Tencent crushes revenue growth; margins slip

I’m on vacation until September 7. I wrote this update on portfolio holding Tencent Holdings on August 21.
 
On August 16 Tencent Holdings (TCEHY) reported second quarter year over year revenue growth of 59%. That was the highest revenue growth in the last seven years and beat the analyst consensus by 7 percentage points.
 
Earnings growth wasn’t too shabby either at 68.9%
 
But Tencent, China’s online gaming giant and owner of We Chat, continues to show a troubling downward trend in operating margins, which fell to 35% in the second quarter this year from 41% in the second quarter of 2016. The problem is that like its U.S. counterparts, Tencent is spending heavily on content. For example, the company has bought the rights to show the NBA championship games in China.
 
And then, of course, there’s the pressure that the Chinese government is putting on Tencent and other online gaming companies to limit the hours that children can spend playing games such as Tencent’s global market leader Honor of Kings.
 
Tencent is a member of my long-term 50 Stocks portfolio, which means the question is What does the company have up its sleeve for reversing the slide in margins. A couple of things come to mind. First, online advertising is a relatively under-developed market in China. That gives Tencent headroom. Online ads at the company increased 55% year over year in the quarter. Second, the company has an aggressive program for bringing AI to its advertising, information services, and financial business where improved targeting stands a good chance of increasing both revenue and margins.
 
The stock was up 73.3% in the year to date as of August 21. The shares were ahead 59.9% since I added them to the 50 Stocks portfolio on February 14, 2017.