Tag Archives: TCEHY

Tencent's Advertising Business Is Just Getting Started

Tencent’s (NASDAQOTH:TCEHY) advertising business is growing quickly. The company’s overall online advertising business grew 55% year over year in the first quarter. Social advertising grew faster, 69% year over year, and totalled 7.4 billion yuan (about $1.2 billion) — 69% of total ad revenue.

But Tencent made an interesting note in its quarterly report.

“To cater to the strong demand for social advertising on our platforms, Weixin Moments increased its maximum ad load to two advertisements per user day in late March.”

In other words, the 1.04 billion Weixin/WeChat users were only seeing a maximum of one advertisement per day in Moments, a product similar to Facebook’s (NASDAQ:FB) news feed. Considering the number of ads Facebook has managed to cram into news feed, there’s plenty of room to increase ad load on WeChat.

Two girls in an airport looking at a smartphone.

Image source: Getty Images.

Advertising is still a small business for Tencent

Tencent’s advertising business is relatively tiny, especially compared to the global leader in social advertising, Facebook.

Last quarter, Facebook generated $2.1 billion in the Asia-Pacific region. What’s more, it did so with fewer users (873 million), who are primarily located in countries with lower GDP per capita than China like India, Indonesia, and Vietnam. So, its average revenue per user, $2.45, is more than twice as much as Tencent generates on Weixin users.

Tencent has kept advertising artificially low on its platform. And that seems to be a smart strategy. It’s been able to grow users quickly, going from less than 200 million users in the first quarter of 2013 to over 1 billion today.

Importantly, Tencent has other sources of revenue to rely on to support the growth and development of WeChat as it adds more users and functionality. Its gaming business continues to drive strong growth, totalling 28.8 billion yuan last quarter, not including in-game virtual item sales. Tencent has also managed to expand into other services including video and music streaming, payments, and referring people to services ranging from taxis to doctors.

So, not inundating its users with advertisements has allowed it to focus on those businesses.

Ready to start growing (slowly)

Tencent’s businesses outside of advertising are still growing quickly, despite their size. Value Added Services grew 35% year over year in the first quarter, and other revenue more than doubled. That said, management believes there’s a lot of room to grow in advertising, and it’s ready to start taking those steps.

“Given our ad loads for social and feeds products are only small fractions of those of industry peers, we believe there is a long runway for continued growth of our social and others advertising,” management wrote in its earnings release.

Considering Tencent is practically doubling its ad load in Moments, investors should see a significant increase in social revenue starting next quarter. It will likely have a negative impact on average ad prices, but management also said it’s seen strong demand. Facebook saw notable changes in its average ad prices when it changed the ad formats on its website to reduce total ad inventory. Tencent could experience the opposite effect with such a steep jump in ad inventory.

As such, investors shouldn’t expect Tencent’s social advertising business to double overnight. However, the change should result in accelerated growth in the business, which, let me remind you, was up 69% year over year last quarter. And two ads per day is still practically nothing compared to what Facebook and other social media users are used to. There’s a “long runway” indeed.

Tencent Takes Gaming By Storm

In this episode of the Market Foolery podcast, host Mac Greer talks with Motley Fool analysts Ron Gross and Matt Argersinger about the market’s hottest stories. For a company with $500 billion in market cap, Tencent(NASDAQOTH:TCEHY) just put up some astonishing growth this quarter — and yet, the stock fell a little bit today.

Traditional retail actually saw a bright spot today with Macy’s(NYSE:M) fantastic quarterly report, but investors shouldn’t abandon all doubts about the sector just yet. Starbucks (NASDAQ:SBUX)is ramping up its growth in China to an astounding degree, and long-term investors might want to take a closer look at the coffee powerhouse for the next few years. Tune in to find out more.

A full transcript follows the video.

This video was recorded on May 16, 2018.

Mac Greer: It’s Wednesday, May 16th. Welcome to Market Foolery! I’m Mac Greer, and joining me in studio, we have Motley Fool analysts Ron Gross and Matt Argersinger. Guys, welcome!

Ron Gross: How are you?

Matt Argersinger:Hey, Mac!

Greer: How you feeling?

Gross: I’m great!

Greer: Good. Matt, you?

Argersinger:I’m good!

Greer:I’m trying to grow a beard,but I’m at that scratchy stage.

Gross:Yeah,it looks good!

Greer: Are you just saying that? [laughs]That’s so hurtful. Well,guys, later in the show we’re going to talk Starbucks. They’rereally ramping up in China,which I hear is a pretty big market,so we’re going to talk about that. And we’re also going to talk about some big earnings from China’slargest social network and gaming company.

But, Ron,I want to begin with something that we don’t say every day –good news from a traditional retailer. Shares of Macy’s up more than 5% right now onbetter than expected earnings. Is the turnaround really happening?

Gross: Well,well, well, look who’s not dead yet!

Argersinger:Yet. [laughs]

Gross: Reallyinteresting! It’s been an interesting six months for retail. If you listened to the show a year ago, we left retail for dead.

Greer:Yes we did.

Gross: Shows what we know. Andthere have certainly been some rebounds, helped by tax cuts and bonuses and tax refunds and a strong economyand almost full unemployment. So, it has been interesting.

Specific to Macy’s,they have done what they needed to do, which is close a lot of stores,maybe around 100 stores. They cutthousands of jobs, which is painful,but when business calls for it, sometimes that’s what needs to be done. And it looks like they’rereaping the benefits of that as well asthe good stuff that’s going on in the economy right now. The same-store sales up 4.7% is a huge, huge number. Now,their friends and family promotionshowed up in this quarter, versus last year, it was in a different quarter,so the comparisons are a little wonky, for lack of a better word.

Greer:What is that? What is the friends and family promotion?

Gross: Itused to be that you literally hadto know someone that worked atone of these stores, and they could pass you along adiscount. Nowadays it’s, if you breathe,you get the friends and family discount. No kidding around!

Greer: [laughs]Opposable thumbs.

Argersinger:Everyone is a friend?

Gross: Everyone is a friend of someone. It’s just abig promotion, like the old Macy’s One Day sales. That helped, the fact that it was in this quarterversus a different quarter last time around. If you strip that out, you’re probably somewhere under 2% on a same-store sales growth basis. Butstill, for a company that has really struggled, that’s still pretty darn good. Adjusted profits up 240%. Now,again, from a very low base, because the company was struggling. Still,it’s really nice to see.

