Key Takeaways
- Government regulation and industry changes threaten Tencent Music's innovation, strategic flexibility, and revenue growth by limiting content access and increasing compliance burdens.
- Shifting consumer preferences and rising competition are eroding user engagement and margins, making it harder to monetize and differentiate amidst evolving digital entertainment trends.
- Diversified revenue growth, enhanced subscriptions, expanding advertising, original content, and disciplined cost control are driving robust profitability and long-term earnings potential.
Catalysts
About Tencent Music Entertainment Group- Operates online music entertainment platforms that provides music streaming, online karaoke, and live streaming services in the People’s Republic of China.
- Intensifying regulatory scrutiny and the ongoing risk of government intervention in China's technology and entertainment sectors may severely restrict Tencent Music's ability to innovate, expand product lines, or secure new content and licensing deals, directly hampering revenue growth and strategic flexibility over the long term.
- The continued shift to decentralized and direct artist-to-fan platforms threatens to erode Tencent Music's negotiating power with labels and artists, potentially resulting in a loss of key exclusive content and decreased user stickiness; this would likely result in subscriber stagnation while also compressing margins due to increased royalty and content acquisition costs.
- Persistent cyber security, data privacy, and compliance demands in China could drive up operating expenses in the years ahead, while stricter regulations could undermine user trust and engagement, resulting in lower user activity and a drag on both advertising and premium subscription revenues.
- Structural industry changes, such as younger consumers gravitating toward short-form video and alternative entertainment platforms, risk reducing users' time spent on pure music streaming services; over time, this threatens to reduce average revenue per user and limit the effectiveness of new monetization models like fan communities, artist merchandise, and offline concerts, ultimately restraining top-line growth.
- Rising competition from both domestic and international players, including aggressive moves by NetEase Cloud Music, ByteDance, and global streaming giants, is likely to ignite price wars and drive up promotional and content costs, directly limiting Tencent Music's ability to sustainably expand net margins and undermining long-term earnings performance.
Tencent Music Entertainment Group Future Earnings and Revenue Growth
Assumptions
How have these above catalysts been quantified?- This narrative explores a more pessimistic perspective on Tencent Music Entertainment Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
- The bearish analysts are assuming Tencent Music Entertainment Group's revenue will grow by 6.7% annually over the next 3 years.
- The bearish analysts assume that profit margins will shrink from 33.8% today to 27.5% in 3 years time.
- The bearish analysts expect earnings to reach CN¥10.1 billion (and earnings per share of CN¥7.44) by about August 2028, down from CN¥10.2 billion today. The analysts are largely in agreement about this estimate.
- In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 28.8x on those 2028 earnings, up from 28.4x today. This future PE is lower than the current PE for the US Entertainment industry at 31.6x.
- Analysts expect the number of shares outstanding to decline by 0.9% per year for the next 3 years.
- To value all of this in today's terms, we will use a discount rate of 9.79%, as per the Simply Wall St company report.
Tencent Music Entertainment Group Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- The company continues to deliver strong year-over-year growth in both revenue and profitability, driven by expanding music subscriptions, advertising, artist merchandise, and offline performances, which suggests a resilient and diversified revenue base that may support long-term earnings growth.
- Tencent Music is successfully increasing its SVIP subscriber count and ARPPU by continuously enhancing product offerings, content ecosystem, and exclusive privileges, indicating potential for sustained improvement in subscription-based revenues and upward pressure on margins.
- Advertising revenues are accelerating due to innovative ad formats, incentive-based memberships, and traction with advertisers, which bodes well for further margin expansion and increased advertising revenue as a share of the total business.
- The company is actively investing in both original content production and international expansion, notably through collaborations with prominent labels, artists, and strategic partnerships like the Ximalaya deal, giving Tencent Music potential for scaling its user base and strengthening gross margins through greater content differentiation.
- Robust operating efficiency and disciplined cost control are enabling bottom line growth that outpaces topline expansion, as shown by declining operating expense ratios and growing net profit, which if sustained, is likely to result in improved long-term profitability and earnings per share.
Valuation
How have all the factors above been brought together to estimate a fair value?- The assumed bearish price target for Tencent Music Entertainment Group is $19.89, which represents two standard deviations below the consensus price target of $27.4. This valuation is based on what can be assumed as the expectations of Tencent Music Entertainment Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
- However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $32.71, and the most bearish reporting a price target of just $16.67.
- In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CN¥36.8 billion, earnings will come to CN¥10.1 billion, and it would be trading on a PE ratio of 28.8x, assuming you use a discount rate of 9.8%.
- Given the current share price of $25.55, the bearish analyst price target of $19.89 is 28.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
- We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.
How well do narratives help inform your perspective?
Disclaimer
AnalystLowTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystLowTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystLowTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.