Why is Tencent's stock price not rising?

From the market's perspective, everyone is clearly dissatisfied with this rally, so I've heard a lot of skepticism like "Why did the stock price drop after the earnings report?" and "The stock price isn't rising."

I can understand this sentiment. After all, Tencent's performance was decent, yet the stock price fell instead of rising. This contrast can easily make people feel unbalanced. However, we all know that no one can predict the behavior of "Mr. Market." Rather than complaining, it's better to research whether Tencent has solid growth potential and find certainty amid uncertainty.

Those who follow me know that I’ve previously written multiple analyses on whether Tencent is worth holding long-term. So today, we won’t discuss the fundamentals—the earnings report has already given a clear answer. Instead, let’s ask ourselves two questions: First, does Tencent have new growth drivers, as this directly impacts the company’s future growth space? Second, does Tencent have the ability to deliver substantial returns to shareholders?

First, does Tencent have new growth drivers? According to the Q3 earnings report, yes—and they’re still within the WeChat ecosystem.

One is WeChat Mini Stores, which Tencent mentioned for the first time in its earnings report. In the opening section, Tencent stated the purpose of upgrading WeChat Mini Stores: "We have upgraded our trading platform strategy around WeChat Mini Stores, aiming to create a unified and trustworthy trading experience leveraging the entire WeChat ecosystem."

Later in the report and during the earnings call, WeChat Mini Stores was mentioned repeatedly, highlighting its importance in Tencent’s e-commerce ecosystem. Tencent has long been criticized for lacking an "e-commerce gene." Without debating whether this claim is valid, from a commercial value perspective, WeChat Mini Stores’ significance to Tencent’s e-commerce business has been highly recognized internally.

According to Tencent executives, the company is upgrading its entire e-commerce strategy around WeChat Mini Stores, hoping to build a larger e-commerce foundation through the WeChat ecosystem.

In plain terms, Official Accounts, Mini Programs, Search, Video Channels, and Moments will all become part of WeChat Mini Stores’ e-commerce play. Once Tencent successfully integrates WeChat Mini Stores with WeChat’s ecosystem resources, the potential of Tencent’s e-commerce business will likely become evident next quarter.

Another driver is WeChat Search. As stated in the earnings report: "WeChat Search leverages large language models to enhance its understanding of complex queries and content, improving the relevance of search results."

When I type "train tickets" into the search bar, relevant Mini Program services appear directly, eliminating the need to spend time searching or switching interfaces. This direct search-to-service efficiency has improved significantly.

This direct search-to-merchant model greatly simplifies the connection path between users and merchants, cutting out cumbersome intermediate steps. It brings convenience to both users and merchants, which is why Tencent emphasized in its earnings report: "WeChat Search achieved year-over-year growth in both commercial search volume and click-through rates."

Then there are Mini Programs. This isn’t their first appearance in earnings reports, but past reports mainly focused on user engagement time, daily active users, and transaction growth. Q3 was the first time Tencent disclosed specific GMV—2 trillion yuan.

You may have noticed that Tencent periodically uncovers new strengths within its existing framework. Previously, it was Video Channels; now, WeChat Mini Stores and Search are the new additions. My take is that Tencent is methodically enhancing the commercialization of the WeChat ecosystem at its own pace. Who knows? The next earnings report might reveal another new sprout in the WeChat ecosystem.

Now, let’s address the second question: Can Tencent deliver good returns to shareholders?

Regarding returns, I’ll highlight two points. First, share buybacks. The day after the earnings release (November 15), Tencent resumed buybacks, repurchasing HK$700 million of its own shares that day and maintaining the same amount for the next two consecutive days.

Tencent’s buyback target for the year is HK$100 billion. As management stated during the earnings call: "To date, we’ve achieved slightly over HK$90 billion, and we believe we’ll exceed the HK$100 billion target this year." In other words, Tencent’s 2024 buyback amount will likely surpass HK$100 billion.

Second, Tencent has the ability to return cash to shareholders. The earnings call emphasized that all investments are funded by investment cash flow (i.e., profits from investments are reinvested), meaning operating cash flow won’t be used for investments. Operating cash flow is primarily allocated to shareholder returns or dividends.

My advice on Tencent remains the same: Hold with peace of mind, wait patiently, ignore short-term fluctuations, and enjoy life. Wishing everyone financial freedom soon.

Source: Niu Gu Zhen Tan