Tencent earnings preview: Will the gaming giant’s share price hit the next level?

With more people locked down and staying indoors, gaming has been on the increase. Will Tencent’s [HKG: 0700] quarterly earnings report on 13 May, and the company’s share price, reflect this?

Gaming giant Tencent’s share price, while not soaring in the first quarter did at least weather the market storm somewhat, rising 1.2%, following on from strong performance in its last earnings call. Tencent’s share price has since risen further.

During the company’s last earnings call in March - after which Tencent’s share price received a modest boost - Tencent chief financial officer and senior vice president, John Lo said the company generates more than a billion payment transactions a day — more than Visa [V] and Mastercard [MA] combined. The majority of these transactions take place offline, he added.

“When you’re handling one billion transactions a day, almost by the definition the majority are offline transactions,” said Lo. “And so, what we saw in February and early March is that there was a very substantial, negative impact on offline transactions.”

As Tencent has already experienced, COVID-19 has sent gaming up, but offline transactions down. How might this trend affect the company’s earnings for the first fiscal quarter? And will a positive announcement help Tencent’s share price hit the next level?

Will Tencent’s share price rise on Q1 earnings?

Outside of the investment world, Tencent Holdings Ltd [0700.HK] is perhaps best known for its popular titles League of Legends and PlayerUnknown's Battlegrounds (PUBG). The Chinese company, which is listed on the Hong Kong Stock Exchange, develops games in-house and licences the titles across PC and mobile platforms both domestically and overseas.

In the last quarter, Tencent’s online gaming revenue rose to RMB 30.3bn ($4.27bn), representing a year-over-year increase of 25%, with international sales accounting for 23% of sales. Revenue from the company’s value-added services segment, which includes games, video subscriptions and music streaming, were up 20% year-over-year to RMB 52.3bn ($7.37bn). Meanwhile, revenue from fintech and business services accounted for 28% of the quarter’s revenue.

The total revenue for Q4 was RMB 105.8bn ($14.9bn). This was the first time the company had reached twelve digits and it surpassed the RMB 103.7bn ($14.61bn) expected by analysts.

Despite the fact the fourth-quarter earnings were reported on 18 March, a couple of weeks before the end of the first quarter, the company hasn’t provided any hard numbers or specific guidance. However, as well as offline transactions, another area that is expected to be adversely affected is cloud services.

Martin Lau, Tencent’s executive director and president, admitted during the call that “delayed implementation of cloud projects” among Tencent’s business customers, which will have a “short-term negative impact on revenue”.

Gaming and advertising are expected to continue to perform strongly. Tencent’s digital and mobile healthcare applications have also experienced a boom recently, as have its remote working products, including WeChat Work and Tencent Meeting. Investors can expect this to be reflected in the quarter’s numbers.

With regards to remote working, Tencent Meeting — its video conferencing service — only launched in December, and has so far “enjoyed spectacular growth,” according to James Mitchell, chief strategy officer and senior executive vice president. By the end of March, Tencent Meeting had recorded more than 10 million active daily users.

Mitchell added during the call that as lockdowns are lifted and society returns (somewhere) to normal, it’s to be expected that people will venture out, return to offices and participate in offline activities. Some changes in consumer and enterprise behaviour, such a reliance on working from home, however, will likely be longer-lasting. If this is the case, Tencent’s remote working products and services could drive up revenue beyond the first quarter.

What the analysts say

Looking ahead then, analysts still expect the company’s revenue and earnings to rise 21% and 15% respectively this fiscal year, according to Leo Sun, writing in the Motley Fool.

“The stock isn't cheap at over 30 times forward earnings, but that premium is arguably justified by its diverse portfolio, wide moat, and entrenched positions across multiple high-growth markets,” he wrote.

As of 8 May’s market close, the stock was priced at HK$418.20, after having spent the best part of the last two years below the HK$400 mark. During the market sell-off in March, it fell to HK$334, although this is a little higher than the company’s 52-week low of HK$312.20.

According to the Wall Street Journal, there are currently 55 analyst recommendations for Tencent. Of these, 48 are a buy, three are overweight and the other four are a hold. The consensus price target is $57.53 (HK$445.89) and the consensus EPS for Q1 is $0.33.