INTERNET: Tencent Moves Up Value Chain, Opens Seattle Lab

Bottom line: Tencent’s soaring market value reflects its leading position as a developer of social networking products, and its concurrent ability to monetize those products.

It seems that Internet titan Tencent (HKEx: 700) can do no wrong these days, at least based on a recent run-up in its share price. Just a couple of weeks after China’s Internet wunderkind passed US banking giant Wells Fargo (NYSE: WFC) to become the world’s 10th most valuable company, Tencent has just passed another milestone to become officially become worth more than $300 billion. (English article)

Of course all of this is just movement based on investor belief that the company’s prospects look rosy. In this case I would have to agree, though I might also argue the 10 percent rise in its share price over the last month may look a little too aggressive. At the same time, Tencent has also just announced its opening of an artificial intelligence (AI) lab in Seattle, joining Internet rival Baidu (Nasdaq: BIDU) in the race to see who can delve the fastest into an area that’s become a daily buzz word for Chinese media.

I’ve said numerous times before that Tencent is my favorite of China’s big 3 Internet companies, and it seems a growing number of people agree. The company’s founder and chief executive Pony Ma is quite savvy at developing social networking products, and the people around him are quite good at monetizing the company’s leading position in that area to earn some very healthy profits.

Last week I wrote about Tencent when it became the world’s 10th most valuable company, noting that it accomplished that feat even though its annual revenue was about a quarter that of Wells Fargo. (English article) But I also noted that Tencent is growing far faster than Wells, with its revenue rising 48 percent last year versus 3 percent growth for the US bank.

Tencent’s main business in online games is starting to slow, but the company has already laid the groundwork for the next phase in its development with its hugely popular WeChat mobile messaging system. I can personally vouch for the system’s attraction as a micropayment platform, as I now use it for nearly all my daily payments, from lunch at the corner noodles shop, to buying vegetables at my local wet market, to paying for clothing at my local Uniqlo.

I’m probably a bit extreme in my rush to get rid of a real-world wallet, but most of my friends these days also use WeChat for various payments throughout their daily life. That fact is quite remarkable, considering WeChat has made such progress in the short space of just two years. By comparison, the rival Alipay service owned by Ant Financial has taken more than a decade to reach its current stage, with Tencent rapidly encroaching on that market leading position.

New AI Lab

But Tencent is never one to sit on its laurels, as evidenced by its announcement that it’s setting up a new AI lab in Seattle. (company announcement) There’s not much more of substance to this particular announcement, which also names former Microsoft (Nasdaq: MSFT) executive Yu Dong as the lab’s new director, which would probably explain the decision to base the facility in Seattle. The announcement also says the lab will focus on development of technology for speech recognition and natural language processing.

This particular development looks remarkably similar to Baidu, which also poached a top Microsoft executive to become the company’s new president earlier this year. In that case Lu Qi also had a strong background in AI, and Baidu has taken just about every opportunity imaginable to stress its future focus will be in that area, including its recent announcement of its own AI lab in Silicon Valley. (previous post)

But unlike Baidu, whose AI focus seems to be on autonomous cars, Tencent looks focused on more practical matters involving voice recognition technology with this latest Seattle move. That plays to my earlier assertion that Tencent is very good at keeping its eye on its core strength in social networking (SNS), since such voice technology is likely to be a critical part in the next wave of SNS products, showing once again why investors like this company so much.