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Tencent Investors Breathe a Sigh of Relief

Danny Vena, The Motley Fool

Investors in Tencent Holdings (NASDAQOTH: TCEHY) got one of the most important lessons regarding the perils of investing in China last year. The company, which makes about 40% of its revenue from gaming, suddenly couldn't get new titles approved by Chinese regulators in the face of an industrywide crackdown. The ban has since been lifted, but not before the damage was done. It wasn't as bad as many had feared, though, and the stock was near break-even on the day following the company's earnings release.

For its fourth quarter, Tencent reported revenue of 84.9 billion yuan ($12.37 billion), up 28% year over year, but less than half of the 58% growth rate the company achieved in the prior-year quarter . Things were even worse on the bottom line. While the company generated more than 14 billion yuan ($2 billion) in profit during the quarter, it fell by 35% year over year, while net margins of 17% were cut in half compared to the year-ago quarter. Revenue beat analysts' consensus estimates of 83 billion yuan, but profit fell far short of the 18.3 billion yuan investors were hoping for.

Three people looking at each others smartphones

Image source: Getty Images.

Picking up the slack

A look at Tencent's various segments illustrates that while the moratorium on gaming hurt, other parts of the business continued to grow.

Revenue from social networks, led by WeChat -- one of the most frequently used apps in China -- grew 25% year over year to 19.45 billion yuan ($2.8 billion), while the number of WeChat users edged up to 1.097 billion. That wasn't enough to make up for the hit to online games revenue, though, which fell to 24.2 billion yuan ($3.5 billion), down 1% compared to the prior-year quarter. Social and other advertising revenue grew 44% to 11.8 billion yuan ($1.7 billion), while media advertising grew to 5.2 billion yuan ($754 million), up 26% year over year.

The other category, which includes such growth areas as cloud-computing, financial technology, and streaming video, grew 72% year over year to 24.2 billion yuan ($3.5 billion).

These smaller initiatives also helped boost results. Cloud-computing doubled in fiscal 2018, and Tencent also saw rapid growth in streaming video, with 89 million subscribers, up 58% year over year, driven by premium content and cross-promotion. Views per daily active user increased 40% year over year, while subscription revenue increased 65%. Mobile payments is also growing quickly, though Tencent doesn't currently break out those results.

Tencent will introduce a new revenue category when it reports next quarter that will include some of the company's fastest-growing businesses.

Back in the game

The company was riding high, and the stock hit record highs in Jan. 2018, when the rug was pulled out. Early in the year, Chinese regulators suspended approvals of all new games amid a bureaucratic shakeup. Additionally, the government in China had expressed concerns about violent content, myopia, and the addictive effect of gaming on children. After a nearly nine-month hiatus, regulators reinstated the approval process, but not before Tencent stock lost nearly half its value. Early this year, after regulators released three batches of approved games, Tencent finally made the cut, announcing that it had received clearance for two of its titles, and thus far, a total of eight new licenses have been approved for the company.

On the conference call, Tencent President Martin Lau warned that new games would be released more slowly this year due to a sizable backlog of applications still being reviewed by government regulators.

What's ahead?

Tencent doesn't provide quarterly guidance, but it said the company would continue to "invest in core infrastructure and frontier technologies."

One thing's for sure, though: Now that the deep freeze of game approvals is beginning to thaw, it won't be long before Tencent is back to its winning ways.

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Danny Vena owns shares of Tencent Holdings. The Motley Fool owns shares of and recommends Tencent Holdings. The Motley Fool has a disclosure policy .