Rate Of ReturnAlibaba vs Tencent Holdings
Tencent is a money-printing machine, Alibaba is a money-burning machine.
Reporting earnings on the same day, Tencent generated 56.7 billion in free cash flow in a single quarter, while Alibaba burned a net 46.6 billion for the full year. One invests in AI while making profits, the other burns all its profits and still doesn't have enough to spend.
Tencent's AI is "icing on the cake," Alibaba's AI is "a last-ditch gamble."
Tencent's AI dragged down profits by 8 percentage points; excluding that, growth was 17%—it can afford to invest and afford to lose. Alibaba's adjusted profit plummeted 56%, with non-GAAP net profit in Q4 down to just 86 million—there's no turning back now.
Tencent sells "addiction," Alibaba sells "goods."
1.43 billion people can't live without WeChat, but 1 billion people can go to Pinduoduo to buy things. Social relationship chains are the only non-transferable digital asset; e-commerce GMV is not. Douyin can steal Alibaba's users, but it can't steal Tencent's relationship chains.
Tencent's 17x PE is the market being lazy, Alibaba's 25x PE is the market being skeptical.
Tencent's profits are real, sustainable, and distributable—buying a money-printing machine with 11%+ annualized growth and 4% buybacks at 16.9x is like picking up money with your eyes closed. Buying Alibaba at 25x is buying a "promise of profit recovery"—management says it will recover, but they didn't say when.
Alibaba's problem is not valuation, it's trust.
520.8 billion in cash, Cloud +34%, AI revenue triple-digit for 11 quarters—the data looks great. But what the market is asking is: when will you stop burning money? Leverage doubled, FCF turned negative, special dividend canceled—management is telling you with their actions: we're going to keep burning.
Tencent's risk is "boredom," Alibaba's risk is "loss of control."
Tencent's biggest risk is becoming a utility company with 15% growth after its games business peaks. Alibaba's biggest risk is 480 billion in AI investment going down the drain, turning into a low-margin, heavy-asset company. The worst-case for the former is still a value stock; the worst-case for the latter could be a value trap.
Conclusion:
If you want to sleep well, buy Tencent. If you want to gamble on a double, buy Alibaba.
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