Alibaba vs Tencent Stock: Alibaba Group Holding Limited, also known as Alibaba Group or Alibaba.com Limited, [NYSE:BABA] is a Chinese multinational technology company specializing in e-commerce, cloud computing, digital media and entertainment, and innovation initiatives.
Its three main sites — Taobao, Tmall and Alibaba.com — have hundreds of millions of users, and host millions of merchants and businesses.
It is China’s — and by some measures, the world’s — biggest online commerce company providing consumer-to-consumer (C2C), business-to-consumer (B2C), and business-to-business (B2B) sales services. Transactions on its online sites totaled $248 billion last year, more than those of eBay and Amazon.com combined.
The company, founded by Chung Tsai and Yun Ma in 1999 in Hangzhou, Zhejiang went public on 19 September 2014, raising US$25 billion.
It was then the largest IPO in world history. One of the top 10 most valuable corporations in the world, Alibaba became the second Asian company to break the US$500 billion valuation mark, after its competitor Tencent. Alibaba.com serves customers worldwide.
Tencent Is The World’s Largest Video Game Vendor
Tencent Holdings Ltd, [OTC: TCEH.Y] also known as Tencent, is a Chinese multinational technology conglomerate holding company.
The company, through its subsidiaries, provides value-added services (VAS), social networking, web portals, e-commerce, internet advertising service, smartphones, payment systems, entertainment, artificial intelligence and technology solutions in mainland China, Hong Kong, North America, Europe, other Asian countries, and internationally.
The company, founded in 1998, is headquartered in Shenzhen, the People’s Republic of China.
Tencent is the world’s largest video game vendor. The company relies on gaming for more than 40% of its total revenues. It is also among the largest social media companies in the world with offerings in China that include the instant messengers Tencent QQ and WeChat, and one of the largest web portals, QQ.com.
Tencent Music (TME) is the leading online music entertainment platform in China with more than 700 million active users and 120 million paying subscribers. The company surpassed the coveted $500 billion dollar market cap in 2018, in the process becoming the first Asian company to do this.
Is Tencent Stock A Buy?
Tencent [OTC: TCEH.Y] is China’s biggest social network and gaming company.
The Shenzhen-based Goliath owns WeChat, the country’s top messaging app with hundreds of millions of active users.
The company also boasts the world’s largest game publishing business and the country’s largest video streaming platforms. Moreover, it also owns China’s second-largest cloud platform and one of its top digital payment platforms.
Tencent’s stock has given an astonishing return of 1,400% over the past decade as the company expanded into new markets with its gaming and advertising businesses leading the charge.
The Chinese heavyweight, over the years, has overtaken Facebook, bought stakes in Snapchat, Tesla and Hollywood films, and today it is one of the biggest rivals of American behemoths such as Google and Netflix.
Tencent’s dream rise can overwhelm investors who may be confounded with the conundrum of whether they should book profits or jump on board, wondering if the Chinese tech giant still has room to run.
Tencent reported surging profits in its latest quarter even as the Chinese behemoth seemed to become another victim of President Trump’s intensifying tech war with China.
Trump issued executive orders in August threatening to ban the Chinese company’s highly popular messaging app WeChat from operating in the US, if Tencent failed to sell it by mid-September.
This, coming on the heels of a similar announcement for the short-form video app owned by Beijing-based ByteDance TikTok, spooked investors and left its executives scrambling to figure out the potential impact on business.
WeChat, which is the overseas version of Tencent’s widely popular Chinese messaging app Weixin, provides a range of services that includes instant messaging and the ability to send money to other users, to name a few. WeChat and Weixin together have more than 1.2 billion monthly active users.
Tencent’s management tried to soothe frayed nerves by repeatedly highlighting the fact that President Donald Trump’s broad executive order against WeChat excludes Weixin, the much bigger Chinese version of the app which serves customers in mainland China.
The company also suggested that the order is exclusively for WeChat in the United States while the company’s other businesses remain outside its purview. Also, the company reiterated that the United States accounts for less than 2% of its global revenue.
Tencent Is The Largest Gaming Company By Revenue
Despite being a relatively unknown name among gamers, Tencent is the world’s largest gaming company by revenue with major stakes in some of the world’s biggest games: “League of Legends,” “Honor of Kings,” “Fortnite,” “PUBG,” and “Call of Duty,” among others.
