Text | Pecan rust-free bowl
Which companies will have higher total profits in the next 10 years than in the past 10 years?
This is an interesting discussion initiated by the famous investor Duan Yongping on Xueqiu in February this year.
In Duan Yongping's prediction, there are Apple, Tencent, Moutai, Berkshire, BRK, Microsoft, Google and other companies, if you carefully dismantle his list of heavy positions, it happens to correspond to the two concepts commonly used by investors in the stock market: value stocks and growth stocks.
For example, Berkshire and Moutai are traditional value stocks known for their stable earnings and high dividends, while Microsoft and Apple are regarded as the representatives of growth stocks in American technology companies with high growth.
And the only thing on this list that might confuse investors is the Chinese internet giant Tencent.
In the past, there has also been a debate on the question of "whether Tencent is a value stock or a growth stock", and the "value stock" theory is based on the background of "the era of high Internet growth is no more", bidding farewell to the era of lying down and winning, supplemented by Tencent's slowing revenue growth as an indicator; Those who hold the "growth stock" theory believe that as one of the few Chinese Internet technology giants that have passed through China's Internet cycle and is currently the largest in terms of market capitalization, Tencent has not rested on its laurels and is constantly adapting to the changes of the times to find its most certain growth.
It should be pointed out that both value stocks and growth stocks are good companies. On May 14, after coming up with a huge buyback, Tencent released its financial report for the first quarter of 2024. Among the most concerned indicators, the relevant data performance is remarkable:
According to the financial report data, in the first quarter of 2024, Tencent's operating income will be 159.501 billion yuan, a year-on-year increase of 6%. The growth rate of gross profit, operating profit (Non-IFRS) and net profit (Non-IFRS) were 23%, 30% and 54% respectively, all of which significantly outperformed the revenue growth rate, and as an important indicator to measure sustainable development, the gross profit growth rate has remained above 20% for four consecutive quarters, showing a good development background.
Specific to the business side, there is also a lot of information worth paying attention to. In addition to the steady growth of traditional core businesses such as social networking, advertising, and games, "budding businesses" such as video accounts, mini programs, mini games, and AI large models have also accelerated their growth, continuously injecting new momentum into the development of enterprises.
It can be said that after dynamic adjustment in the past two years, Tencent is showing new vitality of strong growth on the business side, and its related businesses are also constantly depicting the background of high-quality development under the excellent profit performance.
On this basis, after combing Tencent's financial reports and specific business layout over the years, Caijing Wuji believes that the current value logic of Tencent is biased towards the latter - the market underestimates Tencent's growth potential, and its investment logic is closer to "growth stocks".
1. Tencent has entered the era of "high gross profit".
The most intuitive keyword in Tencent's Q1 financial report is undoubtedly profit.
Judging from the financial report data, after establishing the strategic intention of high-quality growth, Tencent not only returned to the positive track in small steps, but also showed an accelerating V-shaped curve on the performance side.
Since Q4 2022, Tencent has achieved significant growth in gross profit and net profit (Non-IFRS) for six consecutive quarters, with gross profit growth rates of 7%, 19%, 22%, 23%, 25% and 23% year-on-year respectively, and gross profit margin has increased from 43% in Q4 2022 to 53% in Q1 2024, exceeding the level of the stock price peak in 2021. Net profit (Non-IFRS) grew by 19%, 27%, 33%, 39%, 44% and 54% quarter-on-quarter, respectively, and the profit growth rate is clearly accelerating.
For enterprises, gross profit and net profit are never just boring figures, but the assessment of the company's past operating standards and the judgment of future trends.
As Tencent President Martin Lau said at the Tencent Group Annual Meeting at the beginning of 2024: Because of our healthy financial situation, we can "buy" time for the team to do more difficult and correct things, and become friends of time.
This is why, in the snowball discussion, Duan Yongping regarded the company's "gross profit level" as a key indicator to measure growth stocks. Although this may be contrary to the common sense of investors. Because in the indicators of "growth stocks", high growth generally corresponds to high revenue scale and revenue growth, profit is of course the key, but in the face of the alluring charm of "rapid growth", it seems to be a breath of relief.
However, investors seem to ignore one point: the global Internet industry has entered its prime, and after experiencing the dividends of the times such as PC and mobile Internet, the stage of "large-scale growth" has passed.
The gross profit level is one of the best cards in the hands of the tech giants. Globally, the level of gross profit intuitively reflects the quality and efficiency of the giants' business links and the results transformed by long-term investment.
