BLACK BOX

No one knows how much money WeChat is making, and investors are too bullish to care

Tencent, maker of the behemoth Chinese chat app WeChat, announced its earnings today for the three-month period ending in June. The results are predictably stellar.

Quarterly revenue grew 56% to $8.4 billion, while profit hit $3.3 billion. That marks a nearly five-year period of almost uninterrupted quarterly growth for the company.

Tencent’s stock this year (along with Chinese e-commerce giant Alibaba’s) gained more than Apple, Facebook, Amazon, Alphabet, or Microsoft. It’s currently up 70% since Jan. 2.

But the engine that’s exciting investors remains a black box. For all the influence WeChat has had on Chinese culture—including QR codes, mobile payments, and online publishing—it’s never been clear how much money the app generates for its parent company. Tencent’s financial disclosures have neither hinted at the app’s revenue potential nor provided a specific monetary figure suggesting its value.

Many analysts say that doesn’t matter because, despite the company’s oblique financial disclosures, WeChat will only get bigger and more powerful in China. And Tencent’s stock market tear, they believe, is just getting started.

Tencent’s blurry financials

WeChat, as has been well-documented, is more than just a WhatsApp-like chat app. It’s a do-everything, Swiss-army-knife app that’s become a key part of everyday life in China. It now has 963 million monthly users, according to today’s earnings report.

Tencent is much more than WeChat. It’s a sprawling internet company that offers browsers, utility apps, a desktop-era social network called Qzone, a news portal, streaming music and video sites, a proto-WeChat chat app called QQ, and many online games for both PCs and smartphones.

Yet Tencent’s earnings releases, including today’s, remain frustratingly vague. Rather than reveal how much money WeChat and its numerous other properties make, the company breaks down its financials into three broad categories:

  • Value-added services. These typically consist of the virtual goods the company offers, primarily in its video games for smartphones and desktops. In its hit game Honor of Kings, for instance, players can buy extra powers. And in its Qzone social network, users can purchase special avatars.
  • Online advertising. Into this category go ads of any kind, on any Tencent property.
  • Other. This category includes—either exclusively or primarily, it’s unclear which—revenue from WeChat Pay and Tencent’s cloud services. (Years ago it included revenue from an e-commerce site that was later shut down.)

The vast majority of Tencent’s revenue has always come from the first category: value-added services. Analysts say most of Tencent’s growth over the past five years has come through the smartphone games it publishes, and the purchases that can be made within them.

Valuable real estate

But that’s not to say that the chat app has been irrelevant. To the contrary, Tencent has used WeChat (along with traditional app stores) as “real estate” to put its games in front of hundreds of millions of users. It’s also merged WeChat’s ID and chat features with its games, making them all the more social and addictive—thereby spurring in-game purchases. These purchases go into the “value-added services” category, where they’re lumped alongside consumer purchases for digital goods in PC games.

Matthew Brennan, who tracks WeChat’s changes at China Channel, points to the success of Honor of Kings as an example of WeChat’s indirect influence on Tencent’s revenue growth. “When you go into the game, it becomes all about playing with your WeChat friends, and looking at their scores and achievements,” he says. Honor of Kings is currently ranked the top-grossing game in China’s iOS App Store (registration required), and four other Tencent titles fill out the top 10.

The categories Tencent uses for revenue do little to help with a simple but perplexing question: How much money does WeChat actually make for Tencent? Many analysts believe the short answer to be: not much in the past, but that will quickly change.

Just getting started

Only now is WeChat beginning to directly contribute to Tencent’s revenue in a meaningful way. Analysts point to two primary streams (there are others) rife with potential, though it’s still unclear how much they’re boosting Tencent right now.

The first is advertisements. In early 2015, WeChat opened up ad spaces in Moments, its social feed that’s somewhat similar to Facebook’s News Feed. Later it offered more of them elsewhere in the app. Compared to Facebook, WeChat has been very conservative in rolling out ads in the app, citing a desire to keep it free of distractions. “We should not be overloading our users with ads,” Tencent president Martin Lau said tersely during an earnings call in May.

Yet Tencent’s advertising business ramped up significantly starting in early 2015, just after WeChat introduced those ad spaces. According to its financial releases, revenue from “online advertising” now makes up about 14% of Tencent’s total revenue—though that figure includes ads on other Tencent properties, too (such as banner ads within a video game, or video ads in the company’s version of YouTube).

The second main stream is payments. In early 2015, the company began charging merchants a 0.6% fee for online transactions conducted through WeChat Pay. That move was eventually followed by a nearly tenfold jump in Tencent’s revenue within the “other” category.

Despite that surge, it’s unclear how profitable WeChat Pay, specifically, is for Tencent.

Brennan, pointing to WeChat’s low take on payments (Stripe and PayPal each charge about 3%) and its aggressive discounts, speculates it’s a loss leader. Tencent executives, meanwhile, have downplayed its role in making money for the company. “We consider payment at this point in time as to [sic] infrastructure service rather than a service that generates profit for us. And I think that status will maintain for quite some time,” said Lau when Tencent reported on the final quarter of 2016.

A future in finance

Bhavtosh Vajpayee, who tracks Tencent for Bernstein Research in Hong Kong, says that WeChat is likely shying away from disclosing its true ambitions for payments, which lie in consumer financial services. Already, signs are emerging that Tencent is moving in this direction–earlier this month a small group of QQ users discovered they could check their Tencent “social credit” score, which points to a future in lending.

“Payments are the gateway to lending,” says Vajpayee. “And because you’re tracking the same consumer across so many platforms, you know the credit score of the consumer and you have very few non-performing loans.”

Both Vajpayee and Brennan agree that while WeChat’s direct contribution to Tencent’s growth has been minimal to date, that will likely change as soon as next year. If revenue growth from smartphone games plateaus, the company will then roll out ads and payment-related services more aggressively. That means that Tencent’s enormous valuation—approaching $400 billion—will likely only get bigger.

“We are in this explosive stage where having built the usage and got the users, they’re ready to press the pedal,” says Vajpayee.

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