Better Buy: Tencent vs. Facebook

WeChat operator Tencent Holdings Ltd (SEHK: 700) is often compared to global social network sensation Facebook Inc (NASDAQ: FB).

That’s because both run massive social networks and are also involved in all sorts of online advertising via Tencent’s WeChat and Facebook’s eponymous Facebook service as well as Instagram.

However, for longer term investors, which company is currently the better buy? Let’s find out.

Revenue growth

For high growth technology companies such as Tencent and Facebook, the revenue growth number is important as it can assess how successful a tech firm is at tapping its total addressable market.

During its latest quarter (for the three months ended 31 March 2020), Tencent saw its revenue grow to RMB 108.1 billion (US$15.24 billion), up 26% year-on-year from the same period in 2019.

So, how did Facebook do? The ubiquitous social network company saw revenue of US$17.44 billion for the first quarter of 2020, which was only up around 17% year-on-year from a year ago.

Winner: Tencent

Diversification

When looking at any company, as investors we should ensure that a company isn’t too reliant on any one service that could be upended or disrupted. Diversification of revenue streams can be a valuable trait in a stock.

So, for Tencent, the company has four main revenue generators. These are Online Games, Social Networks, Online Advertising and FinTech and Business Services. Overall, these contributed 35%, 23%, 16% and 25%, respectively, of Tencent’s revenue in its most recent quarter.

However, when we look at Facebook, we can see that it is solely reliant on advertising – which made up 98.2% of its revenue in the latest quarter. In diversification terms, Tencent is the clear winner.

Winner: Tencent

Operating margin

Finally, we have operating margin. This helps us determine how profitable a company is after taking into account its operating costs.

Tencent, in the first quarter of 2020, saw an operating margin of 32.9% while Facebook effectively matched that with an operating margin of 33% in the first quarter of 2020.

Winner: It’s a tie

Foolish summary

Overall, I think Tencent is the better stock for investors to own for the long run. Facebook’s overreliance on one product (online advertising) has put it in the crosshairs of data privacy advocates as well as US politicians.

Meanwhile, Tencent’s diversified business in fintech, cloud computing, online gaming and online advertising have seen it continue to grow at a strong pace. That means investors who want to see stronger growth over the long term should go for Tencent.

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