On Tuesday, Mizuho Securities adjusted its outlook on Tencent Music Entertainment Group (NYSE:TME), citing robust financial performance and a positive future margin outlook. The firm has increased the price target for Tencent Music to $17.00, up from the previous $15.00, while reaffirming its Buy rating on the stock.
The upgrade follows Tencent Music's announcement of significant growth in core music revenue, which surpassed expectations by five percentage points.
This growth was attributed to a record increase in subscriber numbers and an exceptional performance in advertising. Additionally, a shift in the company's revenue mix has resulted in a substantial improvement in gross margins, which climbed 260 basis points sequentially to reach 40.9%, exceeding forecasts by 190 basis points.
Mizuho's optimism is further bolstered by the expectation that the factors contributing to the margin growth will persist, supporting continued margin expansion in the upcoming quarters. Tencent Music's dominant role in China's music distribution market is seen as a key driver of this trend. In light of the improved margin outlook, Mizuho has also revised its forecast for Tencent Music's FY26 EBITDA, raising the estimate by 8% to RMB 40 billion.
The new price target is based on a valuation of 12.5 times the estimated FY26 EBITDA, an increase from the previous multiple of 12 times. Despite acknowledging the intense competition within China's mega-cap internet space, Mizuho believes that Tencent Music's status as a leading entity in its specific sector offers an attractive balance of risks and rewards for investors.
InvestingPro Insights
Mizuho Securities' recent bullish stance on Tencent Music Entertainment Group (NYSE:TME) is echoed by some of the real-time metrics and InvestingPro Tips. With a market capitalization of $23.07 billion and a P/E ratio of 29.22, TME is trading at a premium relative to its near-term earnings growth. However, analysts have revised their earnings upwards for the upcoming period, indicating confidence in the company's financial trajectory. Additionally, TME's strong cash position, with more cash than debt on its balance sheet, provides financial stability and flexibility.
Investors should note the impressive returns TME has delivered, with a one-week price total return of 10.94% and a one-year price total return of 103.3%. The stock is trading near its 52-week high, at 99.46% of the peak, reflecting significant investor interest. While the RSI suggests the stock is in overbought territory, the company's dominant role in the entertainment industry and the capability of its cash flows to cover interest payments are positive indicators of its financial health.
For those considering an investment in Tencent Music, there are 16 additional InvestingPro Tips available that can provide further insights into the company's performance and potential. To explore these tips and enhance your investment strategy, visit InvestingPro and remember to use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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