Meta Platforms’ (NASDAQ:META) preliminary agreement with the videogame company Tencent Holdings (TCEHY) marks Meta’s second round in the Chinese market after nearly 14 years, as per The Wall Street Journal. Under the agreement, Tencent would sell a cost-effective version of Meta’s virtual reality headset in China. It is worth mentioning that both companies reached an agreement following almost a year of negotiations.
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This partnership is expected to benefit both companies. Reportedly, the deal will make Tencent the sole distributor of Meta’s VR headsets in China, beginning in late 2024. For Meta, this agreement will facilitate its re-entry into this key market and boost its top-line numbers through increased device sales. This is because Meta is entitled to a larger share of revenue from device sales.
The agreement could encounter regulatory hurdles, as it’s uncertain whether Tencent needs approval from the Chinese government to sell Meta’s headset. Notably, Beijing tightened rules for the videogame industry in 2021 when it placed a limit on the amount of time spent on video gaming among minors to 3 hours per week. The move had a considerable impact on the performance of key sector players, including Tencent and NetEase (NTES).
Meta and China’s History
In 2009, Facebook (formerly Meta) was blocked in China during a crackdown on internet access following anti-government protests. Meta’s platforms, including Instagram and chat messenger WhatsApp, remain inaccessible in the country.
Despite several attempts by Meta’s CEO Mark Zuckerberg to lift the ban, including visits to court officials, the restrictions persist. Currently, Meta’s only revenue source from China is by selling ads on Facebook and Instagram to Chinese companies.
Thus, it is reasonable to conclude that the Tencent deal could be a major win for Meta. It would open another revenue source for the company in one of the key markets, particularly at a time when slowing demand for VR headsets remains a key concern for the company.
Is Meta a Buy, Sell, or Hold?
On TipRanks, the stock’s Strong Buy consensus rating is based on 36 Buys and one Hold recommendations. The average Meta stock price target of $384.62 implies an upside potential of 19.99% from the current level. Shares of the company have gained 157% year-to-date.