Dismantling, Tencent's "high profits" also correspond to the above logic.
On the one hand, the rise in profits reflects the optimization of Tencent's revenue structure, and combined with the financial report data, Tencent is fighting uncertainty with more diversified and higher-quality revenues.
From the perspective of revenue structure, Tencent has been adjusting the proportion of revenue in each business segment since the 930 reform in 2018, and now it has realized a multi-driven trend of games, advertising, financial technology and enterprise services.
Among them, the financial technology and enterprise service business, which represents the digital economy, has accounted for more than 30% for 12 consecutive quarters, becoming a solid performance ballast. According to the latest first quarter report of 2024, the revenue of this business was 52.3 billion yuan, a year-on-year increase of 7%, and the proportion of total revenue further increased to 33%. Tencent's online advertising business also achieved significant growth in the first quarter, with revenue of 26.5 billion yuan, a year-on-year increase of 26%, accounting for 17% of revenue.
At the same time, the game business, which is a key link in revenue, has also shown positive signals. In March this year, benefiting from the new commercialization rhythm and the improvement of game content design, the turnover of "Honor of Kings" and "Peace Elite" recovered in March and achieved year-on-year growth. A number of local market games such as "Golden Shovel War", "CrossFire Mobile" and "Dark Zone Breakout" also hit record highs this quarter, with Brawl Stars doubling the number of daily active accounts in the international market and quadrupling the turnover of the same period last year.
Behind the steady growth of major sectors is the continuous optimization and adjustment of Tencent's diversified businesses, and the consequent high-quality development thrust.
On the other hand, Tencent's "high profit" is not the optimization of a single business, but the optimization of the overall business.
As early as the 2023 annual report, Tencent separately disclosed the gross profit margin of each business segment, and this year's quarterly report continued this trend. Combined with the disclosure information, the three major business segments have achieved varying degrees of quality and efficiency improvement.
Driven by new technologies and tools such as AI and cloud service products, the gross profit margin of the online advertising business increased to 55% from 42% in the same period last year, and the gross profit increased by 66% year-on-year, while the gross profit margin of the fintech and enterprise service business increased to 46% from 34% in the same period last year, and the gross profit increased by 42% year-on-year. In the quarter, the gross profit margin of Tencent's value-added service business also further increased to 57%, although the value-added service revenue with games as the main core decreased slightly year-on-year, but thanks to the increasing proportion of service fees of the mini game platform and the 3% increase in the revenue of overseas games in the quarter, the increase in the proportion of these high-quality revenues drove the overall gross profit of the segment to increase by 5% year-on-year.
It's not just Tencent. If we review the U.S. technology growth stocks such as Apple and Microsoft, after experiencing the disappearance of Internet dividends, we will focus on gross profit performance, actively adjust the income structure, and seek a new growth paradigm.
For example, Apple, when the smartphone market is headwinds, Apple is even in recession in terms of revenue growth, but with the strategy of "combining software and hardware" to maintain a gross profit margin of around 50%, on the other hand, Microsoft, which took off with AI, has also fallen to negative revenue growth in the long "cloud transformation", but the gross profit level has been maintained at about 60%.
From this point of view, "high gross profit" has become a key basic indicator to measure China's Internet and even global technology giants, and Tencent, as the "wind vane" of China's Internet, is still ahead of the curve this time.
2. Behind the high gross profit, Tencent has found the "nail" and "hammer" for growth
In addition to the macro financial report data, to understand the new cycle of China's Internet and Tencent's "high profit" performance, it is still necessary to return to the fundamentals of Tencent's core business.
Behind the pursuit of high gross profit, the reason why Tencent's growth momentum has switched is because it has found the "nail" and "hammer" of growth.
The first is to find the "nail", which means that there is a goal of growth, and the pursuit of "high gross profit" is a kind of pursuit of "qualitative" growth.
Judging from the summary of Tencent's financial reports over the years and the public statements of the management of each business, the business objectives of the core business are focused on "efficiency" and "quality".
The most intuitive example of this is Tencent Cloud's financial technology and enterprise services business.
The enterprise service business, represented by Tencent Cloud, has released two signals to the outside world in the past period:
The first is to take the initiative to slim down, and the project that cuts losses has shifted from "integrated" to "integrated"; Second, in terms of products, Tencent has increased the proportion of self-developed products and shifted to PaaS and SaaS products with high gross margins, which have not only reversed the phenomenon of Tencent increasing revenue but not increasing profits in enterprise services, but also opened up a growth path towards high-margin healthy operation.
