Alibaba's Investment Challenges Vs. Tencent's Revenue Growth: Which Stock Has Higher Upside?

Alibaba Group Holding BABA and Tencent Holdings TCEHY, two of China’s tech giants, have distinct business focuses and strategies.

Alibaba, often likened to Amazon, is primarily an e-commerce powerhouse with interests in cloud computing and digital services.

Alibaba’s Q4 Earnings Vs. Tencent’s Q1 Earnings

Alibaba reported its Q4 earnings, Tuesday. Alibaba’s stock dipped due to significant investment losses, overshadowing its Q4 revenue growth and dividend. The company reported a 7% revenue increase to $30.73 billion, beating estimates, but its adjusted EPS of $1.40 missed by 1 cent. The stock is down 10.86% over the past year, but up 1.60% so far in 2024.

Related: Nasdaq Rises 100 Points; Alibaba Posts Weak Earnings

Tencent, on the other hand, is renowned for its social networking platforms like WeChat and dominance in online gaming. Per its Q1 earnings report that came out Tuesday, Tencent’s revenue rose 6% YoY to RMB159.5 billion (about $22.5 billion), surpassing estimates. Business services and advertising sales divisions showed growth. Profit attributable to equity holders rose 62% year-over-year to RMB41.9 billion ($5.9 billion) versus RMB36.64 billion anticipated. However, Tencent’s VAS segment fell 0.9% year-over-year to RMB78.63 billion.

Regulatory Hurdle Common To Both

Financially, Alibaba tends to have higher revenue and profit margins, although Tencent has encountered regulatory hurdles in its gaming sector, impacting its growth trajectory. In terms of reach, Alibaba has a more extensive international footprint. Tencent has also made significant investments abroad, particularly in gaming and digital content.

Both companies have faced regulatory challenges in China, with Alibaba fined for anti-monopoly violations and Tencent grappling with gaming restrictions.

More recently, the Chinese government has advised major tech companies, including Alibaba, Baidu BIDU, TikTok owner ByteDance, and Tencent, to reduce their spending on foreign-made chips, including those from Nvidia Corp NVDA.

They are now expected to purchase an equal number of locally and foreign-made AI chips for their new data centers. The directive has not been strictly enforced, and it is unclear if penalties will be imposed for non-compliance. This shift from foreign-made chips to domestically produced ones could potentially affect the business operations of both Alibaba and Tencent.

The future trajectories of these tech giants will be shaped by their ability to navigate regulatory complexities and expand their global reach.

How They Compare On Valuations

Let’s see how these two Chinese giants compare on valuations:

While Tencent stock’s faster ascent post mid-March (chart above), Alibaba’s stock offers the more attractive P/E. BABA has a forward P/E of 9.98 versus Tencent’s at 17.09, valuations appear to side with Alibaba stock.

Data Source: Yahoo Finance, Compiled By Benzinga

Which Stock Is The Better Opportunity?

Analysts appear to have a consensus on a higher upside being associated with Alibaba stock vs. Tencent stock. While Tencent stock is a strong buy, offering 5.95% upside, Alibaba’s buy rating has a potential 25.7% upside attached to it.

Data Source: Yahoo Finance, Compiled By Benzinga

Alibaba’s recent Q4 earnings report highlighted challenges with investment losses overshadowing revenue growth, impacting its stock performance.

Tencent, on the other hand, reported strong Q1 revenue growth, exceeding estimates, despite some weakness in its Value-Added Services (VAS) segment.

Both companies face regulatory challenges in China and are now advised to reduce spending on foreign-made chips. The future trajectory of these giants will depend on their ability to navigate regulations and expand globally.

Currently, Alibaba appears more attractively valued and has a higher upside potential according to analysts.

Read Next: Alibaba Stock Dips as Huge Investment Losses In Q4 Overshadow Revenue Growth and Dividend

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