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Why Tencent Music Entertainment Group Fell 15% in April

By Billy Duberstein - Updated May 10, 2021 at 9:04AM

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After the Archegos-driven sell-off in March, Tencent Music had more bad news in April

What happened

Shares of Tencent Music Entertainment Group (TME -0.22%) fell 15% in April, according to data provided by S&P Global Market Intelligence. The dominant Chinese music streaming app's decline followed an epic fall in March, when Archegos Capital Management, a multi-billion-dollar family office, had a huge margin call on its stock portfolio. Archegos' lenders seized its holdings, which included Tencent Music, and sold them en masse stock after a big run-up during February and March.

In April, the company quickly became the target of a new Chinese antitrust campaign.

A young girl listens to big white noise cancelling headphones.

Image source: Getty Images.

So what

Tencent Music was originally formed through a series of acquisitions by Tencent Holdings, which consolidated leading music apps KuGou and Kuwo with its QQ Music. As a result, Tencent Music was able to achieve a dominant 75%-plus market share in Chinese music streaming in recent years.

It's no surprise that Tencent Music would become a potential target for Chinese antitrust regulators, which began a campaign to reign in dominant tech platforms in recent months. Earlier in April, Chinese antitrust regulators slapped Alibaba Group with a $2.75 billion fine for demanding exclusive deals with certain brands on its platform.

Later in the month, Reuters reported that antitrust regulators were now turning their sights on Tencent's sprawling internet businesses. Two people familiar with the matter said part of the focus was on Tencent Music, with a potential focus on exclusive record deals. It's also possible regulators may break Tencent Music back up into its parts, Reuters said.

Now what

It's never great when a company is forced to give up a dominant market share position and become more competitive, so it's no surprise to see Tencent Music sell off on the news.

Tencent Music had long been more profitable than other streaming platforms like Spotify. That's in part due to its higher-margin karaoke platform, but it could also be due to strong-arming labels into lower royalty fees. It's unclear from just looking at the overall income statement.

While Tencent Music enjoys a dominant position in a growing market, it's still trading at a somewhat high 42 times earnings, even after the recent sell-off. As such, investors will have to deal with the a lot of uncertainty until there's more clarity from the Chinese antitrust agency.

Billy Duberstein owns shares of Alibaba Group Holding Ltd. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Alibaba Group Holding Ltd., Spotify Technology, and Tencent Holdings. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Tencent Music Entertainment Group Stock Quote
Tencent Music Entertainment Group
TME
$4.60 (-0.22%) $0.01
Tencent Holdings Limited Stock Quote
Tencent Holdings Limited
TCEHY
$39.59 (-1.05%) $0.42
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$90.74 (1.08%) $0.97
Spotify Stock Quote
Spotify
SPOT
$114.39 (0.21%) $0.24

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