eCommerce: Gaming, Social, Venture Capital

Tencent Holdings: Key Insights

• Ecosystem Applications: Tencent's most prominent applications, QQ and WeChat, have both become expansive ecosystems where users spend most of their time.

• Video Game Investments and More: The conglomerate invests heavily in domestic and international businesses, particularly in the video game industry. But it doesn't stop there: its investment portfolio is highly diversified.

• Revenue Recovery in 2023: After a decline in 2022 that happened due to macroeconomic developments, Tencent managed to regain revenue growth in 2023 by cutting costs and strategically improving its platform functionalities.

Tencent Holdings published its fourth quarter and fiscal year 2023 results, which showed an increase in revenue on the one hand, but a decrease in profit on the other. The China-based conglomerate recovered from 2022's revenue losses, after being significantly impacted by regulations imposed by the Chinese government on the tech and gaming industries to limit their negative impact on consumers.

The results can thus be considered ambiguous – on the one hand, Tencent managed to reverse the previous year’s revenue decline, but some of its core segments, namely the gaming business and select investments, stagnated or decreased. 

Tencent is best known for its ecosystem around the multifunctional WeChat application. Before reviewing Tencent's revenue performance over the past few years, it is important to consider its business structure.

What Is Tencent’s Core Business?

Tencent Holdings is the world’s largest video game provider and belongs to the top-notch social media and venture capital businesses.

Tencent QQ

The corporation was founded in 1998 using technology based on an early web communication application called ICQ, which was developed into Tencent’s own version, QQ. It allowed users to chat online with a free account and was easy to use, which accounted for its rapid success. Since then, QQ has evolved into a multi-layered online platform for gaming, social networking, microblogging and online shopping.

WeChat (Weixin)

The other popular application is WeChat, which was launched years later in 2011. It is similar in nature to WhatsApp, but at the same time, WeChat encompasses significantly more functionalities, including beyond messaging and social media, its own payment application, marketplace, live commerce, gaming features, and more. 

Due to its variety of functions, WeChat is commonly referred to as an ecosystem rather than an application, since it invites users to conduct virtually all of their daily business on the platform. Not without reason, WeChat boasts over 1.3 billion active users, resulting in a penetration rate of about 95% of the Chinese population.

WeChat’s features include

• Moments: A social media interface that displays a timeline where users can post updates, share media, and write blog posts. 

• WeChat Pay: Digital wallet application with mobile payment and money transfer capabilities. Cashless transactions have become the norm with the high usage rate of WeChat Pay, as users pay for everyday commodities like groceries and utility bills through the app. 

• Official Accounts: Companies can set up storefronts and a dedicated marketing channel on WeChat, where they can interact with consumers and sell products. After becoming indispensable during the pandemic, many merchants kept the feature even after the restrictions ended because of its high profitability.

Other services include ride-hailing, translators, photo-editing tools, games, video streaming and more.  

In particular video eCommerce, or livestreaming commerce, is a lucrative feature on the app. The explosive growth of GMV (gross merchandise volume) on WeChat’s video feature in recent years can be seen in the chart below:

With application transactions of US$800 million in 2021, activity more than tripled each year on average, reaching US$6.7 billion in 2022 and then jumping to US$14.1 billion in 2023.

Additional Businesses

In addition, Tencent operates various platforms for television and video on demand, music streaming, video streaming, virtual reality, its own search engine and web browser, as well as ventures in healthcare and insurance. Through its platforms, Tencent makes money from online advertising and financial and business services, including payments, wealth management, cloud services, logistics, and loans. 

Indeed, all facets of life are covered by Tencent’s far-reaching ecosystem.  

But it is not restricted to these segments. Rather, the conglomerate is also known for its extensive investment portfolio.

Tencent Investments: Video Games, Social Media, Innovators

Tencent is known to be an avid investor in various economic sectors, including both international and domestic markets. Widely recognized as an extensive investor in gaming companies, its portfolio also includes social media companies and technology innovators. 

Some of the most prominent include

• Video game companies Funcom, Riot Games, Digital Extremes, Sumo Digital, where Tencent owns 100% of the company. 

• Other video game companies in the portfolio with smaller stakes are Activision Blizzard, Epic Games, Frontier Development, Grinding Gear Games, and Ubisoft. 

• eCommerce companies JD.com and Pinduoduo, of which Tencent owns respective shares of 18% and 16.5%. 

• Social media companies Snapchat (12%), Reddit (11%) and Discord (unknown). 

• Automaker Tesla (5%). 

• Music streaming platform Spotify (7.5%).

Tencent’s investments are a testament to its strategic approach, which emphasizes security through diversification and expansion into different markets. By owning stakes in innovative companies, Tencent always has access to the latest technological advances and benefits from financial returns. 

See how despite degrowth in 2022, the company is still considered the largest player in the video games market: 

However, its ties to external businesses can also prove detrimental when economic conditions fluctuate.

2023 Revenue Recovers After Temporary Dip

An examination of Tencent’s overall revenue performance over the past few years shows that the pandemic acted as an accelerator of earnings growth, as revenues increased from US$54.7 billion in 2019 to reach a temporary peak of US$86.8 billion at the height of the pandemic in 2021.

In 2022, revenues declined for the first time in more than a decade. This was due to macroeconomic factors that hampered the growth of the tech and gaming industries: The Chinese government stopped approving new games from July 2021 to April 2022 and imposed stricter regulations on youth gaming due to concerns about gaming addiction. 

As a result, Tencent’s revenue fell to US$82.5 billion in 2022, but quickly recovered the subsequent year. This is believed to be due in part to cost-cutting strategies (closing non-essential segments like online education, rationalizing low-performing segments, reducing marketing spending and layoffs) and an increased focus on international ventures while divesting from domestic platforms JD.com and Meituan, a food delivery app. 

A detailed breakdown of Tencent’s revenue by business segment provides additional clarity.

Revenue Growth in 2023 Driven by FinTech and Advertising

A comparison of revenue by business segment in 2022 and 2023 shows that FinTech and business services grew year-over-year, as did online advertising.

The VAS (Value-Added Services), which includes social networks and domestic and international gaming, remains the best-performing segment, but has lost US$700 million in revenue since 2022. 

The "Other" division, which contributed a small portion of revenue to begin with, has lost US$300 million in that time. 

In Tencent's earnings release, the company credited the AI integration of its advertising platform and video accounts for the revenue growth in these segments. Increased targeting accuracy for advertising and improved recommendation for video drove revenue, according to the statement.

Tencent’s 2023 Earnings: Wrap-Up

Tencent’s business model is considered the blueprint for app success, as its all-encompassing features keep users engaged and address a plethora of necessities in one location. Its reach extends far all over the globe, which ensures Tencent’s business does not hinge on one market or industry alone. 

Its influence is only expected to grow, with new technologies such as AI, VR and AR providing the baseline for platform expansion.

Sources: Cascade – Investopedia – Morethandigital – Tencent