Since March 2021, a seemingly endless downtrend has ensued for Tencent Music Entertainment Group (TME), with shares down more than 80% since then. To summarize them in a few notable ones, the headwinds come from the following factors.
There is increased competition. Microsoft’s (MSFT) impressive landing in the online video games market, with its anticipated acquisition of Activision Blizzard (ATVI) for nearly $70 billion, is scheduled to close in 2023. This will make Microsoft the third largest giant in the video game world by revenue, after Tencent (TCEHY) and Sony (SONY).
There is the adoption of new rules in China to curb anti-competitive practices by major tech companies, such as bans on providing services below cost to eliminate competitors. This is intended to curb the growing dominance of companies like Tencent, as technologies such as facial recognition and the analysis of personal data could increasingly threaten the privacy of Chinese citizens.
Tencent and tech stocks are now somewhat unpopular, as traders turned their focus to energy and defensive stocks to take advantage of record energy prices and hedge against high uncertainty.
This unfavorable phase will end, although it is difficult to predict when this will happen. Then, Tencent should recover quickly, as the popularity of its services makes it one of the most valuable companies both in China and around the world.
The downtrend in share prices is likely to continue for some time, providing many more interesting entry points into this giant of online entertainment. As such, my view on Tencent stock is bearish for now, but I would hold my position and wait a bit before buying any more shares.
As a provider of online music and audio entertainment services, Tencent Music Entertainment Group is a leader in China. The apps the giant runs in the mainland are very popular, including QQ Music, Kugou Music, Kuwo Music, and WeSing.
The company also offers video games, social networking, and fintech and business services on its platform.
Q3 Earnings
In the third quarter, Tencent Music Entertainment beat analysts on adjusted earnings, returning $0.09 per share versus the median consensus estimate of $0.07 and growing revenue 8% year-over-year to $1.21 billion. Sales were in line with the median forecast.
The company also generated cash flows totaling $248 million, more than triple compared to the same quarter of 2020.
The Wall Street beat came despite declining mobile monthly active users and average monthly revenue per user for online music and social entertainment.
The Financial Condition
As of September 30, 2021, the company’s cash and short-term investments were $3.8 billion.
The balance sheet looks strong as the Altman Z-Score is 10.6, indicating that it is in the safe zone, while the interest coverage ratio is 34.6, indicating easy payment of interest costs on its debt.
The current ratio of 2.6 means that its current assets are more than enough to support short-term commitments.
A Great Prospect for an Extremely Valuable Company
The online entertainment market will grow strongly in the coming years. The size of the market, which was worth $183 billion at the end of 2019, should surpass $650 billion in five years, according to Allied Market Research. That is almost a 21% CAGR increase.
The Internet giant will participate in the expansion by implementing the following strategies. It will differentiate online music services from social entertainment services to adapt the business to regulatory changes while being more competitive.
Tencent will also invest in high-quality music, such as indie musicians and original music. In addition, the company will improve the platform performance by adding video-based content and expanding its long-form audio content. Tencent promises to provide users with more functions to socialize through music.
This should be enough to allow Tencent to climb positions as a valuable company both at home and abroad. This could potentially give the stock a powerful catalyst for higher valuations.
Internet giant Tencent tops the list of China’s 500 Most Valuable Private Companies in 2021, according to a ranking by Shanghai-based Hurun Research Institute. Tencent ranks fifth in the BrandZ Top 100 Most Valuable Global Brands 2021, overtaking Alibaba (BABA) in seventh place.
Wall Street’s Take
In the past three months, five Wall Street analysts have issued a 12-month price target for TME. The company has a Hold consensus rating, based on one Buy, three Holds, and one Sell rating.
The average Tencent Music Entertainment Group price target is $9.53, implying 69.9% upside potential.
Conclusion
The bear market is expected to continue, potentially creating better opportunities to add shares of this valuable global brand with strong growth prospects along the way.
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