They have a lot of things in the works. They’rekind of throwing some things at the wall and seeing what will stick. They have their Macy’s Backstage concept, which is their discount concept. Everyretailer has to have one nowadays, like a Nordstrom (NYSE:JWN)Rack, for example. Theyactually bought a concept store in New York City calledStory,which is a store that revamps its inventory every four to eight weeks to try to keep it fresh. That would be some Inventory management job. Their buyers have their work cut out for them. But, interesting. They’re trying a lot of different things.

They need a new CFO; theirCFO is leaving. Let’s get that in placeso they don’t miss a beatwith respect to that. But, kudos to Macy’s. I don’t know if this carries through,but this is a really strong quarter.

Greer: OK,Matt, a lot there. What do you think?

Argersinger:I mean,part of me thinks this is probably just — I’m sure Ron will agree a little bit — things got a little too pessimistic.

Gross: Yeah.

Argersinger:So, if Macy’s can have a little good news, or any of these traditional retailers can have a little good news,it’s going to spike the stock. I have to look at Macy’s though, and I say, if I’m an investor and I see a P/E of 7X — I don’t know if that’s a normalized number — and a dividend yield above 5% …

Gross: Right? [laughs]

Argersinger:Ron,what do you think? Should I look at this as,this is a deep value type of opportunity here? Maybethis is an opportunity for investors?

Gross:So, they raised guidance. On their going-forward guidance, they’re trading at 8.5X. Measurethat up against a Nordstrom, that’s around 15X, or aJCPenneyor aKohl’sthat are 17X and 12X, respectively, it certainly looks awfully cheap. And itcontinues to be a turnaround play. It’s not the kind of stock you probably want to buyand hold forever. It’s the kind of stock thatpotentially could be mispriced,and when it becomes fairly priced,you would probably want to take your profitsand go home.

Greer: OK, Ron,you mentioned some other names there, including Nordstrom and Kohl’s. Wetalk a lot about Amazon (NASDAQ:AMZN)- proofretailers orcompanies in general. When both of you guys look at traditional retail,is there a company that you think is more Amazon-proof?

Gross: Wealways talk about TJ Maxxas a company that really hasrelationships with thousands of buyers and provides areally strong value on and strong assortment to the customer. So far, that has been Amazon-proof. Itdoesn’t mean it always will be, though.

Argersinger:It’sgoing to be very hard. When I think of a lot of these companies,I think of apparel. And Amazon is making such a big investmentin that area. For a long time, I figured,are people really going to buy clothes online? Shoes? Andsure enough, over the last ten years, that model has been proven. Now,I think something like a Macy’s or Nordstromfeels like a better, more polished brand than yourJCPenney’s of the world, or yourSears, certainly, of the world. Atthe same time,I like what Ron said. There might be some value here, but youlook to get out as soon as you thinkyou have somewhat of a fair valueon these businesses. Youcannot see the outsized growth anymore for any of these brands.

Greer:OK. Ron,as we wrap up here, I know from my boots on the ground researchthat in a previous life,as a younger man —

Gross:Where’s this going?

Greer:– youworked at Macy’s. True or false?

Gross: [laughs]Yes,I will admit.

Greer: OK. What were the highlights and lowlights of Ron Gross’Macy’s career?

Gross: Thebackground is, I was in high school. I worked in the bath shop. The bath shop, for those uninformed, isthe department where they sell bath towels, primarily, and bathroom rugsand things like that. I was terrible at this job. Itmostly revolved around folding things.

Greer: Andwhy were you terrible?

Gross: I’mnot a good folder of things!

Greer: Andyou weren’t passionate about the bath shop?

Gross: Andby the way, this was before the day of bar codes and those guns and scanners. Youhad to key in every little last thing manually at the register. Ifyou made a mistake, you had to go back to the beginning. It wasjust a disaster. Myone recommendation to those kids out therewith a similar type of retail job is,do not call out sick every other week,because they just don’t appreciate when you do that.

Greer: Ah,OK, so you kind of shirked your duties.

Gross: I wasn’t a strong employee.

Greer: OK,duly noted. We like the honesty. Guys, let’s turn our attention toTencent. Tencentreporting better than expected earnings thanks tostrong growth in its mobile games,mobile payments and other digital content. Now, Matt,for those who may not be following this company, Tencent isChina’s largest social networking and gaming company. When we’re talking Tencent, we’re talking WeChat,which has more than a billion users. And,oh yeah, Tencent now has a piece of the action intwo of the biggest games in the smartphone world –PUBG and Fortnite.

Argersinger:That’s right. Youmentioned, biggest social network and video game company in China. Well,this is one of the biggest social network and video game companies in the world. You mentioned the one billion, thefirst time WeChat, which is theirbig social network, hit a billion active users, this most recent quarter.

This is a $500 billionmarket cap company. Huge. It’s one of the biggestcompanies in the world.Revenue up48% to $11.7 billionin the quarter. Operating profits up 59% to $4.9 billion. That’s an operating margin of42%. They’re in Facebookterritorywhen it comes to the profitabilityof their company, of their platform.

Andit makes sense. Like you said, it’s a social network,massive social network. They own some of the biggest video game propertiesin the world. We’re talking League of Legends,Honor of Kings, and oh, by the way, they own 40% of anAmerican company called Epic Games, which happens to publish this game called Fortnite —

Gross: And was started in Potomac, Maryland, by the way.

Argersinger:That’s right!Potomac Computer Systems, or something like that. So,they have their hands in some of the most popular intellectual property in the world. Butif you look at the other parts of the business, we talka lot about their social network and their video games, butvideo and music streaming, up 47%, that business. Advertising, which they really haven’t tapped into –in fact, management has been really hesitant to show ads in the “news feeds” of WeChat users. And yet, that business is up 55%,when they haven’t even really tapped it.

But, it really is the power of that network. You have a billion users, soanything Tencent can do, any game they launch,any video streaming service they launch or new content they create,they can immediatelydistribute that seamlessly across mobile to over a billion users. So,that is an incredibly powerful competitive advantage that Tencent has builtover the last 20 years, and it’s just really starting to shine now as a public company.

Greer:Matt, I just quoted the stock, and I hear these heady numbersand all these untapped opportunities that they’rejust beginning to explore, especially with regards to China. Andthe stock is down slightly today. What gives there?

Argersinger:Well,I’ve seen this play out a little bit with a lot of these large Chinese companies lately.I think, for whatever reason — and, Tencent in particular, because it’s listed on the pink sheets in the U.S. — but, these are all platforms that we knowand hear about and we can invest in, butwe don’t really have any experience with them. And we’renot comfortable, necessarily, with the management of Tencent orJD.comorBaiduorAlibaba, just to go through the list.

