Tencent Music (NYSE: TME), holding a commanding 60% market share, is the number one music streaming service and social media platform in China. The company controls four massively popular apps: QQ Music, Kugou Music, Kuwo Music, and WeSing. Surprisingly, its main source of revenue is not in streaming music subscriptions, but rather in the social aspect of its music ecosystem, which has recently been in decline. Will this affect Tencent Music's growth and bottom line and is now the right time to invest?

The bull case for Tencent Music

Tencent Music is constantly growing, making acquisitions that expand its licenses and catalog. Its latest is Lazy Audio for $417 million, to be closed in the next few months; with this acquisition, the company gets audiobooks, Chinese comedy, podcasts, and radio shows. Other significant investments in the past were to the "big three" record label companies; Warner Music Group, Universal Music Group, and Sony Music Entertainment via its parent company, Tencent Holdings, Ltd. These investments resulted in joint labels and multi-year licensing agreements which help bolster the company's sub-licensing business and reduce its own content fees.

Tencent Music's parent company has nearly $275 billion in cash and short-term (ST) investments and considering the investments it made on its behalf, it's safe to assume that Tencent Music will be well cared for should the need arise.  Tencent Music itself has nearly $4 billion in cash and ST investments, $842 million in debt, and is profitable, with earnings-per-share (EPS) of $0.38; incidentally, its EPS has gone up 51% annually over the last three years.  The company has initiated a share buyback program over the next 12 months to the tune of $1 billion, its biggest ever.

Tencent Music's bread-and-butter is in its Social Entertainment Services division, which accounted for nearly 67% of the company's total revenue in the last quarter. With nearly 700 million monthly active users (MAUs) across its apps, users can mimic real-world fan-idol relationships by purchasing gifts or one-time payments for their favorite performers. The company's suite of apps has a flywheel effect wherein a user can register for its services and listen to music on QQ Music, sing it on WeSing and share it with friends on WeChat, compelling them to download all the apps from its ecosystem.

The bear case for Tencent Music

In fiscal 2020, Tencent Music's mobile monthly active users (MAUs) for Social Entertainment Services declined 4.3% year-over-year (YoY) and its paying users dropped by 14.3%. Analysts are concerned that the reason for this is that competing services, like the massively popular TikTok, are taking market share away from the company. As the biggest growth and revenue generator for the company, this can spell trouble should this trend continue.

The company also faced regulatory headwinds last year when Chinese antitrust authorities forced the company to lower its sub-licensing fees to rivals due to complaints of unfair markups. Additionally, regulators probed Tencent Music's deals with the 'big three' studios for over a year before suspending their examination in February of last year due to the pandemic. It still remains to be seen if they'll resume.

Should I buy Tencent Music stock today?

Yes. Unlike other streaming music companies like Spotify, Tencent Music actually makes a profit and has for the last few years. It also has the security of its parent company, which is a huge conglomerate that handles gaming, social media, and venture capital. Furthermore, with its profits and cash on hand, Tencent Music can produce its own content and become the Netflix of streaming music.

Quickfire round:

1. Who is the CEO of Tencent Music?

Mr. Kar Shun Pang.

2. What does Tencent mean?

A fusion of Chinese characters Teng and Xun, roughly translates to 'galloping fast information.'

3. How much is a subscription to Tencent Music?

As of 2018, its premium music subscription ranges from 8 Yuan to 15 Yuan ($1.20 to $2.25) per month.

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MyWallSt operates a full disclosure policy. MyWallSt staff currently holds long positions in companies mentioned above. Read our full disclosure policy here.