Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Tencent Music Entertainment Soothes the Bulls With a Smooth Quarter

By Leo Sun - Nov 13, 2019 at 9:45AM

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

China’s online music giant continues to generate robust revenue growth and stable profits.

Tencent Music Entertainment's ( TME 9.55% ) stock recently popped after the Chinese music streaming giant posted its third-quarter numbers. Its revenue rose 31% annually to 6.51 billion yuan ($910 million), which missed expectations by $3.5 million.

However, its net income rose 6% to 1.03 billion yuan ($144 million), while its non-GAAP net income grew 8% to 1.24 billion ($173 million), or $0.11 per ADS, which beat expectations by two cents. Those results were mixed, but a deeper dive reveals a few key numbers which brought back the bulls.

A young woman listens to music on her smartphone.

Image source: Getty Images.

Its online music business is growing

TME generated 28% of its revenue from its online music business, which includes its music streaming apps (QQ Music, Kugou, and Kuwou) and digital downloads. The unit's annual growth in paid users, subscription revenue, ARPPU (average revenue per paid user), and total revenue all accelerated from the previous quarter.

Online music


QOQ growth

YOY growth

Mobile MAUs

661 million



Paid users

35.4 million



Subscription revenue

942 million




8.9 RMB ($1.27)




1.85 billion RMB ($260 million)



QOQ = Quarter-over-quarter. YOY = Year-over-year. Source: TME Q3 report.

Its growth in mobile MAUs (monthly active users) might look anemic, but it marks a significant improvement from its flat quarter-over-quarter growth last quarter. This indicates that TME isn't losing users to rival platforms like NetEase's ( NTES 3.13% ) Cloud Music.

A slight slowdown in the social entertainment unit

The remaining 72% of TME's revenue came from its social entertainment unit. That business generates most of its revenue from the WeSing karaoke platform, which lets users buy virtual gifts for their favorite performers.

A young woman sings karaoke into her smartphone.

Image source: Getty Images.

This business is TME's core growth engine, since the average social entertainment user generated roughly 14 times as much revenue as the average online music user. The unit's annual growth in mobile MAUs and paid users accelerated during the quarter, but its growth in ARPPU and total revenue decelerated slightly.

Social entertainment


QOQ growth

YOY growth

Mobile MAUs

242 million



Paid users

12.2 million




127.3 RMB ($18.18)




4.66 billion RMB ($670 million)



QOQ = Quarter-over-quarter. YOY = Year-over-year. Source: TME Q3 report.

The platform's growth in paid users and its sequential dip in ARPPU strongly suggests that WeSing is attracting more viewers, but the average viewer is spending less money on virtual gifts. This might just be a short-term blip, but it could also indicate that the platform's growth is peaking.

Stabilizing margins with steady profit growth

Unlike Spotify ( SPOT 2.80% ), which remains unprofitable due to high content licensing costs, TME is consistently profitable thanks to the growth of its higher-margin social entertainment unit and favorable licensing deals with top record labels.

However, the online music's sublicensing business, which licenses its tracks to other streaming platforms, was recently probed by Chinese antitrust regulators over allegations that it intentionally overcharged its domestic rivals.

The reduction of that higher-margin licensing revenue, along with higher licensing payments to record labels, caused its gross margin to drop 540 basis points annually to 34%. However, that still marked a 110 basis point improvement from the previous quarter.

Higher operating expenses -- led by higher marketing and R&D costs for new services -- caused TME's operating margin to fall 300 basis points annually and 20 basis points sequentially to 18.3%. Nonetheless, TME's robust revenue growth still boosted its total operating profit 12% for the quarter -- indicating that investors shouldn't fret too much over its margins.

Still a better all-around investment than Spotify

Tencent Music doesn't offer any forward guidance, but analysts expect its revenue and earnings to rise 32% and 34%, respectively, next year -- which are stellar growth rates for a stock that trades at less than 30 times forward earnings.

By comparison, Spotify is expected to post 24% revenue growth next year as its bottom line remains in the red. Therefore, it's safe to say that TME is a better all-around play on the streaming market than Spotify (which notably owns a major stake in TME).

Tencent Music didn't deliver a perfect quarter, but its strengths clearly outweigh its weaknesses. It remains the 800-pound gorilla of China's streaming music market, and it generates robust revenue growth and stable profits as its industry peers struggle to stay in the black.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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
$6.77 (9.55%) $0.59
NetEase, Inc. Stock Quote
NetEase, Inc.
$107.34 (3.13%) $3.26
Spotify Stock Quote
$238.51 (2.80%) $6.50

*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 service.

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 12/07/2021.

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

Our Most Popular Articles

Premium Investing Services

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