PUBG, especially, is highly popular with US-based gamers who spend a lot of money on it — it ranked 10th in the United States for sheer consumer spend in 2019.
Tencent’s gaming business was the prime contributor to its revenue last quarter, accounting for 35% of the total revenue.
Its revenue grew 31% annually during the quarter, helped by the coronavirus enforced lockdown as people stayed indoors and played more games. The Chinese tech titan reported a profit of more than 30 billion yuan ($4.3 billion) for the three months ending in June, an upswing of 28% compared to the same period last year. Revenue soared 29% to 114.9 billion yuan ($16.5 billion).
Moreover, the company’s gaming unit is looking to keep the coffers overflowing through overseas growth and expansion. Tencent owns 40% stake in Epic Games— the North Carolina- based company behind “Fortnite,”.
It also owns 84% stocks of Supercell, the Finnish mobile gaming giant behind highly popular games such “Clash of Clans,” “Clash Royale,” and “Brawl Stars.” Tencent also has minority stakes in “Call of Duty” publisher Activision and “Assassin’s Creed” publisher Ubisoft.
All this reduces its dependence on the US and, more importantly, the Chinese market, where gaming companies have to contend with inconsistent censorship standards and strict licensing requirements.
Tencent Is An Advertising Monster
Tencent reported that more than half of its revenue last quarter came from so-called Value-Added Services. The company generated 19% of its revenue last quarter through its advertising business which consisted of selling ads across WeChat, its mobile ad network, the older QQ messaging platform, Tencent Video, and other apps.
The segment’s revenue rose 32% annually during the quarter as stay-at-home economy accelerated and e-commerce, online education, and gaming companies bought more ads throughout the pandemic.
Tencent’s fintech and business services unit, which includes Tencent Cloud, China’s second-largest cloud infrastructure platform after Alibaba Cloud, and apps such as WeChat Pay contributed about 25% of revenue.
Revenue from this segment increased 22% annually last quarter, but the jump was significantly less than what the company reported in previous quarters.
Experts believe that both Tencent and Alibaba are going to incur further deceleration in revenue in their cloud business, and may turn towards other profitable businesses — like Tencent’s ad and gaming units, and Alibaba’s core commerce unit — to bridge the difference.
President Trump’s recent threat to ban WeChat in the US may have spooked investors and pushed many of them to offload the shares of Asia’s tech conglomerate. This, in fact, presents a beautiful opportunity for prudent investors to add the company’s stocks to their portfolio.
Experts believe the U.S.-China tiff doesn’t change the long-term story as the Asia tech giant presents good opportunities, given structural growth drivers.
Analysts expect Tencent’s revenue to grow 22% and earnings to rise 17%, respectively, this year. Tencent is globally extremely competitive with a few weaknesses that are easily offset by its many strengths, which makes it one of the best long-term plays on China’s growth.
Should You Invest in Alibaba?
FOMO (fear of missing out) syndrome has been at its peak recently with major US indices hitting record highs. Chinese equities, however, failed to match the performance of their US counterparts, owing to incessant global hostility towards China.
Thus, they lacked the “buffer” that the U.S. equities enjoyed, before the big tech stocks, driving up the market, found themselves at the center of a brutal sell-off.
Another major reason for the upswing in the U.S. stock markets, and especially technology stocks despite the pandemic-induced chaos, was attributed to the aggressive purchases of U.S. equity derivatives to the tune of billions of dollars by Softbank.
The Japanese multinational conglomerate holding company, as a fund-raising initiative, had sold $13.7 billion of its Alibaba holdings from March to July. Irrespective of the massive offloading by Softbank, shares of the Chinese behemoth managed to climb 59 % from its March low.
It shows that despite the antagonism towards China, liquid, megacap stocks like Alibaba are hard to ignore. The stock, in fact, has been an exceptional performer right since IPO in 2014.
The company has been able to stay in growth mode even as few of its businesses are experiencing a slowdown. The Chinese behemoth has been trying to further broaden its horizon by moving into newer territories.
