Tencent Music Entertainment Group (TME) is an online music entertainment platform offering online karaoke, music streaming, and live streaming services in China. The company also provides an interactive online platform for performers and users to showcase their talent.
Although TME took a hit from the pandemic in the first quarter of 2020, it was able to successfully increase online subscribers and earnings year-over-year. The company has registered impressive growth in the third quarter with its online music paying users increasing 46% to reach 51.7 million.
With most concerts canceled until further notice because of the pandemic, the music industry has been pushed to adapt to virtual concerts. TME’s businesses being mainly online has fared considerably well, as lockdown restrictions have forced millions to stay at home, thereby driving up demand for online games and streaming services. Robust growth in the online music entertainment market coupled with the TME’s monetization strategies and expanded music library has helped the stock gain 37.1% year-to-date. This impressive performance and potential upside based on several other factors have helped TME earn a “Buy” rating in our proprietary rating system.
Here’s how our proprietary POWR Ratings system evaluates TME:
Trade Grade: A
TME is currently trading above its 50-day and 200-day moving averages of $15 and $13.54, respectively, indicating that the stock is in an uptrend. The stock gained 11.81% over the past three months, reflecting short-term bullishness.
TME’s revenue increased 16.4% year-over-year to $1.12 billion in the third quarter ended September 2020. This impressive revenue performance was primarily driven by strong growth in music subscription and advertising revenues. Gross profit rose 11.2% from the year-ago value to $362 million, while net profit increased 10.3% year-over-year to $167 million. EPS rose 9.7% from the prior-year quarter to $0.34.
TME recently announced that it has entered into a digital licensing agreement with Peermusic to promote and distribute Peermusic’s catalog in China. TME also renewed its multi-year licensing and agreement with Merlin. These key collaborations will enable TME to leverage its unique market experience across China.
Buy & Hold Grade: B
In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade takes into account, TME is well-positioned. The stock is currently trading just 9.8% below its 52-week high of $17.97, which it hit on July 9th.
The company’s net revenue grew at a CAGR of 48.3% over the past three years, while net income increased at a CAGR of 64.2% over this period. Also, EPS increased at a CAGR of 52.1% over the past three years. This can be attributed to the innovative developments, steady membership growth, and rapid expansions made by the company.
Overall POWR Rating: B (Buy)
TME is rated a “Buy” due to its short-and-long-term bullishness, solid price momentum, and underlying industry strength, as determined by the components of our POWR Ratings system.
Bottom Line
TME is well-positioned to soar in the upcoming months despite gaining 37.1% so far this year. The company has consistently reported an increase in its online music paying users year-over-year. It is growing at a fast pace and has the potential to grow even further based on its continued business growth, favorable earnings, revenue outlook, and strong financials. TME has a “B” in Peer Grade and Industry Rank in our proprietary POWR Ratings system.
The consensus EPS estimate of $0.13 for the quarter ending December 2020 indicates an 18.2% improvement year-over-year. Moreover, TME has an impressive earnings surprise history, with the company beating consensus EPS estimates in each of the trailing four quarters. The consensus revenue estimate of $1.28 billion for the current quarter indicates a 22.4% increase from the same period last year.
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TME shares were trading at $16.09 per share on Wednesday afternoon, down $0.12 (-0.74%). Year-to-date, TME has gained 37.05%, versus a 13.12% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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