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Why Tencent Might Be an Attractive Buy at Current Prices

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TME metrics

Tencent Music Entertainment (TME) was listed as an ADR (American Depository Receipt) in December 2018. The stock closed trading at $14.0 on December 12, 2018, and is currently trading at $13.20. The stock has lost over 23.0% in market value since May 2019. TME reported its first-quarter results last month with sales of $855 million and earnings of $0.11. While earnings were marginally better than Wall Street estimates, sales were also just above estimates of $850 million.

TME managed to increase sales by 39.0% year-over-year and earnings by 17.0% in the first quarter. TME stock fell despite this revenue and earnings beat. Investors could have been wary about the announcement of its CEO’s resignation and trade war fears.

TME’s core business is insulated against the trade war. Its online music streaming service generates sales via subscription fees, digital downloads, and advertisements. TME’s primary segment is the social entertainment business (known as WeSing), which accounted for 72.0% of sales in the first quarter.

WeSing is a karaoke application and also allows subscribers to purchase concert passes and gifts. TME’s music streaming business accounted for 28.0% of sales. The company’s paid users rose 27.4% YoY in the first quarter. This growth was somewhat offset by a fall in ARPU (average revenue per user) as users are opting for cheaper deals. Analysts expect TME’s sales to rise by 37.5% to $3.78 billion in fiscal 2019 and by 35.8% to $5.13 billion in 2020.

PE multiple

TME stock is currently trading at a forward PE multiple of 40.7x. In comparison, its earnings per share are estimated by analysts to rise by just 7.9% in fiscal 2019 and then rise by a massive 97.6% in fiscal 2020.

How do analysts view TME?

Out of the 12 analysts covering TME, six recommend a “buy” and six recommend a “hold.” There are no “sell” recommendations. Analysts have an average 12-month stock price target of $17.8 for TME, indicating the stock has an upside potential of 35.0% from its current price.

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