There’s a big catalyst, though, coming forward, which is, the Chinese government may soon — as early as this summer — allow domestic Chinese investors to actually buy shares in these companies. Right now, they’renot allowed to invest in these foreign-listed companies,even though these are some of the biggest companies in China. It’s as if we used Amazon in the States, butit was listed in China, and we weren’t allowed to invest in it. Well,imagine that. Imagine what the valuation of Amazon would beif that was the case. That’s what Chinese investors facewith something like Tencent. I think that’s a catalyst. And it could be happening this summer, wherea lot of Chinese investors could suddenly be able to buy shares. That’sgoing to create a huge amount of demand, I think. So,that’s one of the things, I think, that’s waiting to happen before the valuation really goes up for a lot of these companies.

Gross: That’sinteresting, because as a value guy,it has barely crossed my radar. But I do own shares of Facebook,I own shares of Google. So,I am willing to place my bets there. But, Tencent, being a Chinese company, I remain wary of that kind of stuff –to my detriment, [laughs] it would appear,because they are taking it by storm, andand this Fortnite thing is a phenomenonthat I have never seen, at least in my house.

Greer: It’sincredible. I played my first game this weekend,and I couldn’t really figure out how to jump.

Gross: You can dance, too.

Greer: Yeah,I was so far from being able to dance. What I realized is,you really have to be able to jump.

Gross: In real life, you mean?

Greer: Well,in real life, it’s helpful. But in Fortnite, I kept running into the same wallover and over, and then I just got mowed down by someone.

Argersinger:Anddriving your son, I’m sure, crazy.

Greer: Oh,my son was trying to teach me, and it started out with, “This this will be exciting,” and within a minute, he was exasperated. It was the equivalent ofthe 12 o’clockflashing on the VCR. I was that guy.I was running into a wall over and over,I couldn’t jump. I mean, it’s a much more complex game —

Gross: Oh, for sure.

Greer: — than Pong.

Gross: [laughs] Pong!

Greer: Pong,you had to adjust your paddle size. And then, that progressed to Breakout. And the only thing with Breakout isyou had to keep your cool as you broke out.

Argersinger:So,you dominated those games, but when it comes to something like Fortnite —

Greer: There are all thesevariables! You have to jump, you have to move —

Gross: Build, building is the key to Fortnite.

Argersinger:Yeah, building.

Gross: If you’re a strong builder, you can win.

Greer: No.I was just running into a wall over and over.

Gross: These games,this whole genre is called battle royale games, where100 people play at a time in a game of Fortnite.

Greer: Yeah,it’s brilliant.

Gross:It’s brilliant, and don’t forget, Fortnite doesn’t cost any money unless you want to upgrade your outfit —

Greer: Skins, Ron! Not outfits, Skins! Gosh!

Gross: Sorry, skins. Right.

Greer: So insulting!

Gross: You spend money on these microtransactions, $5 and $10 at a time,that actually turns into a real business. Hundreds of millions of dollars’ worth of business. It’s fascinating.

Greer: It’s brilliant. And you can play solo, you can play it in a pair, you can play on a team. Now, they have the Marvel tie-in with Thanos. Oh my gosh, I mean, they’re just printing money.

Argersinger:AndI’m glad Ron just mentioned the model,because it really is a model thatyou saw in nascent stages ten years ago withvideo games, but 90% of the revenue for video games was still selling you the disc,it’s $50 and that’s usually the only transaction that would happen. Now, you layer inall those microtransactions. So,it ends up, gamers spend hundreds of dollars on a single titleover the course of playing the game. And I think, that’s why you look at Tencent, it hasoperating margins above 40%.

Gross: Andjust as an aside, what’s amazing is,you can’t spend money Fortnite,for example, to upgrade your weapon and give yourself an unfair advantageand buy yourself a win. It’sliterally just aesthetics. It just looks cooler. Andkids out there are still willing — not just kids, everyone is still willing to spend those $5 and $10.

Greer: So, you’re telling me kids like to look cool?

Gross: Yeah, I guess so.

Greer: Well,the one tweak I’m going to make based on my experience is, I want a seniors’ division, where 50 and over compete in their own division. Likegolf, right? Then you have a bunch of people running into walls together.

Gross: Nice.

Argersinger:I like that. I like that a lot.

Greer: Money maker. Guys,let’s close with Starbucks, which is really ramping upin China. Matt, these numbers are staggering. OnWednesday, Starbucks announcing plans to build nearly 3,000 new stores in mainland Chinaover the next few years. For those of youscoring at home,that will mean that Starbucks will have around 6,000 storesby the end of 2022. What do you think?

Argersinger:That’s right. Credit toCNBC’s Kate Rogers,who was covering this conference that Starbucks did inChina, its two-day investor conference. Theheadline is really that Starbucks reiterated once again that their business in China isalmost certainly going to eclipse their business in the U.S.in the future. There’s just no doubt about it. And that’s partly, from what you said, they’regoing to have 6,000 stores by 2022.

Right now,they have 3,300 locationsacross 141 cities inChina. They’re opening a new location –this is according to Kate –every 15 hours now in China. So,with the new numbers they’ve put out,I looked back at my own model that I’ve done of Starbucks, looking at store counts, and this is way ahead of where I thought they would be by 2022.

So,if you’re a Starbucks shareholder, I think you probably felt a little frustratedover the last several years. The stock has kind of stagnated. Overall global compshave been low single digits. And the stock has really been stuck in place. Butnow, I look at this and I say, well,Starbucks is trading for roughly 22Xforward earnings, 2% dividend yield,buying back a lot of stock, abusiness that should still be able to grow in the high single digits, sales,especially as China becomes a greater proportion of the business.I think Starbucks looks pretty compellingright now. It’s not going to be a barnstormer,but I think you can do pretty well buying Starbucks today. And if you get the shares under $50,even better.

Greer: Yeah,it was really surprising. Shares of Starbucks down over the past year, butover the past five years, uparound 80%.

Argersinger:Right. It’s still a long-term story. So,I think, if you buy Starbucks today and you look forward to what this business could look like in five years,in China and elsewhere,pretty exciting.

Greer:I confess, when I heard you say you did your model of Starbucks,I first envisioned you building a model of a Starbucks.

Gross: [laughs]A Lego model?

Argersinger:Of aStarbucks store?

Greer: Yeah! And I’m like, “That’s kind of odd.” And then I’m like, “Oh, wait, play it cool, he’s talking financial model. OK, I got it.”I was a little worried there. I’m like, “You know what? Putthe model down, just crunch the numbers.”OKguys, my favorite closing desert island question. You’reon a desert island for the next five years,and you can only hold one of these stocks that we’ve talked about: Macy’s, Tencent, or Starbucks?

