Why Tencent Rallied Today

Shares of Chinese tech giant Tencent Holdings (OTC: TCEHY) rallied today, up as much as 4.5% before settling into a 3.5% gain at the end of the trading day.

Tencent reported its March quarter earnings today, displaying accelerating growth and margin expansion, helped along by artificial intelligence (AI) investments. Given that Chinese tech giants still mostly trade at cheaper valuations than the U.S.'s "Magnificent Seven" stocks, it's no wonder Tencent rallied today.

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Revenue up 13%, operating income up 18%

In the first quarter, Tencent grew revenue up 13%, along with non-IFRS operating margins expanding from 37% to 39%, resulting in operating income growth of 18%.

The growth was broad-based. Encouragingly, Tencent's domestic games, which had declined during the recessionary period in China, increased 24% relative to last year. Even though last year's domestic games revenue was particularly weak, the bounce-back was a good sign that Tencent and China's economy may be emerging from the economic downturn.

Meanwhile, International Games grew a similarly strong 23%, and Digital Advertising, fueled by Tencent's WeChat (Weixin) social media platform, grew another 20%. Finally, Fintech and Business Services grew 5%.

Tencent has absolutely massive user bases across WeChat, which grew users 3% to 1.4 billion people; its huge video game franchises; its 117 million streaming video subscribers; and 123 million steaming music subscribers, not to mention other user bases in digital payments and cloud software.

With that trove of proprietary user data, Tencent has a great opportunity to capitalize on the benefits of AI. To that end, Tencent also announced it would be stepping up its investments in that area, with capital expenditures surging 91% over the prior year.

Image source: Getty Images.

Tencent has done well, but more gains seem likely

For those willing to invest in Chinese companies, Tencent looks among the best in class. It has diverse, high-margin revenue streams, a net cash balance, and roughly $138.1 billion in investments in outside companies. That strength affords Tencent to invest in new growth opportunities, such as AI, all while returning cash to shareholders through repurchases and dividends.

Tencent checks basically all the boxes of financial strength, making its 24 times P/E ratio look quite reasonable, even after today's rally.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Tencent. The Motley Fool has a disclosure policy.