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With tech companies like Tencent Holdings (TCEHY) and Alphabet (GOOG) leading the way for everything from internet content to gaming, which of these companies is better investment? Which company has bigger growth potential, especially after the pandemic has shaken up the market?
This is Sailesh Tirupasur. I'm a part of Stock Card's summer internship program in 2020, and this post is a part of my Stock Battle series. I don't own these two stocks, and my goal here is to study them to decide whether to invest or not.
These stocks are apart of our Companies Shaping the Future stock list. If you want to see other stocks in this category, click here.
Stock research and anaysis:
Tencent and Alphabet are two of the world's most influential tech companies.
Tencent's businesses consist of market-leading gaming, mobile messaging, advertising, cloud, and media streaming businesses. Tencent's stock has surged nearly 50% over the past 12 months, and many investors are hyped about the Chinese internet giant's growth potential. Much of this surge has to do with Tencent being the largest video game publisher in the world. Tencent’s massive video game publication list includes League of Legends, Clash of Clans, Honor of Kings, and has a stake in Epic Games and Bluehole. According to Leo Sun, a tech and consumer goods specialist, the gaming section generated 35% of Tencent's revenue last quarter and grew substantially due to COVID-19 forcing people to stay at home. Tencent's online advertising business, its second most profitable sector, was also flourishing due to online education, and e-commerce companies trying to push ad purchases to stay-at-home consumers. The increase in revenue in ad purchases offset the slower growth of the ad purchases in the travel, auto, and consumer goods markets due to COVID-19 . Overall, Tencent is a stable and diversified company that has few risks. One major risk for the Chinese internet giant is that it has some major competitors. Companies such as ByteDance and Alibaba (BABA) are fierce competitors in the internet space and control a majority of the market share.
Alphabet is a large tech company that owns Google and is fairly diversified in internet content and information. Alphabet's Google dominates online searches, its Android OS leads the smartphone market, and its YouTube division reached over two billion users. The company's stock has grown roughly 35% over the last 12 months, making it a bit less than Tencent. The slower growth rate could be due to the Alphabet's reliance on Google's advertisement business, which generated 82% of the company's revenue last quarter. This dependence on advertisement revenue leaves the company a bit more exposed to the market's dynamics and sensitive to the cost of acquiring traffic. In the latest quarterly earnings report, Google's traffic acquisition costs remained steady year-over-year at 22% of its total ad revenue. However, that percentage could rise as the COVID-19 crisis throttles ad purchases, and fierce competitors, such as Facebook and Amazon, expand their advertising platforms. Moreover, in the recently announced quarterly report, Alphabet's revenue rose 13% annually in the first quarter and seems to be going steady with a 3% increase today. The slower than expected advertisement revenue growth is a risk investors in Alphabet have to consider.
Considering that both companies are the heavy-weight titans of their respective markets and industries, which one is a better investment choice?
While both stocks are solid long term investments, I'd buy Tencent for its better-diversified business, stronger financials, and stronger growth rates.