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Tencent Music Entertainment’s Slowing Growth Spooks the Bulls

Shares of Tencent Music Entertainment (NYSE:TME) recently stumbled after the Chinese streaming music giant posted its second-quarter numbers. The headline numbers weren’t too bad: Its revenue rose 31% annually to 5.9 billion RMB ($859 million), topping expectations by $18 million, as its adjusted net profit rose 6% to 1.1 billion RMB ($164 million), or $0.10 per ADS, beating estimates by two cents.

However, Tencent Music’s slowing growth, contracting margins, and murky expansion plans spooked the bulls. Let’s dig deeper into its second-quarter report to see if those concerns are justified.

Image source: Getty Images.

The online music business is losing momentum

Tencent Music generated 26% of its revenue from its online music streaming apps (QQ Music, Kugou, and Kuwou) and digital downloads during the quarter. However, revenue at the unit fell 3% sequentially as it lost monthly active users (MAUs), and that drop wasn’t offset by an increase in its paid subscribers and monthly average revenue per paid user (ARPPU).

QOQ = Quarter-over-quarter. YOY = Year-over-year. Source: TME Q2 report.

Tencent Music’s growth looks dismal compared to that of its closest rival, NetEase‘s (NASDAQ:NTES) Cloud Music. NetEase stated that users of its mobile app rose 50% annually to 800 million last quarter and that its subscriber base grew 135%, although it didn’t disclose an exact number.

Tencent Music is gradually converting its MAUs to paid subscribers, but its low monthly ARPPU of 8.6 RMB ($1.22) indicates that it doesn’t have much pricing power in this market. Spotify (NYSE:SPOT), which also owns a stake in Tencent Music, charges subscribers $5 to $10 per month in most markets.

On the bright side, the unit’s 32% annual growth in subscriber revenue marked an acceleration from its 26% growth in the first quarter. Tencent Music stated that it will support that growth

Article source: https://www.fool.com/investing/2019/08/14/tencent-music-entertainment-slow-growth-spooks.aspx

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