In 2018, it merged its food delivery service Ele.me with its lifestyle app Koubei to better compete with Tencent-owned Meituan, which also happens to be its biggest rival.
Alibaba Partnership With Disney Is Big
Sales at Alibaba’s digital media and entertainment unit are also rising. Alibaba’s video streaming platform Youku and its music streaming service, Xiaomi are doing quite well.
Alibaba’s licensing agreement with Walt Disney (DIS) unit Buena Vista International gives it access to a large amount of Disney content as well. Alibaba has also made a foray into the highly lucrative sports streaming market. The Chinese conglomerate partnered with China Central Television to stream all the matches of the 2018 FIFA World Cup.
The Chinese e-commerce giant is a compelling force to be reckoned with. In June, the 618-shopping festival in China witnessed sales across Alibaba’s shopping platform totaling $98.52 billion.
Known as 618 because it occurs every year on the 18th day of the sixth month of the year, Alibaba’s mammoth sales attests to its massive popularity as well as the strong spending power of Chinese consumers despite the contagion.
Often called the Amazon [NASDAQ:AMZN] of China, Alibaba continues its impressive march, undeterred by the U.S-China trade war, as well as Covid-19 that originated in China.
Despite the Chinese economy getting crippled earlier this year by the coronavirus outbreak and the worst economic crisis in decades, Alibaba dramatically outperformed the broader market.
For the quarter ended June 30, 2020, Alibaba beat estimates as the pandemic-fueled buying led to a 34% growth in its core e-commerce business.
Alibaba’s cloud computing segment business brought in $1.75 billion in revenue last quarter, with a growth rate of 59% year over year, even faster than its overall revenue growth of 34%. That’s 8% of total revenue in the quarter.
The tech giant recently announced its plans of investing a whopping $28 billion over the next three years into its cloud computing division, which is a very high margin business.
Given the fact that Alibaba already has more than 50% of the Chinese market share in the cloud, this kind of investment should only help it extend its lead in a highly lucrative market and keep its coffers flowing.
The China e-commerce giant’s reported adjusted earnings rose 15% to $2.10 per share as revenue climbed 34% to $21.76 billion, with both showing accelerating growth from the prior quarter. Analysts expected earnings of $1.99 on revenue of $21.3 billion.
Will Alibaba Reach 1 Billion Active Users?
Investors pay a lot of attention to Alibaba’s annual active consumers, a key metric indicating the number of people making purchases on its platform.
Alibaba ended the quarter with 742 million users of its various platforms, up 2% from the prior quarter, or 16 million. Mobile monthly active users totaled 874 million, up 15.8% from the year-ago quarter and 3.3% sequentially.
Moreover, the Chinese government is intensely focused on developing its Artificial Intelligence (AI) capabilities, a branch of computer science concerned with building smart machines capable of performing human-like tasks.
AI requires huge amount of data gathering and Alibaba with its massive consumer database, enjoys a significant advantage here. Apart from AI-enabled tools, Alibaba is also fast working on developing its first AI computer chips as it gets into the semiconductor technology business.
And last, but certainly not the least, Alibaba enjoys a dominant position in China’s e-commerce space, which is expected to be worth about $840 billion by next year.
With more than 700 million active consumers on its online marketplaces, Alibaba has more than 55% of the e-commerce market share in China.
As the Chinese economy rebounds from the COVID-19 pandemic and business and consumer spending resumes, Alibaba’s core commerce business is likely to recover to pre-COVID-19 levels, further brightening the company’s outlook.
Tencent Vs Alibaba Stock
Chinese technology behemoths Alibaba Group Holding Limited and Tencent Holdings Limited are two of the biggest Asian corporations today, by market capitalization.
The two rivals recently posted quarterly earnings reports that came above beat analysts’ estimate by a fair margin. Tencent’s revenue and adjusted earnings rose 29% and 28%, respectively, while Alibaba’s revenue and adjusted earnings witnessed 34% and 18% growth.
The performance of each company has so far allayed any fear that anti-China sentiment, economic chaos unleashed by the pandemic, and heightened delisting risk would affect their stock value.
In fact, Tencent’s stock has jumped more than 50% over the past 12 months, while Alibaba’s stock has soared over 40%. Investors as such would be interested in knowing which of the two most financially successful Asian companies’ stocks they should purchase.
