Analyst upgrades aren't what they used to be -- or are they?
Shares of Chinese streaming-music company Tencent Music (NYSE:TME) got no benefit whatsoever when it was announced yesterday that investment banker JPMorgan Chase, which had helped underwrite the company's IPO in a spinoff from Tencent Holdings, was initiating coverage of the stock with a buy rating. But then a miracle happened.
A few hours later, after close of trading Thursday, HSBC, a second underwriter of Tencent Music, announced that it, too, is initiating coverage of Tencent Music stock, also with a buy rating -- and that finally did spark a rally in the shares.
Tencent Music stock closed up 10.6% today.
Why the total lack of reaction among investors to JPMorgan's endorsement, but a wild chorus of rejoicing when HSBC said exactly the same thing? (And I do mean exactly. Not only did HSBC mimic JPMorgan's buy rating, it also assigned exactly the same target price to Tencent Music shares: $16.)
Perhaps JPMorgan's buy rating simply got lost in the crowd, and HSBC's was easier to notice. New coverage was initiated on 30 separate stocks before the clock struck 10 a.m. EST yesterday morning, whereas HSBC's recommendation of Tencent was the very first one announced after close of trading, at 4:05 p.m. EST.
Or perhaps it was the fact that two different analysts agreed so exactly in their assessments of Tencent Music's chances -- both foreseeing a 23% gain in the stock's price by year end -- that finally tipped the scales in Tencent Music's favor.
Whatever the reason for investors deciding to buy, we now get to see if these two analysts were right about Tencent Music stock.
Personally, I think the odds are good they are right. Valued at 44 times earnings but also expected to grow those earnings at a barnburning 42% annualized pace over the next five years, Tencent Music stock looks fairly priced, at worst, and arguably even cheap when net cash is factored into the equation. If Tencent Music grows as expected, this stock could be a bargain.