Alibaba vs Tencent?

As 2022 emerges, we choose to tackle the age old question. Alibaba (BABA) vs Tencent (TCEHY)? Which tech giant is a better stock to buy? Which company will generate a higher return? Which company is likely to generate a more stable return? In this article we look at several qualitative and quantitative reasons to determine which is the better buy.     

 Regulations

Pony Ma, Tencent CEO (left) with Jack Ma, Alibaba CEO (right)

While both companies have been in the crosshairs of the regulators, Alibaba has clearly been the primary target for the past year. Starting with Ant’s record IPO being scrapped, Alibaba received record fines for monopolistic practices. Along with that, it seems that Alibaba itself will be broken up as the government is pushing for Alipay, the digital payments platform to be separated. In addition, Alipay’s credit scoring data will be forced to be a new entity that the government will control as China attempts to reduce credit risk in its economy.

By contrast, the damage against Tencent is much more subdued. It had to pay fines for anticompetitive practices within Tencent Music, that were less costly despite Tencent having a market cap advantage. More importantly, the core business segments within Tencent have stayed relatively unaffected by government scrutiny.

Diversification

Comparing revenue streams for both companies, it is clear that Tencent’s is significantly more diverse. This is especially important as although Tencent has recently seen setbacks in the video games and eSports sector, in general Tencent is less likely to be substantially affected by singular regulatory change.

As of Q3 2021 financial results, 52.8% of Tencent’s revenue comes from VAS – value-added services, which includes mobile and video games. 15.8% comes from advertisement, and 30.4% from FinTech and other services. In comparison, 85% of Alibaba’s revenue derives from commerce, with 14% comes from Cloud computing and digital media. While Alibaba has a variety of services within e-commerce, its overall revenue is still highly focused within one sector.

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Growth

Revenue Growth

Looking at revenue growth can be a good gauge of how efficient a tech company is at tapping into its total addressable market.

For Alibaba, the company recorded revenue of RMB 841.9 billion (US$15.7 billion) in the last 12 months, a 13.7% growth from the 2020 fiscal year.

Meanwhile, Tencent saw full-year 2020 revenue of RMB 482.1 billion which grew to RMB 549.6 billion in the last 12 months, a 14.0% growth. Short term revenue growth is comparable as the two firms are in similar phases of the business cycle.

With regards to longer term growth, Alibaba’s 2016 revenue was recorded at RMB 101.1 billion, implying a 48.0% 5-year CAGR (with their fiscal year concluding in March). Tencent’s 2015 revenue was RMB 102.9 billion, sustaining a 36.2% 5-year CAGR. Overall, it is fair to say that Alibaba has seen a better revenue performance over 5-year period.

Profit Growth

Alibaba saw a net income of RMB 116.5 billion LTM ending September 30, 2021. This is a -18.7% slump from its numbers from the March 30, 2021 full year figure of RMB 143.3 billion. In contrast, Tencent continued to grow, from RMB 160.1 billion to RMB 191.5 billion, a +19.6% rise.

On a longer time horizon, Alibaba recorded a net income of RMB 71.3 billion recorded at the end of March 2016, which results in a 5-year CAGR of 15.0%. Tencent saw a net profit of RMB 29.1 billion in 2015 and thus seen a 40.6% 5-year CAGR. Overall, Tencent has been a better profit grower both in the long term and should be in the future.

Risks

Alibaba is at risk of delisting from the New York Stock Exchange, as it could follow in the steps of other large companies such as Didi. Many companies are looking to relist back in China or Hong Kong, and Alibaba could follow suit as the government attempts to uncouple its businesses from US markets.

In addition, both Alibaba and Tencent both operate within technology sectors classified within China as “soft tech”, which includes e-commerce, video games, and cloud computing. These sectors have come under significant government scrutiny as they not only try to remove monopolistic practices but also restructure the economy towards “hard tech” (renewable energy, EV, batteries), which China views to be a more suitable model to sustain longer term GDP growth.

Conclusion

In conclusion, despite Alibaba’s ability to tap into different customer bases over the past 5 years, we believe Tencent is the better company to invest in. The key deciding factor was its revenue diversification, meaning its income is more stable and less likely to be drastically impacted by regulatory changes.