Tencent’ Primary Sources of Revenue
Online games, digital ads, social networks, and fintech and business services unit are the four cornerstones of Tencent’s business.
It owns the biggest mobile gaming franchises in the world, and its online games unit generated 34% of its revenue last quarter with universally popular games such as Honor of Kings, which makes about $1bn a quarter and has 200 million monthly players, houses the world’s largest video game publishing business.
Other top revenue generating games include PUBG Mobile, Call of Duty, World of Warcraft, Clash of Clans and Candy Crush Saga among others.
The social networks unit — which includes China’s top messaging app Weixin (known as WeChat outside China), China’s most used online communication tool QQ, the video game streaming platform Huya [NYSE:HUYA], and other media services — generated 23% of Tencent’s revenue for the quarter. Weixin and WeChat together boasts more than 1.20 billion active monthly users.
Investors can also draw comfort from the fact that Tencent’s online advertising business is performing stronger than expected. The segment, which generated 16% of its revenue, sells ads across Weixin/WeChat, QQ, its media platforms, and its mobile advertising network.
The fintech and business services segment, which made up 26% of Tencent’s revenue, houses WeChat Pay, a payment feature integrated into the WeChat app, which allow users to make payments through smartphones.
WeChat Pay is one of the two largest payment platforms in China alongside Alibaba-backed Alipay. The fintech unit also consists of Tencent Cloud, which occupies second position in China’s cloud infrastructure market, just below Alibaba Cloud.
Tencent’s strong growth in this segment has also put to rest investor fears who thought ByteDance, the Chinese tech unicorn behind the immensely popular social media platform TikTok, would steal market share away from Tencent. Analysts expect 24% advertising growth (compound annual growth rate) in the next 3 years, as Tencent gains further market share.
Alibaba’s Primary Sources of Revenue
Core commerce segment, Alibaba Cloud, digital media and entertainment, and innovation initiatives are the four primary sources of revenue generation for Alibaba.
The Chinese tech giant is an e-commerce powerhouse with its core e-commerce segment boasting of 742 million active annual users, and delivering 87% of its revenue and all of its profits last quarter.
This segment includes Chinese e-commerce marketplaces Taobao and Tmall; B2B marketplace Alibaba.com; Southeast Asian marketplace Lazada, and global marketplaces AliExpress, Tmall Global, and Kaola.
Alibaba Cloud is the largest cloud platform in Asia. Its overall contribution to Alibaba’s total revenue was 8%. Its digital media and entertainment unit, comprising its movie production unit, streaming music and video services and its mobile apps generated 4% of its revenue. The innovation initiatives segment, which focuses on AI, accounted for 1% of its revenue.
Tencent Vs BABA: Which Is Growing Faster?
Tencent generated double-digit revenue growth across all four of its segments, with gaming unit proving to be an outstanding performer, clocking an impressive 40% growth.
Its fintech and business revenue rose 29% as WeChat Pay and Tencent Cloud attracted more customers. Its social networking revenue also grew 29% as it reaped the benefits of its takeover of Huya in April, making the social media titan the dominant force in the $3.4 billion Chinese live-streamed gaming arena.
Alibaba’s core commerce revenue jumped 34% annually last quarter, thanks to a strong comeback registered by e-commerce sales after the COVID-19 crisis eased. Alibaba cloud revenue soared 59% as it locked in more public and hybrid cloud customers.
The digital media entertainment unit’s revenue grew 9%, compared to 5% growth in the previous quarter. Alibaba restated its prior guidance for at least 28% revenue growth for the full year, less than analysts’ estimate of 32% revenue growth.
Also, continuous Sino-US bickering means both companies find themselves caught in the crossfire of the escalating tensions between the two economic superpowers. Tencent and Alibaba face delisting risk from a U.S. Senate bill that requires companies to certify they’re not “owned or controlled by a foreign government,” and requires the Securities and Exchange Commission to bar companies that do not allow the Public Company Accounting Oversight Board (PCAOB) to oversee the audits of public companies for three consecutive years. Both Tencent and Alibaba do not allow the PCAOB to oversee their audits.