Taking SaaS products as an example, in April this year, Tencent announced that SaaS products including WeChat Work, Tencent Memories, and Tencent Docs have been fully integrated into Tencent's hybrid model to accelerate the comprehensive AI of its own SaaS ecosystem. In the earnings call after the release of the financial report, Tencent's management revealed that in the first quarter of this year, Tencent's meeting revenue doubled year-on-year, and WeChat's revenue increased by 200% year-on-year. At present, under the wave of large models, although the commercialization of "AI+SaaS" is still in the early stage, judging from the momentum of Tencent's SaaS product revenue growth in the latest quarter, the following two deterministic trends can be basically verified.
First, Tencent's advantage is product capabilities, focusing on SaaS products that are better at and high gross margins, which has improved the overall business health of the enterprise service sector. Second, for the large-scale model to land, go deep into the industry and industry, and find an early and clear commercialization path.
On the other hand, in addition to finding the "nail", Tencent's means of growth have also changed, with the "sprout" business as the "hammer", and the traditional business has also seen new increments.
In March this year, Tencent's management explained the concept of the "sprout" business for the first time, including video accounts, mini programs, mini games and AI large models, which have become the focus of attention from the outside world.
Combined with the financial report data, the above-mentioned sprout business is showing increasingly strong and healthy commercialization capabilities, and continues to provide a key starting point for optimizing the company's profit performance. In the first quarter of 2024, Channels saw a year-on-year increase of more than 80% in user time, and strengthened the live streaming ecosystem by expanding product categories and encouraging more content creators to participate in live streaming. At the same time, Mini Programs and Mini Games also showed strong momentum, with the user duration of Mini Programs increasing by more than 20%, the average daily usage of non-game Mini Programs achieving double-digit percentage growth year-on-year, and the turnover of Mini Games increasing by 30% year-on-year.
On this basis, the "sprout business" is constantly optimizing and reconstructing the traditional business to help the old tree continue to rejuvenate in the new market environment.
The two new businesses of Channels and AI models are a good observation point for Tencent's advertising business segment.
There are two main aspects of the logic of reconstructing ads on Channels:
First of all, compared with Doukuai, the video account, which is still in the early stage of commercialization, still has traffic dividends, and its traffic ecology can be activated and coordinated with the WeChat ecosystem. As of the first quarter of 2024, the combined number of monthly active accounts of WeChat and WeChat has further increased to 1.359 billion, and WeChat's huge traffic pool provides the operating soil for Channels to continue to grow.
Secondly, thanks to the acceleration of the commercialization of Channels itself, the continuous optimization of advertising infrastructure has also continuously raised the upper limit of advertising revenue. Since the fourth quarter of 2022, Tencent's online advertising revenue has maintained double-digit high growth. In Q2 2023, the advertising revenue of Channels has exceeded 3 billion yuan, and in the next quarter, WeChat's pan-internal circulation advertising revenue (referring to advertisements with WeChat Mini Programs, Channels, Official Accounts and WeChat Work as landing pages) will increase by more than 30% year-on-year, accounting for more than half of the total WeChat advertising revenue. In Q1 of this year, the rapid growth of video number advertising and Soyisou advertising has significantly boosted the growth of online advertising revenue and gross profit.
Although the current commercialization of Channels is still in the early stages, the potential of the transaction ecosystem can already be seen, which is due to the fact that, on the one hand, Tencent is accelerating to provide more monetization channels for Channels creators; On the other hand, it is also improving its attractiveness to ecological partners such as brands and service providers through the optimization of its own infrastructure. In this year's WeChat open class, citing a report by 36Kr, the Channels team made it clear that it would increase investment in R&D, operations, and business, and it was estimated that it would expand to the level of hundreds of people and do a good job in the infrastructure of Channels.
Another case that proves the commercialization potential of video accounts is the development of live streaming. According to public data, in 2023, the GMV scale of live streaming on Channels will reach three times that of 2022, and the number of orders will increase by more than 244%.
In addition to Channels, new technologies represented by AI models are also expanding the growth boundaries of advertising business.
As the largest business model of the Internet, the entire link of advertising is closely related to AI. At present, the reconstruction of the advertising business by the large model is mainly reflected in two aspects: first, in the content production process, with the help of AIGC capabilities, to improve creative capabilities and delivery efficiency. Second, in the delivery process, the understanding ability of the model is used to achieve accurate matching of people and goods and improve the conversion rate.
