Is Tencent Music a Buy?
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. TME also offers live music streaming, social entertainment, and online karaoke services. With its strong market position and growing user base, many investors are wondering whether Tencent Music is a buy.
Market Overview
TME went public in December 2018, raising $1.1 billion in its initial public offering (IPO) on the New York Stock Exchange. The company’s stock price has fluctuated since then, but it has generally trended upward. As of August 2021, TME’s market capitalization is around $25 billion.
TME’s revenue comes primarily from music streaming subscriptions and digital music sales. In 2020, the company generated $4.8 billion in revenue, a 16.4% increase from the previous year. TME’s net income was $1.1 billion in 2020, up from $850 million in 2019.
Strengths
One of TME’s biggest strengths is its dominant market position in China. The company has a 76% market share in the online music streaming market, according to iResearch. This gives TME a significant advantage over its competitors, as it can leverage its large user base to negotiate better deals with music labels and attract more exclusive content.
TME’s user base is also a significant strength. With over 800 million monthly active users, the company has a massive audience that it can monetize through subscriptions, digital music sales, and advertising. TME’s user base is also growing rapidly, with a 40% increase in paying users in 2020.
Another strength of TME is its diversification. The company offers a range of services beyond music streaming, including live music streaming, social entertainment, and online karaoke. This diversification helps TME reduce its reliance on any one revenue stream and provides opportunities for cross-selling and upselling.
Weaknesses
One of TME’s biggest weaknesses is its dependence on music labels. The company must negotiate licensing deals with music labels to offer their content on its platform. These deals can be expensive, and TME’s profitability is affected by the terms of these agreements. Additionally, music labels can choose to withhold their content from TME if they are not satisfied with the terms of the deal, which could hurt the company’s user retention and revenue.
Another weakness of TME is its exposure to regulatory risks. The Chinese government has been cracking down on tech companies in recent years, and TME is not immune to this scrutiny. The company has faced regulatory challenges in the past, including a fine for anti-competitive behavior in 2018. Any further regulatory action against TME could hurt the company’s reputation and financial performance.
Opportunities
TME has several opportunities for growth. The company can continue to expand its user base by offering more exclusive content and improving its user experience. TME can also explore new revenue streams, such as merchandise sales or live event ticketing.
TME also has opportunities to expand internationally. The company has already launched its services in several Southeast Asian countries, and it could continue to expand into other markets. However, TME would face significant competition from established players like Spotify and Apple Music in these markets.
Threats
One of the biggest threats to TME is competition. The online music streaming market in China is highly competitive, with several players vying for market share. TME faces competition from established players like NetEase Cloud Music and newcomers like ByteDance’s Xiami Music.
Another threat to TME is piracy. Despite efforts to crack down on piracy, illegal music downloads and streams remain a significant problem in China. Piracy hurts TME’s revenue and makes it harder for the company to negotiate favorable licensing deals with music labels.
Conclusion
Overall, TME is a strong player in the online music streaming market in China. The company has a dominant market position, a large and growing user base, and a diversified revenue stream. However, TME faces significant competition and regulatory risks, and its profitability is dependent on licensing deals with music labels. Investors should carefully consider these factors before deciding whether TME is a buy.
