Takeaways From Tencent's Q2: Analyst Says Chinese Conglomerate Building 'Dominant Position' In Gaming

China-based Tencent Holdings TCEHY reported better-than-expected second-quarter earnings Wednesday, and analysts are predicting the company's valuation will pass the $500-billion mark for the first time since early 2018.

What Happened

Tencent's revenue growth in the first quarter was the slowest seen since it went public in Asian markets in 2004, CNBC reported. The company's video game business suffered from the Chinese government's move to pause new video game approvals last year.

The second quarter marked a turnaround in the company's largest segment, as total online game revenue rose 8% year-over-year to 27.3 billion yuan ($3.89 billion).

Smartphone games accounted for 22.2 billion yuan and rose 26% from last year.

Tencent continued to diversify its business in the quarter, and its financial and technology and cloud computing business grew 37% to 22.9 billion yuan.

The segment now represents Tencent's second-largest business in terms of revenue generated, according to CNBC.

The average price target of 12 analysts who cover Tencent's Hong Kong-listed stock implies a $521.7-billion valuation, CNBC said.

If the figure is accurate, it would put Tencent's stock above the $500-billion mark for the first time since March 2018.

Bernstein: Tencent Stands Out

Tencent is looking to become a player in cloud gaming and happens to be the only company in the world with the necessary infrastructure to do so, Bernstein's David Dai said during a Wednesday CNBC interview.

Tencent can leverage its size as the largest gaming publisher and developer to build an "absolute dominant position" in gaming in the coming years, the analyst said. 

Diversification

Compared to rival global tech giants, Tencent relies less on its core flagship products to generate revenue, Karol Severin, senior games analyst at MIDiA Research, told CNBC in a Wednesday interview. The argument can be made that Tencent is very much diversified, as games accounted for less than 35% of total revenue, he said. 

Gaming remains a "significant" part of Tencent's business, but should no longer be viewed in isolation, Severin said.

The company should be viewed instead on how it monetizes other consumer leisure activities, like video and social media, he said. 

Over-the-counter Tencent shares were down 4.59% at $41.37 at the time of publication. 

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Photo by Chris Yunker via Wikimedia.