Gross:Well,it’s definitely not Macy’s.

Argersinger:[laughs] I think that’s easy.

Gross: Tencent might put upbetter numbers, but I’m just not as comfortable with it. AndStarbucks is just a solid, solid company that I can put in my portfolio andgo to that desert island and not worry about it,so I’ll go Starbucks.

Greer: Notas comfortable with Tencent, is that because of the management, or the business model, or both?

Gross:I’m just not as familiar with it, it’s a little bitmore high-growth, high-flying than I’mtypically comfortable with, and you add in the Chinese piece,and that pushes it over to Starbucks.

Greer: OK. Matty?

Argersinger: I’m going to agree with Ron. The numbers that Tencent isputting up are just staggering,but I feel a little bit less comfortable about where I see the business in five years.I think the business is going to be huge, and it’s growing in all these different areas,but I want to see more of a focus on,eventually, what they can do with this huge WeChat platform.And, whether or not the Chinese government is ever going to step in and say, “Yeah, youguys are a little too influential,” especially as WeChat gets into financial transactions, which,they already have one of the biggest payment platforms. Being able to spread that across a billion users, it makes Tencentthat much more influential in China. So, if I’m going to sleep well at night and, I think, earn 10% a year I’m going Starbucks.

Greer: OK. There you have it. Matt, Ron,thanks for joining me!

Argersinger:Thanks, Mac!

Gross: Thanks, Mac!

Greer:As always, people on the show may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That’s it for this edition of Market Foolery. The show is mixed by Dan Boyd. I’m Mac Greer. Thanks for listening! We’ll see you tomorrow!

Tencent Takes Gaming By Storm

In this episode of the Market Foolery podcast, host Mac Greer talks with Motley Fool analysts Ron Gross and Matt Argersinger about the market’s hottest stories. For a company with $500 billion in market cap, Tencent(NASDAQOTH:TCEHY) just put up some astonishing growth this quarter — and yet, the stock fell a little bit today.

Traditional retail actually saw a bright spot today with Macy’s(NYSE:M) fantastic quarterly report, but investors shouldn’t abandon all doubts about the sector just yet. Starbucks (NASDAQ:SBUX)is ramping up its growth in China to an astounding degree, and long-term investors might want to take a closer look at the coffee powerhouse for the next few years. Tune in to find out more.

A full transcript follows the video.

This video was recorded on May 16, 2018.

Mac Greer: It’s Wednesday, May 16th. Welcome to Market Foolery! I’m Mac Greer, and joining me in studio, we have Motley Fool analysts Ron Gross and Matt Argersinger. Guys, welcome!

Ron Gross: How are you?

Matt Argersinger:Hey, Mac!

Greer: How you feeling?

Gross: I’m great!

Greer: Good. Matt, you?

Argersinger:I’m good!

Greer:I’m trying to grow a beard,but I’m at that scratchy stage.

Gross:Yeah,it looks good!

Greer: Are you just saying that? [laughs]That’s so hurtful. Well,guys, later in the show we’re going to talk Starbucks. They’rereally ramping up in China,which I hear is a pretty big market,so we’re going to talk about that. And we’re also going to talk about some big earnings from China’slargest social network and gaming company.

But, Ron,I want to begin with something that we don’t say every day –good news from a traditional retailer. Shares of Macy’s up more than 5% right now onbetter than expected earnings. Is the turnaround really happening?

Gross: Well,well, well, look who’s not dead yet!

Argersinger:Yet. [laughs]

Gross: Reallyinteresting! It’s been an interesting six months for retail. If you listened to the show a year ago, we left retail for dead.

Greer:Yes we did.

Gross: Shows what we know. Andthere have certainly been some rebounds, helped by tax cuts and bonuses and tax refunds and a strong economyand almost full unemployment. So, it has been interesting.

Specific to Macy’s,they have done what they needed to do, which is close a lot of stores,maybe around 100 stores. They cutthousands of jobs, which is painful,but when business calls for it, sometimes that’s what needs to be done. And it looks like they’rereaping the benefits of that as well asthe good stuff that’s going on in the economy right now. The same-store sales up 4.7% is a huge, huge number. Now,their friends and family promotionshowed up in this quarter, versus last year, it was in a different quarter,so the comparisons are a little wonky, for lack of a better word.

Greer:What is that? What is the friends and family promotion?

Gross: Itused to be that you literally hadto know someone that worked atone of these stores, and they could pass you along adiscount. Nowadays it’s, if you breathe,you get the friends and family discount. No kidding around!

Greer: [laughs]Opposable thumbs.

Argersinger:Everyone is a friend?

Gross: Everyone is a friend of someone. It’s just abig promotion, like the old Macy’s One Day sales. That helped, the fact that it was in this quarterversus a different quarter last time around. If you strip that out, you’re probably somewhere under 2% on a same-store sales growth basis. Butstill, for a company that has really struggled, that’s still pretty darn good. Adjusted profits up 240%. Now,again, from a very low base, because the company was struggling. Still,it’s really nice to see.

They have a lot of things in the works. They’rekind of throwing some things at the wall and seeing what will stick. They have their Macy’s Backstage concept, which is their discount concept. Everyretailer has to have one nowadays, like a Nordstrom (NYSE:JWN)Rack, for example. Theyactually bought a concept store in New York City calledStory,which is a store that revamps its inventory every four to eight weeks to try to keep it fresh. That would be some Inventory management job. Their buyers have their work cut out for them. But, interesting. They’re trying a lot of different things.

They need a new CFO; theirCFO is leaving. Let’s get that in placeso they don’t miss a beatwith respect to that. But, kudos to Macy’s. I don’t know if this carries through,but this is a really strong quarter.

Greer: OK,Matt, a lot there. What do you think?

Argersinger:I mean,part of me thinks this is probably just — I’m sure Ron will agree a little bit — things got a little too pessimistic.

Gross: Yeah.

Argersinger:So, if Macy’s can have a little good news, or any of these traditional retailers can have a little good news,it’s going to spike the stock. I have to look at Macy’s though, and I say, if I’m an investor and I see a P/E of 7X — I don’t know if that’s a normalized number — and a dividend yield above 5% …

Gross: Right? [laughs]

Argersinger:Ron,what do you think? Should I look at this as,this is a deep value type of opportunity here? Maybethis is an opportunity for investors?

