Tencent holdings second quarter revenue rose 8% YoY, mainly due to strength in its gaming segment driven by the success of its game Dungeon Fighters Online(DnF).
The game was released in May and became the most downloaded game in China after its release.
Tencent is the operator of the WeChat messaging service in China, but most people know it as a gaming company.
It earned $22.5 billion in the quarter, comfortably beating analyst estimates. But what caught investors’ attention was the 82% surge in profit year over year.
Gaming segments dominates sales
International games revenue was up 9% year over year on the back of the increased popularity of PUBG and Supercell’s games.
Domestic gaming revenue, also up 9% YoY, was boosted by the successful launch of DnF as well as the renewed interest in Valorant.
The resumption in the growth of local gaming revenue is a positive for Tencent investors.
CEO Ma Huateng praised the performance of the domestic team and was happy with the new launches in the quarter.
Our Domestic Games revenue resumed growth, and our International Games revenue accelerated growth, due to increased user engagement at several of our evergreen titles, and the successful launches of certain new games.
The company also reported a rise in audience numbers and subscribers thanks to the locally produced drama series based on Chinese literature.
Local competition is a threat
Despite all the improvements, the company’s stock was down 5% during trading.
Even though Tencent’s international gaming segment continues to dominate, its local gaming business faces serious threats from companies like NetEase and miHoYo.
Games like Eggy Party and Genishin Impact continue to highlight vulnerabilities in Tencent’s strategy to dominate the local industry.
These competitors also develop games in-house, which means they retain a larger share of revenue as profits.
The ability to play with better margins gives them an edge over Tencent. The CEO of Tencent has openly admitted to feeling pressured by the competition:
Competitors have continued to create new products, leaving us feeling we have achieved nothing
Apart from the gaming segment, the company reported a 2% increase in social network-related revenue.
This was offset by a decline in live-streaming revenues during the quarter.
Online advertising brought in a 19% surge in revenue while FinTech and Business Services also rose 4% YoY.
How should investors react to the earnings?
There is no doubt that the international gaming juggernaut continues to improve its performance across all segments.
The weakest link, the local gaming segment, also returned to winning ways in the quarter. This should give investors some confidence to keep holding the stock.
However, as the trading activity shows, the company still has a lot to achieve to consistently dominate the gaming scene.
This is why new investors would be better off waiting for consistency in revenue growth before taking a position in the stock.
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