Tencent – Breaking cover

Tencent goes for the Metaverse?

• Tencent looks to be about to begin its quest to enter the Metaverse but how an almost unknown device manufacturer (Black Shark) will help Tencent crack this fiendishly complex conundrum remains a complete mystery.
• Black Shark is a Chinese manufacturer of smartphones and accessories that are aimed at the gaming segment but there is no sign of any product or expertise that would help Tencent to get into VR or AR.
• Although RFM research has concluded that the Metaverse has to work with every digital device, it is only through VR and AR that the full benefits of the Metaverse will be realised.
• Hence, every digital ecosystem that is looking to have a position in the Metaverse is working on having one or both of these categories covered with an in-house product.
• This is why I am somewhat mystified as to how acquiring Black Shark will help Tencent on its path towards the Metaverse.
• Black Shark is predominantly producing products aimed at smartphone gaming and so it is possible that Tencent is considering acquiring this company for reasons that have nothing to do with the Metaverse.
• Having control of hardware could help Tencent become more vertically integrated such that in-house games would run better on Black Shark hardware potentially helping it to compete more effectively in Chinese gaming.
• However, at the same time, the increasingly tight regulatory environment is playing to Tencent’s advantage as more regulations make it harder for smaller players to comply and compete with Tencent.
• Hence, I am far from convinced that this acquisition makes sense for Tencent and would not be surprised to find that nothing transpires from any talks that Tencent is having with Black Shark.
• Tencent has identified the Metaverse as important and given that the early versions of it are almost entirely about gaming it would seem logical that Tencent is one of the early Metaverse movers in China.
• That being said, I suspect that the Metaverse is going to take a very long time to become a mass-market reality just as the smartphone did before it.
• More broadly, I continue to think that Tencent has a large regulatory overhang as it has a large and thriving financial services business that has grown out of WeChat.
• Ant Group had a similar business, but this has been decimated by regulation (see here) and I think that the same may well apply to Tencent.
• Given that this is 30%+ of revenues and the majority of growth, if this were to take a large hit, then Tencent’s valuation would have much further to fall.
• Alibaba, by contrast, has already priced in the predations of regulation and is trading at a bargain-basement valuation.
• Hence, I am holding onto my battered position in Alibaba which finally seems to have found a bottom where it seems stuck in the absence of a catalyst.