Personal Finance

Forget Facebook Inc, Buy This Chinese Tech Giant Instead

Tencent's WeChat for iOS.

Facebook (NASDAQ: FB) is often considered the 800-pound gorilla of internet growth stocks. The social network's monthly active users (MAUs) rose 17% annually to 1.86 billion last quarter, and analysts expect its revenue and earnings to respectively grow 37% and 28% this year. Those numbers look solid, and make its forward P/E of 20 look fairly cheap.

However, investors should also recognize a Chinese tech company that beats Facebook in terms of raw growth -- Shenzhen-based Tencent (NASDAQOTH: TCEHY) , which owns a massive ecosystem of social networks, web portals, e-commerce sites, and online games. Let's take a closer look at Tencent, and why it's a potentially more exciting growth play than Facebook.

Tencent's WeChat for iOS.

Tencent's WeChat. Image source: iTunes.

What does Tencent do?

Tencent is best known as the creator of messaging apps QQ and WeChat, and the parent company of developers Riot Games ( League of Legends ) and SuperCell ( Clash of Clans ). The numbers behind those apps and games are astounding -- QQ has over 650 million MAUs, WeChat has nearly 850 million MAUs, League of Legends has over 100 million monthly active players, and over 100 million people play Supercell's games every day .

Tencent also holds minority stakes in a wide variety of companies -- including Activision Blizzard , Glu Mobile , Sohu 's Sogou search engine, and e-commerce site . The growth of that portfolio made Tencent one of the three most valuable companies in Asia alongside Samsung and China Mobile last year. It also made it the largest video game company in the world.

How fast is Tencent growing?

Tencent is 18 years old, but it's still posting double-digit sales and earnings growth. Last quarter, its revenue rose 52% annually to 40.4 billion yuan ($6 billion). Online ad revenues rose 51% to 7.5 billion yuan, thanks to new newsfeed ads within WeChat, which grew its MAUs by 30% annually during the quarter.

Tencent classifies all revenue generated from micro-transactions across its social networks, portals, and games as "value-added services" (VAS). Its VAS revenue rose 36% annually to nearly 28 billion yuan last quarter.

Within that total, its mobile gaming revenue surged 87% annually to 9.9 billion yuan, thanks to its purchase of SuperCell and its growing library of mobile games. PC games revenue rose 10%, as MOBA (multiplayer online battle arena), action, RPG, music, and sports games attracted a steady flow of gamers.

Offsetting slowing user growth with ecosystem growth

Like Facebook, Tencent is running out of room to reach new users, since about 70% of China's internet users already use its services. So to generate more revenues per user, Tencent is expanding its ecosystem into online payments, cloud services, and O2O (online-to-offline) services for WeChat like ride hailing, food orders, and e-commerce transactions.

That's why Tencent's "others" revenue -- which includes payment, cloud, and other services -- rose 348% annually to 4.96 billion yuan last quarter. A core growth driver is its payments platform WePay, which processes $50 billion in bank transfers every month. While that growth is impressive, investors should note that Tencent is currently battling Baidu and Alibaba on nearly all these adjacent fronts as the three tech giants leverage their respective strengths in gaming, search, and e-commerce to expand their overlapping ecosystems.

But despite all those big investments, Tencent's operating margins have remained comfortably above 30% over the past few years, thanks to its robust revenue growth and strategy of acquiring companies with high-margin businesses.

Source: YCharts

Tencent's net profit rose 43% annually to 10.6 billion ($1.5 billion) last quarter, which gives the tech giant an impressive net profit margin of 26%. Looking ahead, analysts expect Tencent's revenue and earnings to respectively grow 50% and 33% this year.

The key takeaway

The ADR shares of Tencent aren't cheap at about 45 times earnings, but that premium could be justified by the company's impressive growth and the expansion of its ecosystem across multiple markets. Therefore, the next time you're thinking of adding a big, growing tech stock like Facebook to your portfolio, you might want to consider buying Tencent -- which has a more diversified business and stronger growth numbers.

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Leo Sun owns shares of Baidu, Tencent, and China Mobile. The Motley Fool owns shares of and recommends Activision Blizzard, Baidu, and Facebook. The Motley Fool recommends China Mobile and The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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