Why Tencent Music Entertainment Stock Withered on Wednesday
Key Points
For the second day in a row, analysts updated their takes on the company.
These adjustments were generally not positive.
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The fallout from a weaker-than-expected earnings report published by Tencent Music Entertainment (NYSE: TME) continued on Wednesday. For the second day in a row, the China-based company was hit with analyst price target cuts, as well as two recommendation downgrades. This pushed the stock down by over 9%.
Earnings fallout
One of the downgrades came from Benchmark's Fawne Jiang, who lowered her rating on Tencent Music to hold from the previous buy. No price target was provided.
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According to reports, Jiang had been bullish on Tencent Music, chiefly because of its impressive growth in the online music market. This provided a foundation for high-margin subscription revenue from users eager to consumer the content.
The pundit wrote that while fourth-quarter results -- published before market open Tuesday -- were strong, the immediate future looks more murky. She expressed concern that rising competition will threaten growth in those ever-important subscriptions. Jiang also sees threats in new ways of creating and consuming content, exacerbated by the eager take-up of artificial intelligence (AI).
Several of Jiang's peers also became less bullish on Tencent Music, lowering their price targets for the stock. Goldman Sachs analyst Lincoln Kong cut his target to $17.60 per share from $20, while maintaining his buy recommendation. Alex Yao from JPMorgan Chase unit JPMorgan chopped his down to $12 from $30, yet kept his neutral rating intact.
Unimpressed users?
Yes, Tencent Music is still posting double-digit growth in key metrics (like revenue), but its audience is lately going in the opposite direction -- its earnings report revealed that the company's monthly average user (MAU) count declined by 5%.
Such a metric is crucial to any company with a heavy social media dimension; any sign that the user base is eroding understandably raises investor concerns. While Tencent Music is still a viable business, I'd be quite worried about that MAU slide, and eager to know how management intends to reverse it.
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