Who's Allen Zhang And Why He May Matter Way More Than Mark Zuckerberg

| About: Tencent Holding (TCEHY)

Summary

While FB is widely seen as leading social platform, WeChat actually has a better product.

WeChat ARPU also has demonstrated enormous upside.

The key challenge is whether WeChat can profit and also expand outside of China.

Facebook's (NASDAQ:FB) most recent quarterly performance has been impressive. Quarterly revenues came in at $5.4 billion with $1.5 billion net income. More interesting (and valuable) than the financial results though are Facebook's usage stats. Monthly active users (MAU) grew 15% and reached 1.65 billion while Daily Active Users (DAU) reached 1.09 billion with a DAU/MAU ratio at an enviable 66%. Note that the DAU/MAU ratio is one of the most important metrics for product managers to track as it's an indication of how "sticky" an app is.

Click to enlarge

Here are some DAU/MAU benchmarks as reference:

Also, Facebook's ARPU (Average Revenue Per User) is worth a closer look. Note that revenue is almost entirely from advertising.

Worldwide $3.73
  • US/Canada
13.54
  • Europe
4.50
  • Asia-Pacific
1.59
Click to enlarge

Clearly, and not surprisingly, Facebook's most valuable customers are in North America where incomes and advertising rates are highest. Asia-Pacific ARPU lags far behind.

As impressive as Facebook's performance has been, Tencent's (OTCPK:TCEHY) WeChat actually has a brighter future and, I argue, this is largely due to the more compelling product vision (and execution ability) of Allen Zhang, who launched WeChat in 2011 and currently heads Tencent's recently formed WeChat Group. As seen in the chart below, WeChat has massive market share in China and still grew MAU at 29% in the most recent quarter.

Click to enlarge

For those not yet familiar with WeChat (or weixin 微信 in Chinese), it started as China's WhatsApp, a social messaging app. However, since its launch in 2011, WeChat has steadily added features and functionality to become the remote control for the lives of hundreds of millions of Chinese. For example, a WeChat user in China can (and does) book a car ride (like Uber (Private:UBER)), transfer money (like PayPal (NASDAQ:PYPL)), book plane or train tickets (like Expedia (NASDAQ:EXPE)), buy goods online (like Amazon (NASDAQ:AMZN)) and even make investments (like WealthFront) - but all without ever having to leave the WeChat app. Users can also use WeChat for booking doctor appointments, paying electricity fees or traffic fines. As of December 2015, WeChat has over a billion created accounts, 650 million monthly active users; with 70 million outside of China. Much more impressively, WeChat's DAU is approximately 570 million giving it a jaw-dropping 88% DAU/MAU ratio.

As evidenced by its DAU/MAU ratio, WeChat actually has a much stickier app that it is operating at scale with hundreds of millions of users. This is because it is the first app to truly integrate online-offline capabilities of payment, e-commerce and a host of other functions that for many tech companies in the West, including Facebook, are still a somewhat far-off vision.

One of the keys to WeChat's success is Zhang's ability to develop viral features to drive adoption and usage. A well-known example of this was the introduction of virtual red envelopes in Chinese New Year to leverage the tradition of offering monetary gifts during the biggest holiday in China. The introduction of this feature resulted in more than 200 million users linking their debit cards to their WeChat account and 32 billion virtual red envelopes being delivered this past Chinese New Year.

With respect to ARPU, WeChat is estimated to be at least $7. Furthermore, analysts at Barclays estimate that WeChat is valued at about $30 billion as a standalone business, or about $95 per user (versus the $19 billion and $45 per user that Facebook paid for WhatsApp). However, because of WeChat's do-it-all product philosophy, its ARPU still has tremendous upside. By way of reference, Amazon's ARPU is estimated to be $323 while Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is $182. It's also noteworthy that WeChat has not seriously begun selling advertising yet and its current ARPU is derived from games and other value-added services (stickers, etc... Despite a still relatively crude advertising platform, WeChat is able to charge CPMs between $6 to $21 for Moments advertising (with a minimum buy of about $30,000) with brands such as Coca-Cola (NYSE:KO) and Mercedes-Benz on board.

Zhang's product strategy already has demonstrated WeChat's ability to achieve an almost unimaginable level of user engagement. The revenue potential is also enormous as WeChat's ARPU of over $500 is not inconceivable. However, WeChat faces two key challenges to becoming the global leader in a mobile internet world: How much profit can it wring per user and can its do-it-all product philosophy be successfully launched in markets outside of China.

Profitability seems to be the easier problem to solve and WeChat is on the way to doing so (e.g. fees for certain money transfers, more sophisticated ad buying platform, etc.). The more interesting problem it faces is global expansion. If it is able to replicate its ecosystem outside of China, WeChat could easily be in the driver's seat with Allen Zhang crowned as king of the mobile world.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.