Please ensure Javascript is enabled for purposes of website accessibility

Tencent Music Stock Gets It Right the Second Time

By Rick Munarriz - May 14, 2019 at 8:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Chinese streaming music giant beats expectations in its second earnings report as a public company.

Chinese growth stocks are facing the music these days, but Tencent Music Entertainment (TME -3.04%) is literally always facing the music. China's leading streaming music provider reported slightly better-than-expected results after Monday's market close, but a high-ranking executive stepping down is weighing on the otherwise encouraging financial results. 

Revenue rose 39% to $855 million, just ahead of the $850 million that analysts were targeting. Top-line growth is decelerating from the 84% it served up through the first nine months of last year and the 51% uptick it scored in the fourth quarter, its first earnings report as a public company. It's still a welcome top-line beat, something that investors were treated to the first time around.

The path down the income statement has been bumpy in both reports, and this time we saw operating profit and net income rise 23% and 15%, respectively. However, adjusted earnings of $0.11 a share was also just above the $0.10 a share that Wall Street pros were modeling. Tencent Music Entertainment finally got it right the second time around. 

Tencent Music Entertainment logo at the company's headquarters.

Image source: Tencent Music Entertainment.

Singing in a new key

Tencent Music Entertainment operates several of China's most popular music streaming and social karaoke sites, controlling the lion's share of the country's market. Its position is so dominant that a month ago reports surfaced that Tencent Music Entertainment was under investigation for possible antitrust violations. 

Tencent Music Entertainment's biggest business is social entertainment, accounting for 72% of its revenue. The segment is growing faster than the rest of the business, with revenue climbing 44% over the past year. The more traditional music streaming platforms grew at a still-respectable 28% clip. 

Audiences for Tencent Music Entertainment's apps aren't growing anywhere as quickly as its top line. There were 654 million mobile monthly active users across it online music services, up 4.6% over the past year. Social entertainment's mobile monthly active users inched a mere 0.4% higher. We're seeing healthy double-digit revenue growth on both fronts as Tencent Music Entertainment is excelling at turning freeloaders into premium members. The number of paying users rose 27% in online music and 13% on the social entertainment front. There's still a lot of upside there, as less than 5% of its monthly active users are currently premium accounts. 

It was a solid quarter for Tencent Music Entertainment, but the announcement on Monday night that co-president and board member Guomin Xie was resigning for personal reasons early next month initially ate into the market's enthusiasm for the stock.

Tencent Music Entertainment continues to trade above its IPO price since going public at $13 in mid-December. It was a rough time to go public, and things aren't much better now with trade tariff tensions keeping Chinese growth stocks in check. Tencent Music Entertainment remains a name that investors will want to consider when Chinese equities bounce back. It is highly profitable -- something that can't be said for many of the world's other streaming music specialists -- and it's hard to dismiss the prospects for a company that controls roughly 75% of China's streaming music market. This may be the second time in as many quarters in which the stock fades out during earnings season, but as long as it continues to grow profitably, it will eventually learn how to pump up the volume. 

Rick Munarriz owns shares of Tencent Music Entertainment Group. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Tencent Music Entertainment Group Stock Quote
Tencent Music Entertainment Group
$4.46 (-3.04%) $0.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.