballs. This inevitably entices more of the consumer class to Wechat. And so on.
The organic growth from this shows in the double-digit user growth numbers.
Tencent is in all the right markets growing at lightspeed with what I would argue is a one-of-a-kind asset. The company’s highly-engaged user base is the key to dominating mobile ads, e-commerce, gaming and payments. And given a five-year period, I have no doubt the company — and TCHEY stock — will make huge strides under the visionary leadership of founder and CEO, Ma Huateng.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.