Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

Tencent Holdings Ltd. once again posted net income that exceeded analyst estimates.

By now, these beats should no longer be a surprise to investors: net has surpassed analyst estimates in nine of the past 12 quarters. Expect Tencent's growing income from investments in other companies to make it even harder for analysts to predict the Chinese social media giant's results.

Upside
Another earnings surprise shows how analysts are struggling with Tencent
Source: Bloomberg

In the most recent quarter Tencent recognized 3.9 billion yuan ($589 million) in other gains -- more than three times the amount than in the year-earlier period -- including one from the IPO of ZhongAn Insurance. That's equivalent to 17 percent of pretax income, up from about 8 percent a year ago.

These investments are such an integral part of the company that they fall under operating profit, lumped in with its advertising and gaming businesses. This has helped net income climb at a faster rate than revenue for a fourth consecutive quarter. 

Earnings Momentum
Tencent's net income has grown faster than revenue in the past four quarters
Source: Bloomberg

There are signs of weakness in Tencent's third-quarter performance. For example its Honour of Kings game is no longer atop the rankings in China's iOS store; the rate of growth in WeChat's monthly active users softened to 15.8 percent from 19.5 percent the prior quarter; and the number of active users of its other chat service, QQ, dropped by 3.8 percent.

A slowdown in key user metrics is inevitable as China hits peak WeChat. Tencent is trying to offset this by boosting revenue in areas such as cloud computing and payments services. As it does so, however, it continues building out its portfolio of holdings in public companies -- such as Snap Inc. -- as well as private firms in the entertainment, technology, online-to-offline, and internet sectors.

With many of these investments hidden by the veil of private ownership, divining Tencent's bottom line is going to get more complicated. That means the risk of future surprises to both the upside and downside is getting higher.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net