Gross:So, they raised guidance. On their going-forward guidance, they’re trading at 8.5X. Measurethat up against a Nordstrom, that’s around 15X, or aJCPenneyor aKohl’sthat are 17X and 12X, respectively, it certainly looks awfully cheap. And itcontinues to be a turnaround play. It’s not the kind of stock you probably want to buyand hold forever. It’s the kind of stock thatpotentially could be mispriced,and when it becomes fairly priced,you would probably want to take your profitsand go home.

Greer: OK, Ron,you mentioned some other names there, including Nordstrom and Kohl’s. Wetalk a lot about Amazon (NASDAQ:AMZN)- proofretailers orcompanies in general. When both of you guys look at traditional retail,is there a company that you think is more Amazon-proof?

Gross: Wealways talk about TJ Maxxas a company that really hasrelationships with thousands of buyers and provides areally strong value on and strong assortment to the customer. So far, that has been Amazon-proof. Itdoesn’t mean it always will be, though.

Argersinger:It’sgoing to be very hard. When I think of a lot of these companies,I think of apparel. And Amazon is making such a big investmentin that area. For a long time, I figured,are people really going to buy clothes online? Shoes? Andsure enough, over the last ten years, that model has been proven. Now,I think something like a Macy’s or Nordstromfeels like a better, more polished brand than yourJCPenney’s of the world, or yourSears, certainly, of the world. Atthe same time,I like what Ron said. There might be some value here, but youlook to get out as soon as you thinkyou have somewhat of a fair valueon these businesses. Youcannot see the outsized growth anymore for any of these brands.

Greer:OK. Ron,as we wrap up here, I know from my boots on the ground researchthat in a previous life,as a younger man —

Gross:Where’s this going?

Greer:– youworked at Macy’s. True or false?

Gross: [laughs]Yes,I will admit.

Greer: OK. What were the highlights and lowlights of Ron Gross’Macy’s career?

Gross: Thebackground is, I was in high school. I worked in the bath shop. The bath shop, for those uninformed, isthe department where they sell bath towels, primarily, and bathroom rugsand things like that. I was terrible at this job. Itmostly revolved around folding things.

Greer: Andwhy were you terrible?

Gross: I’mnot a good folder of things!

Greer: Andyou weren’t passionate about the bath shop?

Gross: Andby the way, this was before the day of bar codes and those guns and scanners. Youhad to key in every little last thing manually at the register. Ifyou made a mistake, you had to go back to the beginning. It wasjust a disaster. Myone recommendation to those kids out therewith a similar type of retail job is,do not call out sick every other week,because they just don’t appreciate when you do that.

Greer: Ah,OK, so you kind of shirked your duties.

Gross: I wasn’t a strong employee.

Greer: OK,duly noted. We like the honesty. Guys, let’s turn our attention toTencent. Tencentreporting better than expected earnings thanks tostrong growth in its mobile games,mobile payments and other digital content. Now, Matt,for those who may not be following this company, Tencent isChina’s largest social networking and gaming company. When we’re talking Tencent, we’re talking WeChat,which has more than a billion users. And,oh yeah, Tencent now has a piece of the action intwo of the biggest games in the smartphone world –PUBG and Fortnite.

Argersinger:That’s right. Youmentioned, biggest social network and video game company in China. Well,this is one of the biggest social network and video game companies in the world. You mentioned the one billion, thefirst time WeChat, which is theirbig social network, hit a billion active users, this most recent quarter.

This is a $500 billionmarket cap company. Huge. It’s one of the biggestcompanies in the world.Revenue up48% to $11.7 billionin the quarter. Operating profits up 59% to $4.9 billion. That’s an operating margin of42%. They’re in Facebookterritorywhen it comes to the profitabilityof their company, of their platform.

Andit makes sense. Like you said, it’s a social network,massive social network. They own some of the biggest video game propertiesin the world. We’re talking League of Legends,Honor of Kings, and oh, by the way, they own 40% of anAmerican company called Epic Games, which happens to publish this game called Fortnite —

Gross: And was started in Potomac, Maryland, by the way.

Argersinger:That’s right!Potomac Computer Systems, or something like that. So,they have their hands in some of the most popular intellectual property in the world. Butif you look at the other parts of the business, we talka lot about their social network and their video games, butvideo and music streaming, up 47%, that business. Advertising, which they really haven’t tapped into –in fact, management has been really hesitant to show ads in the “news feeds” of WeChat users. And yet, that business is up 55%,when they haven’t even really tapped it.

But, it really is the power of that network. You have a billion users, soanything Tencent can do, any game they launch,any video streaming service they launch or new content they create,they can immediatelydistribute that seamlessly across mobile to over a billion users. So,that is an incredibly powerful competitive advantage that Tencent has builtover the last 20 years, and it’s just really starting to shine now as a public company.

Greer:Matt, I just quoted the stock, and I hear these heady numbersand all these untapped opportunities that they’rejust beginning to explore, especially with regards to China. Andthe stock is down slightly today. What gives there?

Argersinger:Well,I’ve seen this play out a little bit with a lot of these large Chinese companies lately.I think, for whatever reason — and, Tencent in particular, because it’s listed on the pink sheets in the U.S. — but, these are all platforms that we knowand hear about and we can invest in, butwe don’t really have any experience with them. And we’renot comfortable, necessarily, with the management of Tencent orJD.comorBaiduorAlibaba, just to go through the list.

There’s a big catalyst, though, coming forward, which is, the Chinese government may soon — as early as this summer — allow domestic Chinese investors to actually buy shares in these companies. Right now, they’renot allowed to invest in these foreign-listed companies,even though these are some of the biggest companies in China. It’s as if we used Amazon in the States, butit was listed in China, and we weren’t allowed to invest in it. Well,imagine that. Imagine what the valuation of Amazon would beif that was the case. That’s what Chinese investors facewith something like Tencent. I think that’s a catalyst. And it could be happening this summer, wherea lot of Chinese investors could suddenly be able to buy shares. That’sgoing to create a huge amount of demand, I think. So,that’s one of the things, I think, that’s waiting to happen before the valuation really goes up for a lot of these companies.

Gross: That’sinteresting, because as a value guy,it has barely crossed my radar. But I do own shares of Facebook,I own shares of Google. So,I am willing to place my bets there. But, Tencent, being a Chinese company, I remain wary of that kind of stuff –to my detriment, [laughs] it would appear,because they are taking it by storm, andand this Fortnite thing is a phenomenonthat I have never seen, at least in my house.

Greer: It’sincredible. I played my first game this weekend,and I couldn’t really figure out how to jump.

