Post-Earnings Dip or Discounted Launchpad?
It’s earnings season in China, and two of the country’s biggest tech names just served up sharply contrasting dishes. Tencent’s results were robust—revenue up 13%, gross profit surging 20%, and a margin-rich business model continuing to hum. $BABA-W(09988)$, meanwhile, posted a revenue miss and promptly shed over 5% in market value. But here’s the twist: net profit at Alibaba skyrocketed 279% year-on-year. It’s a tale of two giants at an AI crossroads.
So, is it time to back up the truck for Alibaba—or is $TENCENT(00700)$ the smarter bet? In my view, Alibaba’s drop presents a buying opportunity.
Two giants diverge at China’s AI-lit innovation crossroads
Tencent’s Climb Looks Calm and Calculated
Tencent's latest quarter reflects a company getting more efficient and more valuable. Revenue hit RMB 180.02 billion, while non-IFRS operating profit climbed 18% to RMB 69.32 billion. The margin story is compelling: a 34.2% operating margin and a near-30% profit margin make Tencent one of the leanest machines in Asia. And the share price has quietly risen over 30% in the past year—beating the Hang Seng Index by nearly 10 percentage points.
But what really stands out isn’t the sheer size of Tencent’s media and gaming businesses—it’s the cash. With over RMB 377 billion in cash and only RMB 405 billion in debt, the balance sheet is rock-solid. Levered free cash flow of RMB 128 billion gives Tencent ample firepower to invest in AI, buy back shares, or even pounce on acquisitions.
Valuation-wise, it trades at a forward P/E of 17.45—not cheap by China standards, but far from excessive given the 14.2% earnings growth. The 0.89% dividend yield is modest, yet growing, and the PEG ratio of 1.62 suggests growth isn’t overpriced.
The Hidden AI Edge: Tencent’s Enterprise Bets
Most investors focus on Tencent’s gaming or WeChat ecosystem—but its stealthy expansion into AI-powered enterprise tools is easy to overlook. Its 'Hunyuan' large model is being tested within industries like insurance, finance, and government—where WeChat’s deep integration already offers a competitive moat. Tencent isn't just riding the AI hype wave; it's embedding AI where it already controls distribution and user behaviour.
Alibaba: Disappointment Today, Leverage Tomorrow?
Alibaba’s revenue miss—RMB 236.45 billion versus RMB 237.91 billion expected—was more of a headline than a structural concern. What matters more is profit: net income jumped nearly four-fold year-on-year. That wasn’t just base-effect magic. It was driven by operating discipline and cost rationalisation across its sprawl of business units.
Despite the wobble, the stock is still up nearly 49% year-to-date, outperforming Tencent and the index alike. And with a trailing P/E of 17, a PEG of well under 1 if adjusted for normalised growth, and a 0.83% forward yield, there’s an argument to be made that Alibaba is one of the most mispriced blue chips in the world.
Valuations diverge, fundamentals don’t always follow in sync
Yes, margins remain slim—13% profit margin versus Tencent’s 29%—and its business is more exposed to retail, logistics and consumer sentiment. But Alibaba's cash pile of RMB 428 billion dwarfs its debt load, and its free cash flow, while slimmer than Tencent’s, remains solid at RMB 12.9 billion. The firm also boasts a higher return on assets than it did pre-pandemic, reflecting a more focused post-split strategy.
Under the Hood: What the Market’s Missing
One subtle but critical divergence: Tencent’s beta is 0.59, while Alibaba’s is just 0.24. That means Alibaba is currently trading more like a defensive stock—despite being deeply tied to cyclical e-commerce and cloud computing. This muted volatility could suggest investor caution has gone too far.
And here's a detail many overlook: Alibaba’s market cap is just 2.35 trillion RMB, nearly half Tencent’s. Yet its revenue base is almost 50% larger. You read that correctly—Alibaba generated RMB 996 billion in the past 12 months, compared to Tencent’s RMB 680 billion. The discount here isn’t just on earnings or sentiment. It's on scale.
Alibaba climbs uneven skies, Tencent flies the stable route
Can Alibaba Reach $180 Again?
The path back to $180 won’t be linear, but it’s feasible. First, $Alibaba(BABA)$ needs to reaffirm growth—topline, not just bottomline—particularly from cloud and international commerce. Second, sentiment towards Chinese tech must thaw further, especially among Western institutions. Lastly, any upside surprise on the AI front could act as a re-rating trigger.
The current consensus price target sits at $165, with high-end forecasts pushing up to $190. That implies a potential upside of around 33% from current levels near $124—without factoring in dividends or buybacks. A return to $180 is not a given, but it’s certainly back on the radar
Verdict: Two Titans, One Asymmetric Opportunity
Tencent is the steadier hand. It offers higher margins, less volatility, and superior long-term returns. But Alibaba is the contrarian pick—cheaper, faster growing on a per-share basis, and still climbing out of a sentiment hole. In my view, the AI arms race in China will benefit both—but the market has already priced that into Tencent, not yet into Alibaba.
So yes, I’m boarding both—but I’m loading more weight on Alibaba. It may not be the easier ride, but it’s the one with the greater altitude ahead.
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