Morgan Stanley is bullish on this Chinese tech giant — giving it upside of nearly 20%

Published Mon, Feb 13 20237:27 PM EST

Chinese tech giant Tencent is ramping up its efforts to monetize its fast-growing short video function, and Morgan Stanley is bullish on that. The company is increasingly focused on Channels, the short video function within its popular superapp WeChat, as it seeks to challenge the dominance of other rival platforms, such as ByteDance's Douyin and Kuaishou Technology . "Video accounts are a key earnings growth driver for the next 2-3 years, contributing a respective 21% and 28% of incremental revenue and earnings, we estimate," Morgan Stanley's analysts, led by Gary Yu, wrote in a note earlier this month. The investment bank identified the platform as a "low hanging fruit with immediate monetization opportunities" among three key investment areas in the near term. "We believe [video accounts] will fuel Tencent's ads growth in the next 3-5 years with lucrative margins and limited incremental costs," the bank said. The bank added that the platform has "surprised the market" with its "faster-than-expected" boost and has now become "one of the key revenue drivers" for Tencent's advertising recovery. "We expect this momentum to continue and drive 17% year-on-year ads growth in 2023, outperforming industry growth of 11% year-on-year and becoming the single biggest earnings driver," the bank said. It estimates the platform will contribute 30% of Tencent's incremental operating profit into 2025. Other key growth drivers Morgan Stanley said it believes global gaming will be another key growth driver for Tencent, though it will be a "much longer-term growth story." Nevertheless, the bank sees global gaming as an "under-penetrated" market with room for growth to reaccelerate in 2023. Another longer-term growth driver is Tencent's software-as-a-service products, namely Tencent Meeting, Tencent Docs and Tencent Cloud. "We believe it will take 2-3 more years for Tencent to reach breakeven in cloud businesses and for them to become a long-term growth driver," the bank said. Morgan Stanley has raised its price target on Tencent to 450 Hong Kong dollars ($57.30) from 420 Hong Kong dollars — an implied upside of about 20% to the stock's closing price on Feb. 13. The rise in price target comes after a similarly bullish report from Goldman Sachs . "We believe Tencent continues to present favorable risk-reward to investors as it remains one of the most uniquely positioned amongst China Internet companies given its unrivaled WeChat eco-system, leadership in games and new growth drivers across video accounts, international games and [software as a service]," Goldman's analysts, led by Lincoln Kong, wrote on Jan. 31. — CNBC's Michael Bloom contributed to reporting.