As Tencent's revenue base, the advertising business has been upgraded from model capabilities to AI native product exploration, and technology is also the key word of Tencent's advertising iteration. As early as 2021, Tencent began to upgrade the "advertising model", and in September last year, Tencent revealed that the newly upgraded Tencent hybrid model has been deeply integrated into Tencent's advertising business. In January this year, Tencent launched the one-stop AI advertising creative platform "Tencent Advertising Ideas", realizing the full link of "one-stop review of creative generation and advertising delivery".
Advertising is seen as one of the "most volatile industries", and it is not difficult to see from the restructuring of this traditional business by the sprout business that Tencent has found a methodology to drive growth. The most feared thing about all business growth is "holding a hammer and not finding a nail", or "knowing only a nail, but not making a hammer".
Tencent has done a good job in these two aspects, and the growth vitality and growth of the business have naturally emerged.
3. "Growth stock" Tencent, what is the imagination?
In a letter to all shareholders, Warren Buffett, a well-known investor, once mentioned a criterion for "high-quality growth stocks":
It has the growth momentum to keep pace with the times through the cycle.
For the Internet technology industry, the most important thing is always the "future", which is also the key to supporting the company's long-term growth.
In the past, the market's judgment of Tencent's "lack of growth" was essentially a concern about its "huge scale" that it would be difficult to tell a moving growth story.
However, judging from the comprehensive financial report and market research, the above views are actually relatively one-sided.
On the one hand, Tencent's growth momentum has long been based on the continuous deepening of "new connections" and "new applications".
For Internet companies, the new stage of traffic growth is not the growth of numbers, but the evolution of "connectivity".
QQ was created from connecting the social needs of individuals, WeChat was created by connecting users' social relations, enterprise WeChat connecting the internal ecology of the organization, and industrial Internet connecting industries and resources...... The number of users has always been so large, and it is a new imagination of connectivity, which has created Tencent's thriving business ecosystem and built a moat for Tencent to pass through the cycle.
On this basis, in the face of the existing diversified and huge traffic ecology, Tencent is also constantly using "new applications" to create greater imagination.
From mini programs and games in the WeChat ecosystem, to the e-commerce process of Channels, to the constantly updated and expanded financial and enterprise services, Tencent is constantly showing strong innovation vitality at the specific application level around existing resources, bringing new interaction methods and business opportunities to users, merchants and enterprises.
In the face of the new online transaction model, brands, merchants, and users often face high learning and trust costs, merchants are worried that the transaction link is stuck and consumes energy, brands are unwilling to spend time and energy to re-set up the layout, and users are worried that the demand cannot be transmitted.
Among them, Channels, Mini Programs, and WeCom are the "three major trading positions" specially built by Tencent's ecosystem for the above pain points. The Mini Program connects the whole domain and focuses on the efficiency of transaction conversion; WeCom reaches users and strives to explore more possibilities for business.
Under this new ecosystem, merchants can not only complete the entire process of digital operation in one stop, but also achieve efficient transactions and long-term customer acquisition across different transaction scenarios. The resulting benefits have also become a strong support for Tencent to optimize its operating quality and improve its profit performance.
As early as the end of last year, the transaction scale of the Mini Program reached 1.5 trillion yuan in a single quarter, covering online and offline services in multiple scenarios such as catering and retail, transportation and travel, and people's livelihood payment.
On the other hand, Tencent's innovation momentum has not stagnated, but based on long-term R&D investment, it has shifted from "copying and competing" to "independent innovation", and has continuously raised the level of innovation.
In an atmosphere where Internet companies are keen to copy and compete and benchmark against competitors, Tencent's time-tested products and businesses show the creativity and internal drive to continuously iterate on user needs under new thinking.
In the long run, this value thinking of keeping pace with the times and constantly innovating has been consolidated in Tencent's continuous deepening of additional R&D investment, and has been translated into more tangible results.
According to public data, Tencent's R&D expenditure reached 15.6 billion yuan in the quarter, and the R&D investment has exceeded 285.3 billion yuan in the six years since 2018. Over the years, Tencent has been in the first echelon in terms of the total number of patent applications and the number of authorized patents in the world. This is also the solid foundation behind its performance growth.
From this point of view, although the outside world's "growth questions" about this company have not stopped. However, from a longer-term perspective, we believe that Tencent has the long-term growth potential to go through the cycle, and its intrinsic value will receive more applause and rewards in the foreseeable future.