Seeking Alpha is still the best platform to make favorable propaganda for under-appreciated stocks like Tencent (OTCPK:TCEHY) (OTCPK:TCTZF). Proof of Seeking Alpha’s influence is my April 9 buy recommendation for TCEHY. It produced a +27.09% price return. This significant paper profit is tempting me to cash out. Fortunately, recent developments convinced me that Tencent’s stock has more upside potential this year. Be assertive, go, overcome the Neutral rating that Seeking Alpha’s Quant Rating System gave TCEHY.

My fearless forecast is that TCEHY can go up another 10-20% before 2020 ends. No thanks to COVID-19, I expect Tencent to wrap up FY 2020 with revenue of $69 billion and $1.83 EPS.

(Source: Seeking Alpha Premium)

We should exploit the persistent market aberration. Yes, TCEHY has a YTD gain of +29.56% and profit-taking is justified. Unfortunately, the fast-growing, highly-profitable business of Tencent is still valued lower than that of Zynga (ZNGA) and Glu Mobile (GLUU). Thanks to my Seeking Alpha Premium benefits, I could easily compare the valuation ratios of same-industry companies. TCEHY is a strong buy because the market still gave it only a Forward GAAP P/E of 40.71. This is lower than GLUU’s Forward GAAP P/E valuation of 73.36.

(Source: Seeking Alpha Premium)

The bias for GLUU over TCEHY is unfair considering Tencent is consistently profitable. Tencent’s 5-year revenue CAGR of 36.98% also qualifies it as a high-growth stock. It deserves a forward P/E valuation of at least 48x. Growth-wise, China-based Tencent touts a higher 5-year revenue CAGR than over-covered growth stocks like Netflix (NASDAQ:NFLX) and Amazon (AMZN).

Refer to the chart below and you will comprehend why I’m highly-confident that growth-stock TCEHY has more upside potential. Going forward, the mega-cap companies boycotting Facebook’s advertising platforms will have more money to spend on Tencent Ads and app-install ads on Tencent-owned or Tencent-published mobile games.

(Source: Seeking Alpha Premium)

Tencent’s recent purchase of iFlix will also disrupt Netflix’s growing business in Asia. Tencent will gain customers from the 13 countries where iFlix operates. Tencent is the better growth stock compared to NFLX. It has video games, Tencent Music (TME), Tencent Video, search engine Sogou (SOGO), and e-commerce portal Shopee. Tencent ought to be adored like Amazon. Tencent Cloud is emerging as a global challenger to Amazon Web Services. Tencent Cloud’s 2019 revenue was $2.9 billion. No thanks to COVID-19, Tencent Cloud could gross $4 billion this year.

The worst risk to investing in Tencent is that socio-political bias against Chinese companies means TCEHY remains undervalued/under-appreciated compared to American or European companies. In terms of profitability and growth potential, Tencent will continue to outpace many of its Technology sector peers.

New Games Fuel Tencent’s Strong Growth Momentum

Tencent’s YTD gain of +29.56% is definitely due to the pandemic boosting video games and online streaming entertainment. The COVID-19 boost will continue for many more months. The forcible stay-at-home directives of many governments still persist in many countries. I argued last April that Riot’s Valorant and other new games are robust tailwinds for Tencent. Going forward, the freemium monetization design and low PC system requirements of Valorant convinced me that it could add $700 million to $1.2 billion to Tencent’s annual revenue. I’m now again endorsing TCEHY as a strong buy because of Tencent’s new games that got unveiled last June 28.

Riot’s Valorant plus Tencent’s upcoming mobile Dungeon Fighter and Metal Slug mobile games can help Tencent maintain its 33.13% revenue CAGR. I do not know much about Metal Slug but the PC version of Dungeon Fighter Online had 2019 sales of $1.6 billion. As of last year, the PC version of Dungeon Fighter Online has lifetime revenue of $13.4 billion.

(Source: Seeking Alpha Premium)

Tencent made billions of dollars making a Chinese mobile port (Honor of Kings) of Riot’s PC MOBA game League of Legends. Tencent grossed more than $1.5 billion porting PUBG to mobile. It is therefore highly feasible that Tencent can make billions of dollars porting Dungeon Fighter to Android/iOS.

Tencent’s mobile version of Dungeon Fighter will launch in China on August 12. Fifty million Chinese players have pre-registered for Dungeon & Fighter Mobile. My fearless forecast is that this new PC-to-mobile game title can add $100 to $400 million in new sales to Tencent’s 2020 annual revenue.

The other new mobile game that could help fulfill my FY 2020 estimate of $69 billion is Riot’s League of Legends: Wild Rift. YouTube videos uploaded by Filipino Wild Rift Alpha Testers convinced me it will fare well in international markets. Wild Rift will appeal to Americans/Asians/Europeans bored with the easy gameplay of Mobile Legends: Bang Bang.

(Source: Riot Games)

Riot Games designed Wild Rift so that it won’t repeat the mistake of Tencent over Arena of Valor. Arena of Valor is the English/international version of Honor of Kings. It failed in the international market because it did not offer something new that would make players abandon Mobile Legends: Bang Bang.

Unlike other mobile MOBA games, Wild Rift will only allow players to buy upgrade items/boost potions in their camp. The 15 buttons on the right side of Wild Rift also indicated that gameplay will be not as easy as Mobile Legends: Bang Bang. Making mobile MOBA games that could rival the complexity and intensity of PC MOBAs might be a winning formula for Riot Games.

I am also optimistic that Tencent’s Pokemon-themed MOBA game will appeal to mobile gamers. Nintendo (OTCPK:NTDOY) has partnered with Tencent to release Pokemon Unite. It will be a MOBA game that allows players to do cross-platform MOBA competition on Switch, Android, and iOS devices.

(Source: Nintendo)

Conclusion

My 20 Tencent investing ideas here at Seeking Alpha should be reviewed. Almost all of them were on the money. New games plus high profitability and high growth made Tencent a strong buy. Raise your bets (or average up) on TCEHY because this company is a one-stop-shop for entertainment. Tencent has video games, music, podcasts, TV shows/movies, and online education. Yes, learning something online is a good way for people to entertain themselves at home while there’s a pandemic virus.

TCEHY is a strong buy because entertaining people is why Tencent grew its annual income from $1.2 billion in 2010 to $13.5 billion in 2019.

(Source: MacroTrends)

Tencent’s little-known online education efforts could help boost the stock to above $75. WeLearning is Tencent’s universal smart education platform. The infographic below is a campaign map towards another gold mine for Tencent.

(Source: Tencent/JMDedu)

The global online education industry was estimated to be worth $187.77 billion. It is growing at 9.23% CAGR and will be worth $319.167 billion by 2025. Tencent’s aggressive move on online education will boost its already rich balance sheet.

Disclosure: I am/we are long TCEHY, AMZN, NFLX, FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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2020-07-01