Gross: You can dance, too.

Greer: Yeah,I was so far from being able to dance. What I realized is,you really have to be able to jump.

Gross: In real life, you mean?

Greer: Well,in real life, it’s helpful. But in Fortnite, I kept running into the same wallover and over, and then I just got mowed down by someone.

Argersinger:Anddriving your son, I’m sure, crazy.

Greer: Oh,my son was trying to teach me, and it started out with, “This this will be exciting,” and within a minute, he was exasperated. It was the equivalent ofthe 12 o’clockflashing on the VCR. I was that guy.I was running into a wall over and over,I couldn’t jump. I mean, it’s a much more complex game —

Gross: Oh, for sure.

Greer: — than Pong.

Gross: [laughs] Pong!

Greer: Pong,you had to adjust your paddle size. And then, that progressed to Breakout. And the only thing with Breakout isyou had to keep your cool as you broke out.

Argersinger:So,you dominated those games, but when it comes to something like Fortnite —

Greer: There are all thesevariables! You have to jump, you have to move —

Gross: Build, building is the key to Fortnite.

Argersinger:Yeah, building.

Gross: If you’re a strong builder, you can win.

Greer: No.I was just running into a wall over and over.

Gross: These games,this whole genre is called battle royale games, where100 people play at a time in a game of Fortnite.

Greer: Yeah,it’s brilliant.

Gross:It’s brilliant, and don’t forget, Fortnite doesn’t cost any money unless you want to upgrade your outfit —

Greer: Skins, Ron! Not outfits, Skins! Gosh!

Gross: Sorry, skins. Right.

Greer: So insulting!

Gross: You spend money on these microtransactions, $5 and $10 at a time,that actually turns into a real business. Hundreds of millions of dollars’ worth of business. It’s fascinating.

Greer: It’s brilliant. And you can play solo, you can play it in a pair, you can play on a team. Now, they have the Marvel tie-in with Thanos. Oh my gosh, I mean, they’re just printing money.

Argersinger:AndI’m glad Ron just mentioned the model,because it really is a model thatyou saw in nascent stages ten years ago withvideo games, but 90% of the revenue for video games was still selling you the disc,it’s $50 and that’s usually the only transaction that would happen. Now, you layer inall those microtransactions. So,it ends up, gamers spend hundreds of dollars on a single titleover the course of playing the game. And I think, that’s why you look at Tencent, it hasoperating margins above 40%.

Gross: Andjust as an aside, what’s amazing is,you can’t spend money Fortnite,for example, to upgrade your weapon and give yourself an unfair advantageand buy yourself a win. It’sliterally just aesthetics. It just looks cooler. Andkids out there are still willing — not just kids, everyone is still willing to spend those $5 and $10.

Greer: So, you’re telling me kids like to look cool?

Gross: Yeah, I guess so.

Greer: Well,the one tweak I’m going to make based on my experience is, I want a seniors’ division, where 50 and over compete in their own division. Likegolf, right? Then you have a bunch of people running into walls together.

Gross: Nice.

Argersinger:I like that. I like that a lot.

Greer: Money maker. Guys,let’s close with Starbucks, which is really ramping upin China. Matt, these numbers are staggering. OnWednesday, Starbucks announcing plans to build nearly 3,000 new stores in mainland Chinaover the next few years. For those of youscoring at home,that will mean that Starbucks will have around 6,000 storesby the end of 2022. What do you think?

Argersinger:That’s right. Credit toCNBC’s Kate Rogers,who was covering this conference that Starbucks did inChina, its two-day investor conference. Theheadline is really that Starbucks reiterated once again that their business in China isalmost certainly going to eclipse their business in the U.S.in the future. There’s just no doubt about it. And that’s partly, from what you said, they’regoing to have 6,000 stores by 2022.

Right now,they have 3,300 locationsacross 141 cities inChina. They’re opening a new location –this is according to Kate –every 15 hours now in China. So,with the new numbers they’ve put out,I looked back at my own model that I’ve done of Starbucks, looking at store counts, and this is way ahead of where I thought they would be by 2022.

So,if you’re a Starbucks shareholder, I think you probably felt a little frustratedover the last several years. The stock has kind of stagnated. Overall global compshave been low single digits. And the stock has really been stuck in place. Butnow, I look at this and I say, well,Starbucks is trading for roughly 22Xforward earnings, 2% dividend yield,buying back a lot of stock, abusiness that should still be able to grow in the high single digits, sales,especially as China becomes a greater proportion of the business.I think Starbucks looks pretty compellingright now. It’s not going to be a barnstormer,but I think you can do pretty well buying Starbucks today. And if you get the shares under $50,even better.

Greer: Yeah,it was really surprising. Shares of Starbucks down over the past year, butover the past five years, uparound 80%.

Argersinger:Right. It’s still a long-term story. So,I think, if you buy Starbucks today and you look forward to what this business could look like in five years,in China and elsewhere,pretty exciting.

Greer:I confess, when I heard you say you did your model of Starbucks,I first envisioned you building a model of a Starbucks.

Gross: [laughs]A Lego model?

Argersinger:Of aStarbucks store?

Greer: Yeah! And I’m like, “That’s kind of odd.” And then I’m like, “Oh, wait, play it cool, he’s talking financial model. OK, I got it.”I was a little worried there. I’m like, “You know what? Putthe model down, just crunch the numbers.”OKguys, my favorite closing desert island question. You’reon a desert island for the next five years,and you can only hold one of these stocks that we’ve talked about: Macy’s, Tencent, or Starbucks?

Gross:Well,it’s definitely not Macy’s.

Argersinger:[laughs] I think that’s easy.

Gross: Tencent might put upbetter numbers, but I’m just not as comfortable with it. AndStarbucks is just a solid, solid company that I can put in my portfolio andgo to that desert island and not worry about it,so I’ll go Starbucks.

Greer: Notas comfortable with Tencent, is that because of the management, or the business model, or both?

Gross:I’m just not as familiar with it, it’s a little bitmore high-growth, high-flying than I’mtypically comfortable with, and you add in the Chinese piece,and that pushes it over to Starbucks.

Greer: OK. Matty?

Argersinger: I’m going to agree with Ron. The numbers that Tencent isputting up are just staggering,but I feel a little bit less comfortable about where I see the business in five years.I think the business is going to be huge, and it’s growing in all these different areas,but I want to see more of a focus on,eventually, what they can do with this huge WeChat platform.And, whether or not the Chinese government is ever going to step in and say, “Yeah, youguys are a little too influential,” especially as WeChat gets into financial transactions, which,they already have one of the biggest payment platforms. Being able to spread that across a billion users, it makes Tencentthat much more influential in China. So, if I’m going to sleep well at night and, I think, earn 10% a year I’m going Starbucks.

