3 Reasons Tencent Music’s Revenue Won’t Impress

Tencent Music Entertainment (NYSE: TME) hit a new all-time high on Tuesday, only to pull back gains after posting disappointing financial results. China’s first music streaming service arrived with the kind of numbers its peers would love to generate, but it just wasn’t enough.

Revenue grew 50.5% to $ 785 million, well ahead of the global leader Spotify (NYSE: SPOT), who pushed a 30% increase in turnover during the same three months. A stock-based accounting charge turned a reported profit into a deficit, but on an adjusted basis, Tencent Music Entertainment saw its profit increase 37% to $ 133 million, or $ 0.08 per share. Tencent Music Entertainment has always been profitable given its high margin revenue mix, which has never been the case with Spotify, which just marked its first quarter with operating profit.

Tencent Music Entertainment’s report looks solid on the surface, but the title initially went down after Tuesday afternoon’s post. Let’s see why the market is not impressed.

Image source: Tencent Music Entertainment.

1. Decelerating growth can be problematic

There was a lot of gasoline in the tank when Tencent Music Entertainment went public late last year. Revenue grew 84% in the first nine months of 2018, and net income more than tripled. The explosive growth came from social entertainment services, accounting for 72% of revenue, while Tencent Music Entertainment takes advantage of online karaoke and live streaming services. While online music services account for the lion’s share of Spotify’s top results, the revenue Tencent Music Entertainment earns from user subscriptions, music sublicenses, and digital music sales is only 28% of the total. ‘activity.

It’s easy to see why nearly 51% growth in the fourth quarter would be a bummer for a dot-com speedster with 84% growth in the first nine months of the year. It’s an even harder pill to swallow as adjusted earnings have failed to keep pace with slowing revenue growth.

Check out the latest results call transcripts for the companies we cover.

2. Meeting expectations is not enough

This was Tencent Music Entertainment’s first quarterly release as a public company. Analysts pegged adjusted earnings at $ 0.08 per share, but they were aiming a little high with the consensus estimate calling for $ 786.4 million in revenue.

You can’t blame Tencent Music Entertainment that Wall Street has grown too impatient with its predictions, but the lack of prominence is problematic. Tencent Music Entertainment will now have to handle expectations with caution. It will be difficult to regain investor confidence if it fails again next time.

3. Rallying for winnings can be a problem

Tencent Music Entertainment has had volatile stock since go public at $ 13 in mid-December. It didn’t generate much initial buzz and closed as an interrupted IPO on the third day of trading. The stock began to rally as investor sentiment towards Chinese growth stocks improved, climbing 69% from its low in mid-December to all-time high on Tuesday morning.

The dynamics are great, but they also raise expectations. If the stock was still trading among tweens and approaching Wall Street expectations, as it did, the stock might have risen with a sigh of relief. Knocking on the $ 20 door Tuesday made a ho-hum report a failure.

Tencent Music Entertainment remains a dynamic and fast growing Chinese dot-com, with more than 800 million active users on its four popular platforms. It controls around 75% of the Chinese music streaming market. It generates significant niche-defying margins, given the popularity of virtual gifts and other high-end social goodies. This is one to watch despite the disappointing results report.

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

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