NYSE: TME - Tencent Music Stock Analysis

Sven states that Tencent Music Entertainment (TME) has fallen 68% over the past year, resulting in a single-digit price-to-earnings (P/E) ratio. He highlights that cash on hand accounts for over half of its market capitalization, and the company is profitable, pays dividends, and conducts share buybacks. Sven believes TME possesses a near-monopoly in online karaoke in China, holding licensed copyrights from major global labels like Sony, Warner, and Universal, and operates within the Tencent ecosystem.

Despite recent revenue stagnation due to competition from services like TikTok, TME maintains solid liquidity with approximately $6 billion in cash, representing about half of its $12 billion market capitalization. The company also holds significant capital investments, including stakes in Spotify and Universal Music Group, valued at around $2.7 billion, plus an additional $2 billion in other financial assets. With total assets of $17 billion and equity of $12 billion, Sven suggests the stock is trading at its price-to-book value. He acknowledges that the company recently acquired podcast provider Himalaya for $2.4 billion, issuing shares in the process, which caused short-term margin pressure and consumed 50% of its historical net income. While this acquisition is expected to boost revenue and expand its ecosystem by adding new users, it signifies the cost of maintaining its industry position.

Sven addresses market concerns, including a 4.3% decline in monthly active users (MAUs) to 551 million and intense competition from ByteDance's TikTok and Douyin, which limits screen time for Chinese users. He also notes analyst downgrades from firms like Goldman and JP Morgan, though Barclays maintains a 'Long' rating. Sven dismisses typical analyst behavior, suggesting they react to current trends rather than identifying value. He believes the worst is already priced into the stock, considering its substantial cash reserves and other assets.

Sven views TME as a 'substance value' stock, noting the board's focus on a 'second growth engine' as an indication that the core business has matured. He explains that TME is strategically focusing on higher-paying, more valuable customers, which inherently leads to a loss of lower-paying users and explains the MAU decline. Sven concludes that if TME remains profitable and continues to grow its ecosystem, supported by ongoing share buybacks and dividends, it represents a good investment, particularly given the margin of safety provided by its liquid assets and strategic holdings.