Since its IPO, Tencent Music (NYSE: TME) stock has continued its upward trajectory. Investors’ bullishness on Tencent Music stock only grew after TME reported its fourth-quarter results, which were strong.
Strong Fourth-Quarter Results
TME reported Q4 revenue of $785 million, up 50.5% from last year’s Q4. TME lost $127 million in the period due to a one-time equity issuance charge of $221 million related to the company’s issuance of TME stock to Warner Music Group and Sony Music Entertainment.
For the full year, TME’s total revenue rose 72.9% to $2.76 billion. TME reported net cash provided by operating activities of $281 million. The company’s cash and cash equivalents rose by over 300%, to $2.52 billion. The IPO of Tencent Music stock added $509 million to the company’s cash total, while its operations generated $819 million of cash.
TME’s International Growth Opportunity
Funds from the IPO ofTencent Music stock will support the company’s global-growth ambitions. CEO Cussion Kar Shun Pang pointed to online music and social-entertainment services as the two growth areas for the company. Its investments in premium content, innovative products, and proprietary technology drove its recent growth. This year, it will build on that strategy while accelerating the promotion of its premium content.
Premium content can increase the company’s profit. If Tencent Music can get a higher percentage of revenue from premium content while attracting more customers, expect its earnings growth to accelerate in the quarters ahead, boosting Tencent Music stock.
TME’s investments in its partnerships are paying off. By joining forces with domestic and international music labels, Tencent Music broadens its appeal to its customers. Proprietary, in-house content that caters to users’ demands will also boost TME’s growth, further differentiating the company from its competitors and lifting Tencent Music stock.
Mobile Growth Expectations
TME reported 27 million paying users of its online services, representing growth of 39.2% year-over-year. The number of the company’s paying social-entertainment users grew by 22.9% to 10.2 million. But the total monthly average users of the company’s online-music products was 644 million, suggesting that it could monetize more of its users. And so far, TME has proved that it has the right balance of producing content in-house, partnering with others, and discovering other innovative ways to promote its products.
Investors should not ignore TME’s costs. In Q4, its cost of revenue grew 62.5% as its content fees and its revenue-sharing fees rose. The more content it produces in-house, the higher its costs will be. Fortunately, Tencent’s high-quality original content should attract more users and subscriber revenue over the long-term.
TME’s operating expenses grew 58.1% to $197 million. It also spent more on sales and marketing, as it increased its efforts on branding, its products, and its content. The company’s general and administrative spending increased after the company incurred higher employee and personnel costs. If TME can keep its staff turnover low, then the initiative should benefit the company over the long-term.
The Valuation of Tencent Music Stock
The eight analysts who cover TME stock believe the stock is trading at fair value, according to Tipranks. With analysts’ price targets on Tencent Music stock ranging from $15 – $21, TME stock could fall if investors decide to buy its competitors’ stocks instead.
Among its competitors are Sony (NYSE: SNE) and Spotify Technology SA (NYSE: SPOT). Tencent Music, like many young companies, is growing quickly, and it should be profitable over the long-term. Investors will need to weigh the current $29 billion market capitalization of Tencent Music stock against its prospects.
The number of shares of Tencent Music stock being sold short is also up, increasing from 19.4 million shares in January to 30.4 million shares on March 14, 2019.
The Bottom Line on Tencent Music Stock
Tencent Music stock’s growth outlook is are very good. Investors should add TME stock to their watch lists.
As of this writing, the author did not hold a position in any of the aforementioned securities.