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Augmented reality (AR) has arrived and is gaining momentum. Technology has facilitated incredible demonstrations of bringing video game elements to a live stage.
NFL spectators watching the Carolina Panthers take on the New York Jets on September 12 enjoyed a full AR display when a monstrous (holographic) panther roamed the stadium and perched on the scoreboard. The event alone showed the mighty future of AR and perhaps made investors wonder about the company or businesses behind the show. One of them is Tencent Holdings (OTC: TCEHY), which seems like a good deal for investors.
Image source: Getty Images.
Augmented reality takes the field
The Famous Group (TFG) advertising agency was responsible for the virtual panther event. The TFG platform and Epic Games’ UnrealEngine software were used to overlay a computer generated object on the real and real environment. This contrasts with the somewhat more familiar virtual reality, in which the environment is digital and contained.
With over 10 million views online, the popularity of the AR event caught the attention of TFG and drew nearly $ 60,000 in revenue for the team and sponsors. Epic Games receives a 5% commission on revenue generated by game developers and businesses using UnrealEngine, for amounts over $ 1 million (anything over $ 1 million is royalty free). Looking at the four major professional sports leagues in the United States – NFL, MLB, NHL, NBA – there are 124 teams that could put on a similar spectacle. It’s the tip of the revenue iceberg that includes corporate conferences, concerts and other mainstream events around the world.
That brings us to Tencent, which took a 40% minority stake in Epic Games in 2013 for the price of $ 300 million. Tencent is a leading technology company headquartered in China, best known for its internet, social media, gaming, cloud computing and mobile payment products and services.
Tencent achieved annual revenue of nearly $ 75 billion in 2020, a growth rate of 28% from 2019, as investors helped push the share price up by $ 49 in January 2020 to a high of $ 99 at the start of this year. What Epic Games is doing is impacting Tencent’s finances and the Panthers event shows potential for additional revenue to come.
Regulations temporarily put a lid on Tencent’s value
But all has not been rosy for Tencent recently, as government regulations in China have introduced new rules and restrictions related to antitrust, data regulation and online gaming. The massive efforts to control internet use, including time restrictions on children’s games, have led companies like Tencent to lose millions of dollars in value. Tencent’s stock has gone from $ 99 in January to $ 58 today, wiping out almost all of its 2020 earnings.
Meanwhile, in its second quarter earnings release on Aug. 18, the company said its profits rose 29% (year-over-year) to $ 6 billion, beating analysts’ estimates. by almost 25% and revenues soared 20% to $ 21 billion. The result was a quick jolt in the stock price from $ 53 to $ 67 before it slipped back down.
Tencent management, led by President Martin Lau, is taking steps to stay in compliance with the new regulations. The company suspended new user registrations for the WeChat social media platform for a week in July to ensure all regulatory requirements were met before registering new users. Lau’s public recognition and agreement with Chinese regulators on the need for more internet regulations has not helped investors, as evidenced by the resulting drop in stock prices. However, his comments should put the company in a better light with regulators and ultimately benefit Tencent in the long run.
Tencent was largely spared by the State Administration for Market Regulation, receiving only a handful of penalties. Potential fines of up to $ 1.5 billion for antitrust sanctions focused on Tencent Music Entertainment Group, but resulted in only a small fine of $ 75,000, as well as Tencent Music waiving music rights exclusive. Letting go of those rights could hurt future earnings, as investors will have more information on the release of third quarter financial data in November.
Seize an opportunity at low cost
According to a report by Grand View Research, the AR market is valued at $ 26 billion, with a projected compound growth rate of 43%, which would translate into an estimated value of $ 340 billion by 2028. Interestingly, the top companies featured do not include Tencent.
But with a $ 50 million investment in Ultraleap, which provides sensors and software for touchless gesture recognition and haptic feedback, the company is strengthening its position in the AR space. Combined with its previous investment in Epic Games and the purchase of Riot Games, Tencent should get a piece of the AR pie for years to come.
John Slusser, owner of The Famous Group, thinks this is just a glimpse of what can be done with AR technology. With more innovation, the panther can even learn new tricks.
Despite regulatory fears, analysts still have a 12-month average price target of $ 81 for Tencent stock. This represents a potential gain of 40% above the current share price. The stock can be volatile as regulations are shaken and it is possible that more penalties will be imposed. But the company continues to generate revenue at a steady pace and has improved its earnings along the way, which should push the share price higher.
Any potential fine presents a short-term risk for investors, but for those who can handle some volatility in exchange for a cheap stock, it could be an AR game that will boost your portfolio over the next decade and more. -of the.
This article represents the opinion of the author, who may disagree with the “official†recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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