"Management's outlook remains encouraging. Why it matters: Despite constraints on GPU purchases, advertising revenue growth accelerated to 21%, due to an upgraded advertising foundational model and new automated campaign tools that improved targeting and reach. This helps dispel concerns that US chip restrictions could derail Tencent's AI roadmap. Management reiterated that it has sufficient chips for internal use and doesn't prioritize external GPU rentals."
"Among its segments, we believe advertising offers the most significant growth potential, supported by our projected 14% five-year ad revenue compound annual growth rate. This growth is underpinned by more closedloop ads within the WeChat ecosystem, which command higher pricing. Additionally, advancements in large language models enhance understanding of ads, products, and users, resulting in better targeting and matching. Tencent's new automated ad platform, AIM+, further strengthens its position."
Tencent reported third-quarter revenue up 15% and recurring operating profit up 18% year on year, driven by games and advertising alongside continued AI investments. Advertising revenue accelerated 21% after upgrading its advertising foundational model and launching automated campaign tools that improved targeting and reach. Management stated it has sufficient internal GPUs and does not prioritize external GPU rentals despite U.S. chip restrictions. International games revenue rose 43%, reflecting market-share gains and diversification outside China. Fair value for wide-moat Tencent is estimated at HKD 800 and shares are considered undervalued. Advertising growth is expected to be supported by closed-loop WeChat ads, LLM-driven targeting improvements, and the AIM+ automated ad platform. A reported 15% Apple fee on WeChat minigames could enable monetization of in-app purchases.
Read at global.morningstar.com
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