Why Tencent Rose Today

Shares of Chinese big tech stock Tencent (OTC: TCEHY) rallied today, increasing as much as 3.4%, before settling into a more modest 0.7% gain as of 2:43 p.m. ET.

Tencent is arguably China's best technology company. It owns WeChat, China's dominant 1.39 billion-user social media network; is China's leading mobile game publisher; owns fintech leader TenPay; and is the country's leading video and music streaming platforms. In addition, Tencent is one of China's leading cloud software companies, and is building its own artificial intelligence (AI) large language model, called HunYuan.

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Tencent reported strong earnings today that beat on both the top and bottom lines. Although the stock rallied into today ahead of the print, its continued rise and modest valuation still bodes well for investors.

Tencent accelerates growth

In the fourth quarter, Tencent's revenue grew 11% to 172.4 billion renminbi, or about $24 billion, and its adjusted (non-IFRS) earnings per share was RMB5.909, or $0.82. Both figures handily beat analyst estimates, and the revenue marked a nice acceleration over the full year's 8% growth.

China's consumer economy has been in a recession for a couple of years now, but the past quarter saw a highly encouraging rebound in key Tencent segments. That could mean the government's stimulus measures announced last summer and continuing into 2025 are beginning to have an effect.

Tencent grew domestic video game revenue 23% over the prior year, suggesting a rebound in that critical segment. Meanwhile, international gaming revenue grew a solid 16%. Marketing revenue, which encompasses Tencent's digital advertising across WeChat and other properties, was up a solid 17%, with management noting increased spending across "most major categories." The fintech and business services segment was the laggard, with only 3% growth, although Tencent noted modest growth across all elements of that segment.

Importantly, WeChat users continued to grow, up 0.2% quarter over quarter and 3% year over year. On the back of the solid results, management confidently announced a 32% increase in its dividend, as well as continuing share repurchases in 2025.

Tencent is still reasonably priced

Tencent has rallied 87% over the past year, yet it still trades below its all-time highs last reached back in early 2021. While the company's headline P/E ratio is 24.5 based on full-year 2024 diluted earnings results, Tencent also has ample shareholdings in outside companies.

Combined, these holdings were valued at roughly RMB905.4 billion at year-end, or about $126 billion. When stripping out these investments, Tencent's trailing P/E ratio falls to just 19.7. That is still very cheap compared with U.S. tech giants, which typically have a trailing P/E ratios in the mid-20s to mid-30s range or higher.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tencent. The Motley Fool has a disclosure policy.