Is Tencent Music undervalued?
Tencent Music Entertainment (TME) is a leading online music platform in China, with over 800 million monthly active users. The company operates several popular music streaming services, including QQ Music, Kugou Music, and Kuwo Music. Despite its dominant market position and strong financial performance, some investors believe that Tencent Music is undervalued. In this article, we will examine the factors that contribute to this perception and evaluate whether Tencent Music is indeed undervalued.
Market Position
One of the key factors that contribute to Tencent Music’s perceived undervaluation is its dominant market position. According to a report by QuestMobile, Tencent Music’s combined market share in China’s online music market was over 70% in 2020. This gives the company a significant competitive advantage over its rivals, as it can leverage its scale to negotiate better deals with music labels and attract more users to its platform.
Financial Performance
Tencent Music’s financial performance has also been strong in recent years. In 2020, the company generated revenue of RMB 21.8 billion ($3.3 billion), an increase of 16.4% compared to the previous year. Its net profit for the year was RMB 5.9 billion ($900 million), up 11.5% from 2019. The company’s strong financial performance is driven by its diversified revenue streams, which include online music services, social entertainment services, and online karaoke.
Valuation
Despite its dominant market position and strong financial performance, Tencent Music’s valuation has been a subject of debate among investors. As of June 2021, the company’s market capitalization was around $20 billion, which some investors believe is too low given its growth prospects and market position. For comparison, Spotify, a leading music streaming platform in the global market, has a market capitalization of over $50 billion.
One reason for Tencent Music’s relatively low valuation could be the regulatory environment in China. In recent years, the Chinese government has increased its scrutiny of tech companies, particularly those with significant market power. This has led to increased regulatory risks for companies like Tencent Music, which could impact their growth prospects and profitability.
Another factor that could be contributing to Tencent Music’s undervaluation is the company’s ownership structure. Tencent Music is majority-owned by Tencent Holdings, a Chinese tech giant that also owns popular social media platforms like WeChat and QQ. Some investors may be concerned about the potential conflicts of interest that could arise from this ownership structure, particularly if Tencent Holdings were to prioritize its other businesses over Tencent Music.
Conclusion
In conclusion, while Tencent Music’s dominant market position and strong financial performance suggest that the company is undervalued, there are several factors that could be contributing to this perception. These include regulatory risks, concerns about the company’s ownership structure, and the overall valuation of the Chinese tech sector. As with any investment, it is important for investors to carefully evaluate these factors and make informed decisions based on their own risk tolerance and investment objectives.
