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Tencent (TCEHY) to Report Q4 Earnings: What's in the Cards?

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Tencent Holdings (TCEHY - Free Report) is set to report fourth-quarter 2018 results on Mar 21.

In the last reported quarter, Tencent reported earnings of 30 cents per share that beat the Zacks Consensus Estimate by couple of cents.

Revenues of RMB 80.6 billion ($11.85 billion) were up 24% year over year and 9% sequentially. Combined Monthly Active User (MAU) of Weixin and WeChat increased 10.5% from the year-ago quarter to 1.08 billion, driven by increasing adoption of Mini Programs and Weixin Pay. Smart device MAU of QQ was 698 million, up 6.9% year over year.

The Zacks Consensus Estimate for fourth-quarter earnings has remained steady at 28 cents over the past seven days. The consensus mark for revenues currently stands at $12.33 billion, reflecting year-over-year growth of 21.3%.

Let’s see how things are shaping up for this announcement.

Key Factors to Watch

Tencent has significant depth in its gaming portfolio that coupled with strong distribution capability is expected to drive growth. The company derived almost 32% of revenues from online games in the last reported quarter. Notably, Tencent and NetEase (NTES - Free Report) are among the biggest game distributors in China.

Tencent is benefiting from its dominance in China, which is the world’s largest video game market, in terms of users (527 million) and revenues. However, the stalled video game approval process in China that was in place for the majority of 2018 (since Mar 28) is likely to dent Tencent’s top-line growth.

Moreover, stringent regulations are expected to hurt user base growth. Notably, in August 2018, the Chinese Education Ministry announced plans to limit the number of online games and the amount of time kids spend playing on electronic devices. The ministry cited the measures as part of government’s effort to reduce eye-related problems in kids and adolescents.

Tencent shut down its popular Everyday Texas Hold’em poker game and also pulled down Monster Hunter: World from its WeGame platform amid increasing regulatory crackdown.

Nevertheless, strong adoption of role-playing games (RPG) such as Free Fantasy Online, MT4 and Saint Seiya, which generates higher average revenue per user (ARPU), is expected to boost gaming revenues in the to-be-reported quarter. Further, continuing momentum for Honor of Kings is a key catalyst.

Moreover, the company’s initiative to expand the capabilities and usage of Mini Programs by integrating them with digital tools like Weixin Pay is expected to boost developer and customer base. Also, improving user engagement level is a key catalyst.

Further, momentum in cloud services revenues is expected to continue due to fast penetration into key sectors, including finance, Smart Retail and municipal services. Additionally, strength in video advertising is noteworthy.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Tencent has a Zacks Rank #3 and an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks With a Favorable Combination

Here are a couple of companies, which, per our model, have the right combination of elements to post an earnings beat this quarter:

Akamai (AKAM - Free Report) has an Earnings ESP of +5.16% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Agilent (A - Free Report) has an Earnings ESP of +0.08% and a Zacks Rank #2.

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