Additionally, President Donald Trump recently threatened to ban WeChat in the US within 45 days, citing national security concerns. WeChat has more than one billion users worldwide but says the US only accounts for 2% of its revenue.
Also, Alibaba’s Taobao remains on the U.S. Trade Representative’s blacklist of “notorious” counterfeit marketplaces, though it is yet to have a major impact on Alibaba’s e-commerce business.
Alibaba vs Tencent Stock: The Bottom Line
The Case for Tencent
Tencent owns the world’s largest video games business and the most popular messaging app in China.
It also operates China’s second-largest cloud infrastructure platform, and one of the country’s largest digital payment networks, in addition to a series of leading streaming media platforms.
In the first half of 2020, Tencent’s revenue jumped 28% year over year as stay-at-home measures boosted its mobile gaming business and pandemic-oriented businesses such as online education and e-commerce brought in more ad revenues for the company.
Tencent also continues to expand WeChat’s ecosystem of Mini Programs, which enables the user to carry out multiple tasks from a single app.
Escalating tension between Washington and Beijing has prompted the Trump administration to issue a threat of sanctions against big Chinese tech companies like Tencent. President Donald Trump recently threatened to ban WeChat.
Tencent downplays the move assuring investors that the largely symbolic move is unlikely to make any significant dent in the app’s core Chinese business. Tencent also continues to expand its portfolio of investments, both, domestically and internationally.
Analysts expect Tencent’s revenue to jump 30% this year. Tencent’s stock traded at a premium, at nearly 40 times forward earnings, but Tencent’s better-diversified business model, higher operating margins, wide moat, and robust earnings growth rates easily justify the premium price. Additionally, Tencent is also better diversified than Alibaba, which is still heavily dependent on e-commerce sales and online ads.
The Case for Alibaba
Alibaba is the largest e-commerce provider in China, where it competes with JD.com (JD), Pinduoduo (PDD), Tencent and others for its own share of the mammoth Chinese company.
Shares of Alibaba rose 14.4% in August 2020, overcoming the initial slump as the stellar earning report trumped American government actions against Chinese companies.
The Street, impressed by continued strong recovery staged by China’s manufacturing and services sectors, solid growth in Chinese e-commerce sales, bright growth prospects in the Alicloud cloud-computing platform and Ant Financial online banking service, kept raising price targets and reiterating “buy” ratings.
Buoyed by all these, Alibaba plans to list on the Hong Kong and Shanghai exchanges, hoping to raise up to $30B in the world’s largest IPO.
Ant Group’s Chinese IPO Could Be a Long-Term Tailwind for Both Alibaba and Ant
It is said that history repeats itself and that is what Chinese billionaire Jack Ma is all set to prove with the record-breaking Ant IPO, already being dubbed as IPO of the century.
Ant Group, the financial affiliate of Ma’s e-commerce company Alibaba, is set to launch its IPO in both, Hong Kong and on Shanghai’s Star Market, China’s Nasdaq-like tech board.
For obvious reasons, Ant has decided against listing its company in the U.S., given the current hostility between the US and China. If it rakes in $30 billion, it would become the largest IPO in history, surpassing Saudi oil giant Aramco, which raised $29.4 billion in its Riyadh IPO in December 2019.
Alibaba, which has a 33% stake in Ant, raised a record-shattering $25 billion in its IPO debut in 2014 in the US. According to a Bloomberg report, for the year ending in June, Alipay’s total transactions in the 12 months ended in June was more than $17 billion. Additionally, Alipay, which is one of the most popular payment apps in China, registered over 1 billion total users.
The Ant Financial IPO, set to be one of the biggest in recent history, will be a long-term tailwind for both Alibaba and Ant, as it will give it the additional resources to expand its international presence. More importantly, it will give Alibaba additional arsenal as it tries to play the catch-up game with Tencent. Ant lags behind Tencent in terms of size and profitability, and the IPO is expected to bridge that gap.
To sum it up, irrespective of which of the two Chinese giants occupy the numero uno slot, experts believe that both companies are likely to emerge winners as digital payments in Asia are projected to reach $4,490,452 million by 2024.
This implies a CAGR of over 16%. As such, both dominating tech companies in China (just like Facebook and Google co-dominate in the West), are all set to witness explosive growth in coming years.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.