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.
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.
JPMorgan Chase is an advertising partner of Motley Fool Money. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and JPMorgan Chase. The Motley Fool has a disclosure policy.