Tencent Music Entertainment [TME] has been named a stock to watch in a report released earlier this month. The company's share price is up 19% year-to-date and investors will be hoping for similarly optimsitc forecasts to push the stock to new highs.
Goldman Sachs has predicted that TME will be one of the top profiteers of the streaming music market over the next decade, alongside peers Vivendi, Spotify and Sony.
"We believe Tencent Music has a unique opportunity to capture the growing demand for online music in China and leverage the massive user base on its social media platforms to drive traffic to its music services," Goldman analysts told Business Insider in June.
Only 4% of TME’s user base are currently paying for music content, according to Goldman analysts, which gives the company “significant scope to drive greater monetisation of music content over time”.
The positive comments arrived after Goldman launched a report predicting the music streaming market will be worth around $37bn by 2030. This follows a string of revised profit forecasts from big players such as Universal Media Group, Warner Music and Spotify, as well as a faster than expected adoption of paid streaming services such as Spotify and Apple Music.
A growing slice of the pie
TME, which went public on the NYSE in December, has over 800 million active monthly users, more than its US peers Spotify and Apple Music, as well as its Asian rivals NetEase Cloud Music and Alibaba’s Xiaomi Music.
So far, TME has suffered from its inability to convert these active monthly users to paying subscribers. A large part of this is down to a resistance from the Chinese public to pay for pricey streaming services. However, this attitude is now showing signs of changing as China’s government has taken steps to reduce piracy and make these services more affordable.
TME's monthly active users
In 2015, the Chinese government cracked down on pirated music outlets, which drove a higher demand for subscription music streaming. There has also been an expansion in China’s mobile networks, reducing the cost of mobile data and, ultimately, the cost of services such as TME.
As a result, iResearch predicts that the music streaming market in China is estimated to grow from $1.14bn in 2018 to $6.27bn in 2023. Furthermore, the research firm expects the number of users that will translate to paid subscribers in China to rise from 5.3% in 2018 to 8.0% by 2020, leaving TME in a great position to capitalise.
Recovering a falling share price
Renewed faith in the potential of music streaming may give TME an opportunity to retest its all-time high of $19.11 reached in March 2019. It closed June at $14.99, 27% off this level, after a tough couple of months for the company.
While TME shares have risen by 19% year-to-date, it saw a drop of nearly 30% in April and May – the announcement that its co-CEO Guomin Xie would be stepping down hit the stock particularly hard.
|PE ratio (TTM)||47.99|
|Quarterly Revenue Growth (YoY)||39.40%|
Tencent Music's share price vitals, Yahoo finance, 01/07/2019
Currently, it looks like the company is on the road to recovery from this down period. In June, shares gained 16.29% as positive outlooks for the industry were maintained.
Forward looking statements for the company also appear positive. TME has a consensus forward P/E ratio of 27.69, a significant discount on the 47.85 (TTM) the share price currently supports. In addition, its earnings are expected to rise by 7.9% in 2019, 36.6% in 2020, and 46.6% by 2024.
Market Realist has noted that out of 15 analysts tracking TME stock, eight have given it a “buy” rating, seven have given it a “hold” and none have rated the stock a “sell”.