Greer: OK. There you have it. Matt, Ron,thanks for joining me!

Argersinger:Thanks, Mac!

Gross: Thanks, Mac!

Greer:As always, people on the show may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That’s it for this edition of Market Foolery. The show is mixed by Dan Boyd. I’m Mac Greer. Thanks for listening! We’ll see you tomorrow!

Tencent Earnings: Its Investments Are Paying Off

Investors were apprehensive going into Chinese tech giant Tencent Holdings’ (NASDAQOTH:TCEHY) financial report this week, given last quarter’s slower growth and shrinking margins. The company telegraphed its plans to ramp up strategic investments in an effort to increase its market share and drive long-term growth.

Those fears were put to rest, though, when Tencent produced results that beat expectations, showing investors that the company’s longer-term view was paying off.

3 young people looking at smartphones oblivious to each other.

Tencent obliterated expectations. Image source: Getty Images.

Tencent results: The raw numbers

Metric

Q1 2018

Q1 2017

Year-Over-Year Change

Revenue

73.5 billion RMB ($11.69 billion)

49.6 billion RMB ($7.9 billion)

48%

Operating profit

30.7 billion RMB ($4.88 billion)

19.3 billion RMB ($3 billion)

59%

Net profit

23.3 billion RMB ($3.7 billion)

14.5 billion RMB ($2.3 billion)

61%

Data source: Tencent First-Quarter 2018 Financial Release. Chart by author. Differences due to exchange rates.

What happened at Tencent this quarter?

For the just completed first quarter, Tencent reported revenue of 73.5 billion RMB (about $11.7 billion), up 48% year over year, and an 11% acceleration from last quarter. This blew past analysts’ consensus estimates of 71.04 billion RMB.Net income of 23.3 billion RMB soared 61% year over year, and 12% sequentially, also blasting past expectations of 17.5 billion RMB.

The company’s online gaming and social media businesses are booming.

Revenue from online games grew 26% year over year to 28.8 billion RMB (about $4.6 billion) from strength in mobile games, like its blockbuster title Honour of Kings, which boasts an estimated 200 million players, and newer titles like QQ Speed Mobile, similar to Mario Kart.

Tencent also said it achieved “global leadership” in the tactical tournament genre. The battle royale phenomenon, led by Fortnite and PlayerUnknown’s Battlegrounds (PUBG), has taken the world by storm. Fortnite boasts 40 million monthly active users globally across PC and console, and adoption was boosted by its recent mobile release. Tencent owns a 40% stake in Fortnite developer Epic Games and is seeking government approval to introduce that successful battle royale game in China. Tencent also developed and recently launched two games for Chinese consumers based on licensed IP of PUBG, and the company said those games achieved “breakout popularity in China.”

Social media revenue jumped 47% year over year to 18.1 billion RMB (about $2.9 billion), from growth in its streaming video and music subscriptions, as well as sales of in-game virtual items. Tencent’s WeChat (Weixin) social messaging app is ubiquitous in China, and the company said users topped 1 billion for the first time. Streaming video subscribers for Tencent Video (similar to Hulu) increased 85% compared to the prior-year quarter.

Sales of online advertising climbed 55% year over year to 10.69 billion RMB (about $1.7 billion). Advertising on social media soared 68% on an increase in feed ads, while media advertising grew 31% driven by increased ads in streaming video.

The company announced that it has increased the “maximum ad load to two advertisements per user per day” on Weixin Moments beginning in late March, which bodes well for future advertising revenue growth. Much of that growth will be seen in the coming quarter, and Tencent said its sees a “long runway for continued growth” in advertising.

Revenue contributed by the company’s “other” segment increased 111% to 15.9 billion RMB (about $2.5 billion), driven by a doubling of cloud-computing revenue and digital payments businesses.

Looking ahead

Tencent Chairman and CEO Ma Huateng (Pony Ma) had this to say about the results:

We drove adoption of our infrastructure services, seeing notable progress in areas such as mobile payment, cloud services, online financial services, and smart retail. We will continue to invest in improving our own products as well as enabling services for our partners, in order to fulfill our mission of enhancing the quality of life through Internet services.

The company doesn’t provide formal guidance, but its plan to “continue to invest” has worked out thus far for investors, and I don’t think that will change going forward.

3 Reasons Walmart's Flipkart Acquisition Is Its Most Important Yet

Walmart (NYSE:WMT) has agreed to purchase a 77% stake in India’s leading e-commerce company, Flipkart, for $16 billion. Walmart is buying out shares from existing investors, but several key companies are keeping their stakes, including Tencent (NASDAQOTH:TCEHY) and Microsoft.

Amazon (NASDAQ:AMZN) — the No. 2 e-commerce company in India — was also reportedly interested in buying a majority stake in Flipkart, but the Indian company feared regulators wouldn’t approve such a deal. Walmart, by comparison, has an extremely small presence in India — 21 stores.

Walmart’s acquisition of Flipkart is the latest and biggest in a spree of e-commerce acquisitions the company has made since it acquired Jet.com in 2016. And while Jet.com and its former CEO Marc Lore have fueled great growth in Walmart’s online sales, Flipkart could end up being more important long term. Here are three reasons why.

Walmart CEO Doug McMillon and Flipkart co-founder Binny Bansal shaking hands.

Image source: Walmart

There’s a lot at stake

The $16 billion Walmart is putting up for its majority stake in Flipkart makes it the company’s largest acquisition ever. It’s nearly five times as much as Walmart paid for all of Jet.com — $3.3 billion — and it’s much more than the company has spent over the previous two years on all of its e-commerce acquisitions combined.

In other words, Walmart has a lot riding on the continued growth of Flipkart and its ability to eventually turn a profit.

In the near term, Walmart expects to take a $0.25 to $0.30 hit on itsearnings per share (EPS) for fiscal 2018, assuming the deal closes by the end of the quarter. Next year, it expects to double that loss per share to about $0.60. So, not only is Walmart investing money upfront to acquire Flipkart, it will continue investing billions in the company as it turns a loss for the foreseeable future.

If Walmart is unable to help Flipkart grow its market share and fend off Amazon, it could have overpaid for its largest acquisition in company history.

A massive opportunity

Flipkart is the leading player in one of the largest and fastest-growing markets in the world. E-commerce in India is estimated to reach $200 billion in 2026, according to analysts at Morgan Stanley. That’s up from an estimated $38.5 billion in 2017.

