Tencent Hampered by Regulatory Uncertainty, Although Upside Remains

The month of August marked a difficult time for not only Chinese stocks, but for their investors as well. Chinese regulators continually took hard stances against technology firms, causing a steady multi-week decline across several sectors. For the Tencent Music Entertainment Group (TME), the crackdown came down on its splash advertisements (essentially mobile pop-ups) which had until then comprised 80-90% of its ad inventory.  (See Tencent Music Entertainment stock charts on TipRanks)

Vincent Yu reported on the shift in tone, noting the increasing downsides for shareholders of Tencent. Yu wrote that although TME’s Q2 earnings were less than stellar, the entertainment multinational holding company still brought in record numbers of paying users.  

Yu assigned a Buy rating on the stock, and lowered his price target from $25 to $18. This more conservative, yet bullish, target currently represents a potential 12-month upside of 102.47%.  

The analyst was lenient on the fact that TME’s ad growth has decelerated, as it had a difficult comparison from Q4’s triple-digit expansion. He mentioned that Tencent has laid out its roadmap toward expanding its ad business and revenue, partially through integrating audio and video commercials into its main platforms.  

Tencent’s Q2 revenue came in about 1% less than Wall Street consensus estimates. Looking ahead, Yu expects that “revenue is flat in a best case scenario” year-over-year by the end of 2021, partially due to regulatory uncertainties. These unfortunate numbers come even after the firm shifted to paid streaming music from “download to listen,” and also reaffirmed user acquisition targets.  

On TipRanks, TME has an analyst rating consensus of Moderate Buy, based on 4 Buy and 5 hold ratings, and 1 Sell rating. The average Tencent Music Entertainment price target is $14.19, suggesting a possible 12-month upside of 62%.

Disclosure: At the time of publication, Brock Ladenheim did not have a position in any of the securities mentioned in this article.

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