Why Tencent Music Is Delaying Its IPO

Recent market volatility could be rattling investors, particularly those who are interested in risky assets -- like IPOs. That's why Tencent (TCEHY 1.91%) Music has decided to wait a few weeks before its debut. Prospective investors won't have to wait too long, though, as the company is still expected to go public in November.  In this episode of Industry Focus, Dylan Lewis is joined by Motley Fool contributor Evan Niu.

A full transcript follows the video.

This video was recorded on Oct. 12, 2018.

Dylan Lewis: Now, of course, with all those strengths, there were some concerns about market volatility recently. We've had some pretty big sell offs, particularly in the tech space. This was an IPO that was slated to happen at some point in the next few weeks, and it seemed like the book building was in process pretty much. Recent news indicates that that's going to be delayed a bit.

Evan Niu: Right. The markets have been pretty choppy the past couple of weeks, particularly with the massive sell-off that you mentioned this week that wiped off three or four months of gains in the major indices. And, yeah, tech took it pretty hard, especially. But there's been some concerns about rising interest rates, etc. So now, Tencent reportedly wants to wait a little bit longer to go public, at least until November, even though it already filed its F-1 registration statement at the beginning of October. It was previously expected to do a roadshow as early as next week, and they'd go public by the end of the month.

But if you think about it, it makes sense. This was going to be one of the biggest IPOs of 2018, valuing the company somewhere between $25-30 billion. That's a pretty huge valuation, especially for a Chinese company going public in the U.S. Besides, that deal could be a risk, specifically as it relates to the IPO pricing. IPOs are priced based in part on investor demand. If all this recent volatility has dampened the market's appetite for risky stocks, and all IPOs are fundamentally very risky, then you can see how they'd be a little bit worried that if there's not enough demand, pricing could get hurt, and that ruins your positive headlines and big presence in celebration of this huge deal.

Lewis: Yeah, it is not unprecedented for a big IPO to be delayed. This is something we've seen in the past before. To your point earlier about this being a pretty appealing offering, I'm with you. I think this is a very interesting stock to watch, and certainly a company that I am interested in.

You look at that valuation range they were targeting, $25-30 billion, that puts them at something in the neighborhood of 10X sales, give or take, if they continue on the run rate that they've been on for the first half of 2018. And they're already profitable. The path to long-term profitability, the path to them being a successful, sustainable business, is already there. It's not something that you have to bet on. And it seems like there's still a lot of growth built into this business.

Niu: Yeah. I'm definitely interested. I'm not sure what I'm going to do quite yet. But it actually makes me very curious about Twitch. Amazon bought Twitch several years ago for about $1 billion before they really had a lot of these monetization strategies in place. I'm very curious how big the Twitch business has grown for Amazon. Amazon doesn't really disclose anything about Twitch. When you see the success of Tencent Music, which, as we've mentioned, is this hybrid model between Twitch and Spotify, with the vast majority of the money coming from the live streaming side, it makes you wonder about how the Twitch business is going for Amazon, too.

Lewis: Yeah. We might actually have to do a show on HUYA down the road. It's kind of considered the Twitch of China. That is a comp for Twitch and maybe a little bit of an insight into what's going on on the books there. I guess that will be our next ____ of China show, Evan.

Niu: [laughs] There's no shortage of ____ of China.