It’s no wonder Amazon is investing aggressively to take share from Flipkart and fend off smaller competitors. Amazon is opening dozens of fulfillment and delivery stations throughout India. It’s selling its Prime memberships at a ridiculously low price (making it the fastest-growing market for Prime ever). And it’s gaining ground on Flipkart.

Flipkart grew its gross merchandise volume 43% year over year in the six-month period ending in September 2017. That’s faster than the overall industry, but still slower than Amazon’s growth, which came in at 67% for the same period.

Even as Amazon outpaces Flipkart, the market holds a massive opportunity for growth, and Flipkart has shown continued strength outpacing the overall market despite being the market leader.

“A key center of learning”

Walmart CEO Doug McMillon said, “India will now become a key center of learning” during the conference call with analysts following the acquisition announcement.

Walmart COO Judith McKenna pointed to Flipkart’s research in artificial intelligence, use of data across its platforms, logistics network, and burgeoning mobile payments service, PhonePe, as its key strengths. Walmart could glean operational insight from those efforts and leverage them for growth in international markets, including the U.S.

The Flipkart deal will also partner Walmart with Tencent and Microsoft, which could lend their technological expertise to e-commerce. Tencent already has a strong position in mobile payments in China with WeChat Pay, which has over 600 million users. Walmart and Flipkart are also in talks “with additional potential investors who may join the round,” according to Walmart’s press release.

Walmart seemingly wants to make Flipkart and India the place where it experiments with technology and e-commerce, and then apply what it learns to its global operations. That could very well be the most important part of this acquisition for Walmart.

Vipshop Stock Fails to Live Up to the Hype

The income statement keeps moving in different directions atVipshop Holdings (NYSE:VIPS). The Chinese online discounter of brand-name apparel posted mixed financial results after Monday’s market close. Net revenue rose 24.6% to $3.2 billion for the first quarter. This is Vipshop’s seventh consecutive quarter of decelerating top-line growth, but the revenue increase actually exceeded the 22.4% increase that analysts were targeting.

It’s another story on the bottom line, as adjusted net income declined 9% to $116 million — or $0.17 a share. Analysts were holding out for $0.18 a share. Vipshop used to routinely beat Wall Street’s profit targets, but it’s now only done that once over the past four quarters.

VIP's page showing shopper photos spelling V-IP.

Image source: Vipshop Holdings.

Shopping around

Vipshop’s client base is holding steady. The number of active customers over the trailing 12 months has risen just 2% to 56.6 million. Vipshop’s revenue growth is tied almost entirely to a 25% increase in orders and a 25% increase in revenue per customer. That’s good — and bad — as it suggests that Vipshop is more at the mercy of the repeat business of existing customers than new shoppers.

It gets worse. Vipshop shares were racing higher earlier this year — for the first time after more than doubling in three consecutive years through 2014 — after announcing a partnershipwith JD.com (NASDAQ:JD) and Tencent Holdings (NASDAQOTH:TCEHY). Vipshop rallied when the deal was announced, with JD.com and Tencent investing a combined $863 million in Vipshop. The partnership was supposed to give Vipshop more visibility on the platforms of its new larger investors, and Monday Vipshop spelled out how it’s been on JD’s app homepage since mid-March and an entry in Tencent’s WeChat wallet since early April. This should’ve been the formula to breathe new life into its slowing sales growth, but this doesn’t seem to be the case.

Vipshop’s guidance for the current quarter calls for 17% to 22% in revenue growth. Vipshop has been conservative in the past, but even the high end of this range suggests we’re eyeing an eighth consecutive quarter of decelerating growth. With a presence on JD.com and Tencent, slowing growth isn’t a good look.

Investors have already accepted that earnings growth will be a challenge in the near term. Vipshop’s earnings have declined for four straight quarters. The competitive marketplace is dictating heavy promotional activity to get noticed, and margins are getting squeezed in the process. However, slowing sales — and analysts were already perched at the high end of Vipshop’s net revenue range — nip the initial enthusiasm of the collaboration with JD.com and Tencent.

Vipshop Stock Fails to Live Up to the Hype

The income statement keeps moving in different directions atVipshop Holdings (NYSE:VIPS). The Chinese online discounter of brand-name apparel posted mixed financial results after Monday’s market close. Net revenue rose 24.6% to $3.2 billion for the first quarter. This is Vipshop’s seventh consecutive quarter of decelerating top-line growth, but the revenue increase actually exceeded the 22.4% increase that analysts were targeting.

It’s another story on the bottom line, as adjusted net income declined 9% to $116 million — or $0.17 a share. Analysts were holding out for $0.18 a share. Vipshop used to routinely beat Wall Street’s profit targets, but it’s now only done that once over the past four quarters.

VIP's page showing shopper photos spelling V-IP.

Image source: Vipshop Holdings.

Shopping around

Vipshop’s client base is holding steady. The number of active customers over the trailing 12 months has risen just 2% to 56.6 million. Vipshop’s revenue growth is tied almost entirely to a 25% increase in orders and a 25% increase in revenue per customer. That’s good — and bad — as it suggests that Vipshop is more at the mercy of the repeat business of existing customers than new shoppers.

It gets worse. Vipshop shares were racing higher earlier this year — for the first time after more than doubling in three consecutive years through 2014 — after announcing a partnershipwith JD.com (NASDAQ:JD) and Tencent Holdings (NASDAQOTH:TCEHY). Vipshop rallied when the deal was announced, with JD.com and Tencent investing a combined $863 million in Vipshop. The partnership was supposed to give Vipshop more visibility on the platforms of its new larger investors, and Monday Vipshop spelled out how it’s been on JD’s app homepage since mid-March and an entry in Tencent’s WeChat wallet since early April. This should’ve been the formula to breathe new life into its slowing sales growth, but this doesn’t seem to be the case.

Vipshop’s guidance for the current quarter calls for 17% to 22% in revenue growth. Vipshop has been conservative in the past, but even the high end of this range suggests we’re eyeing an eighth consecutive quarter of decelerating growth. With a presence on JD.com and Tencent, slowing growth isn’t a good look.

Investors have already accepted that earnings growth will be a challenge in the near term. Vipshop’s earnings have declined for four straight quarters. The competitive marketplace is dictating heavy promotional activity to get noticed, and margins are getting squeezed in the process. However, slowing sales — and analysts were already perched at the high end of Vipshop’s net revenue range — nip the initial enthusiasm of the collaboration with JD.com and Tencent.