On Wednesday, BofA Securities adjusted its outlook on Tencent Music Entertainment Group (NYSE:TME), reducing the price target to $15.00 from the previous $18.00, while continuing to endorse the stock with a Buy rating.
The firm's decision follows Tencent Music's second-quarter results, which were reported to be largely in line with expectations. The company has signaled a strategic shift toward focusing on average revenue per user (ARPU) growth starting in the second half of 2024.
Tencent Music, according to the firm, is poised to prioritize quality growth through the offering of premium services to its engaged users. This shift comes as the company recognizes that retaining users with a low-price strategy may not be as effective as anticipated and could potentially weaken ARPU.
The company's impressive subscriber net-add growth in the first half of 2024, surpassing 10 million compared to the previous full-year target of 12 million, provides Tencent Music with the flexibility to refine its pricing strategy and user segmentation moving forward.
The firm highlighted that there are no changes to Tencent Music's long-term goal of reaching 150 million paying users, a number which stood at 117 million as of the second quarter of 2024. The analyst from BofA Securities emphasized that improved ARPU growth is expected to contribute to higher profitability, especially as the company leverages operational efficiencies.
Tencent Music's management has expressed confidence in the company's ability to deliver sustainable quality growth. They believe that the company's strong performance in subscriber additions during the first half of the year will allow for more effective optimization of pricing strategies and user segmentation in the latter half of the year.
In summary, despite the reduction in the price target, BofA Securities maintains a positive outlook on Tencent Music Entertainment Group, underpinned by the company's strategic initiatives aimed at enhancing ARPU and driving profitability through operational leverage.
In other recent news, Tencent Music Entertainment Group's second-quarter earnings report showed a slight decline in total revenue by 1.7% to 7.16 billion yuan ($999 million).
Despite this, the company's online music business experienced a substantial increase of 27.7%, nearly offsetting the downturn in social entertainment and other services. The number of paying users for the music streaming segment also climbed 17.7% to reach 117 million.
However, the company's social entertainment segment saw a significant 42.8% decrease in revenue, largely due to regulatory crackdowns on live-streaming by the Chinese government.
Analysts from Jefferies and Citi maintained their Buy ratings on Tencent Music stock, with Jefferies setting a consistent price target of $15.40 and Citi at $18.00.
Mizuho Securities also adjusted its outlook on Tencent Music, lowering the price target to $16 from the prior target of $17, while keeping an Outperform rating on the company's stock. These are among the recent developments for Tencent Music Entertainment Group.
InvestingPro Insights
As Tencent Music Entertainment Group (NYSE:TME) adapts its strategies to enhance average revenue per user, it's worth noting some key financial metrics and insights from InvestingPro. With a market capitalization of $17.59 billion and a P/E ratio adjusted for the last twelve months as of Q1 2024 at 24.21, the company appears to be trading at a value that reflects its near-term earnings growth. The PEG ratio during the same period is under 1, at 0.98, suggesting that the stock could be valued reasonably in relation to its expected growth rates.
InvestingPro Tips highlight that Tencent Music holds more cash than debt, providing financial stability, and that seven analysts have revised their earnings upwards for the upcoming period, indicating potential optimism in the company's financial performance. Moreover, the stock has experienced significant price fluctuations, with a notable 82.41% return over the last year, yet it has taken a hit over the last week with a -16.14% price total return.
For investors seeking more detailed analysis, there are additional InvestingPro Tips available, which can be accessed for Tencent Music Entertainment Group at https://www.investing.com/pro/TME. These tips offer insights into the company's position within the entertainment industry, its profitability, and its ability to cover interest payments through cash flows, among other metrics.
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