Alibaba and Tencent: Master of diversification

August 21, 2017

Last week Tencent and Alibaba entered in the small clubs of company’s worth over $400 bn. In the tech industry just Apple, Amazon, Facebook and Amazon are now bigger than the 2 Chinese companies.

 

Tencent and Alibaba are often associated and compared to their American competitors but the differences in terms of business mode and revenues stream is enormous.

 

Take FB and Google. In the last 3 years for both companies more than 75% of their revenues come from online advertising. FB and Google are struggling to diversify the current revenues streams and to reduce the risk of a potential future decline of online advertising.

 

Google tried hard to diversify in the last few years with poor result:

  • The company entered in the mobile industry with the acquisition of Motorola paying $12bn in 2012. In 2014 Motorola was sold to Lenovo for $2.9bn...

  • Remember Google Glass? Big flop

  • Google acquired other companies to try to diversify its revenues model with poor result. For example, the acquisition of Nest, the thermostat company, was another bad move.

  • Google self-driving car is still a mystery.

 

Still between 2012 and 2017 Google shares grew by over 500%. Why? Google is a master in online advertising and was able to grow its annual revenues by over 50% in the last 5 years.

 

FB and Google accounts for 70% of the growth in the online advertising market. For every additional dollar pushed in the online advertising, 70 cents go in the bank accounts of Google or Facebook.

 

For Tencent and Alibaba the story is different.

 

Just 10% of the revenues of Tencent and Alibaba are from online advertising.

 

Alibaba and Tencenet make revenues from multiple sources and channel including:

  • Gaming

  • Payment services and platform

  • Ecommerce platform (both B2B and B2C)

  • Cloud computing infrastructure

  • Apps

  • Messaging

  • Financial services (Asset Management and Insurance Products)

  • Offline commerce (Alibaba own some of the biggest malls in China)

 

To give you an idea of the amazing works done by Tencent and Alibaba in the last few years think about the size of some of their new markets:

  • Gaming: In the 2Q2017 Tencent made $2.2bn Revenues from an online game called Honour of Kings (70% Gross Profit Margin);

  • Asset Management:  in July 2017 Alibaba’s four year old Yu’e Bao fund has overtaken JPMorgan’s US government money market fund, which has $150bn.

 

Considering that the Chinese players have similar valuation multiples of FB (and similar EBITDA Margin), with EV/Revenues in the range of 16.0x-18.0x, from a risk management point of view Alibaba and Tencent seems less risky thanks to a much stronger revenues diversification and no connection with the volatile market of online advertising.

 

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