It’s getting harder to believe in Tencent Holdings Ltd.’s comeback.
The Chinese social media goliath’s profit plummeted 13% last quarter – worse than the most pessimistic analyst anticipated – after an economic downturn depressed advertising and prompted charges within its huge portfolio of investments. Marketers fled to nurse shrinking budgets. And costs jumped 21% as Tencent hoovered up pricey content to feed its Netflix-style service. Shares in Prosus NV, which groups largest shareholder Naspers Ltd.’s internet holdings, fell as much as 4%.
Tencent was supposed to hit the comeback trail this year after a nine-month freeze on game approvals gutted its most profitable business in 2018. But a sharp Chinese economic slowdown, competition from up-and-comer ByteDance Inc. for internet traffic and advertising, and now tricky political considerations is snarling that recovery. That’s a key reason its stock has vastly under-performed arch-rival Alibaba Group Holding Ltd. this year, creating a gap of roughly $90 billion in their market valuation. But after a brutal couple of years, its long-awaited turnaround may come down to a game — good thing that game is Call of Duty, one of the best-selling franchises in industry history.
Yesterday, Tencent reported net income of 20.4 billion yuan ($2.9 billion) in the September quarter. That came alongside a 90% drop in one-time gains – an item that tracks its vast portfolio of startups around the world – after swallowing charges for investments in connected automobiles.
“The results were unbearable,” said David Dai, a Hong Kong-based analyst with Bernstein. “Games and media advertising were especially bad.”
China’s economic slowdown is dousing revenue growth across Tencent’s platforms, dampening appetite for advertising among large brands as well as subscriptions to its video and music streaming services. Sales from media advertising, including on the Netflix-like Tencent Video service, plummeted 28% as marketers cut spending while major shows got delayed. Beijing’s decision to cap playing time for underage users is also prompting Tencent to spend more on producing AAA-rated mobile titles that appeal to a global audience.
The company is also grappling with a potential suspension of National Basketball Association game broadcasts – which drew half a billion viewers last year – after Houston Rockets General Manager Daryl Morey triggered a media blackout in China by tweeting support for Hong Kong’s pro-democracy protests. The company had paid $1.5 billion for five years of exclusive streaming rights. Tencent President Martin Lau said however he foresaw no long-lasting impact. Bloomberg