On Wednesday, Morgan Stanley (NYSE:MS) adjusted its outlook on Tencent Holdings (700:HK) (OTC: OTC:TCEHY) stock, reducing the price target from HK$570.00 to HK$550.00, while retaining an Overweight rating. With a market capitalization of $446 billion and an impressive "GREAT" financial health score according to InvestingPro, Tencent remains a prominent player in the Interactive Media & Services industry.
The stock currently appears undervalued based on comprehensive analysis. The firm's analysts highlighted a projected 16% year-over-year growth in online games for the fourth quarter of 2024, with domestic games increasing by 18% and international games by 14%.
This growth is attributed to deferred revenue from previously strong grossing titles. The company's overall revenue growth of 7.39% and robust profit margins of 52.28% demonstrate its operational efficiency. InvestingPro subscribers can access detailed financial metrics and 8 additional exclusive ProTips about Tencent's performance.
Despite a slowdown in the grossing momentum of evergreen games during the fourth quarter, Morgan Stanley noted positive developments in new games. Delta Force, particularly its PC version, demonstrated a stronger performance than mobile, achieving a quarterly run-rate of Rmb300 million.
Additionally, Path of Exile 2 (POE2) topped the Steam charts in December, and Onepiece Ambition mobile reached a quarterly run-rate of Rmb500 million. The analysts also mentioned upcoming titles such as Valorant Mobile, HoK World, and Dawn Awakening, which are expected to mitigate concerns over the company's ability to maintain momentum into 2025.
The report further anticipates a 14% year-over-year increase in advertising revenue, driven by advancements in artificial intelligence ad technology and video account monetization. The ad load has increased to 4% from the previous 3%, signaling an uptick in advertising intensity. Improvements in feed recommendations resulting from the AI tech upgrade were recognized, which should bolster the distribution of mid-to-long tail content and enhance user engagement.
Morgan Stanley's analysis reflects expectations of Tencent's continued growth in both gaming and advertising segments, despite adjustments to the stock's price target. The firm remains optimistic about Tencent's performance prospects, underpinned by the strong pipeline of new games and technological enhancements in advertising. With an impressive return on equity of 20% and strong cash flows, Tencent demonstrates solid fundamentals. For a comprehensive analysis of Tencent's valuation and growth prospects, access the full Pro Research Report available exclusively on InvestingPro.
In other recent news, Tencent Holdings experienced notable growth in its third quarter of 2024. The company reported an 8% rise in total revenue, reaching RMB 167.2 billion, backed by a significant 33% increase in net profit attributable to equity holders, which amounted to RMB 59.8 billion. The company's earnings per share also saw a 36% boost, reaching RMB 6.34. These positive results were primarily driven by robust performance in the games segment, digital content, and marketing services.
Benchmark reaffirmed its Buy rating on Tencent, highlighting the company's effective management in a challenging economic climate. The firm's analysis indicates potential for growth in Tencent's advertising segment and anticipates faster earnings growth relative to revenue growth. Nomura/Instinet also reiterated a Buy rating for Tencent, noting an 8% year-over-year increase in total revenue.
Further developments include Tencent's investment in AI technology and expansion of its e-commerce strategy through Weixin Mini Shops. Despite facing challenges in the short video and live streaming e-commerce markets, Tencent remains optimistic about its international games revenue and the long-term prospects of the Mini Shops and e-commerce business. These are among the recent developments at Tencent, demonstrating the company's commitment to revenue growth, profitability, and strategic investments.
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