The Valuation Gap between Tencent Holdings Ltd (TCTZF) and Facebook Inc (FB)
Tencent Holdings Ltd (OTCMKTS:TCTZF) is currently trading at lower multiple earnings, begging the question what could be wrong on its valuation having generated almost the same amount of revenue as Facebook Inc (NASDAQ:FB), last year. The fact that the Chinese giant generated more profit than its U.S. counterpart also warrants a rethink of its valuation.
Tencent operates in a kind of a monopoly back in China, as Facebook YouTube, and Twitter Inc (NYSE:TWTR) are banned from operating in the country. The Chinese social giant boasts of 1.4 billion monthly active users, just like Facebook, on its QQ and QZone platforms. Tencent also owns popular chat app WeChat, which has 500 million active monthly users.
Tencent generated $12.7 billion in revenue, mostly from its gaming business, slightly more than Facebook Inc (NASDAQ:FB)’s $12.5 billion, which mostly came from advertising. Tencent continues to reap big from games like Candy Crush and League of Legends that accounted for 57% of the total revenue. Membership fees alone from QQ and QZone brought in an additional $3 billion for the company
Tencent has a healthier net margin, at 30%, compared to Facebook’s 23%, yet the Street continues to place a lower value on the group’s earnings. Tencent’s shares, according to Elkon, trade at 33 times net profit forecast for the next 12 months, while Facebook’s continue to trade at 39 times. Facebook shares are up by 5% this year, compared to Tencent’s that have risen by 30%.
However, concerns about the future may help explain the unexpected gap, as Tencent growth is limited to China’s borders. compared to Facebook Inc (NASDAQ:FB) which is aggressively pursuing global expansion. A point of note is that 15% of Facebook’s monthly users are in North America, compared to Tencent which relies on homegrown users.
Facebook is also aggressively monetizing its other apps, having announced plans to open up the Messenger app to become more of a platform for other services, similar to WeChat. Tencent has also started to experiment with advertising on its social app, which analysts at Barclays believe could generate an additional $3 billion in revenue by 2017.
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