Shares of Tencent Music Entertainment (TME) fell 9.2% this week and are down 63.2% since the all-time high in March. The once-high-flying Chinese music streaming company, listed on the Nasdaq, closed at $11.70 on Friday (July 16), having lost $2 billion of market value in five days.
A string of negative news has hammered Tencent Music shares. On Friday, Morgan Stanley downgraded TME to “equal-weight” and slashed its price target from $23 to $14. The move follows news that Chinese regulators are taking a tough stance on Chinese companies listed on U.S. stock exchanges. Although Tencent Music was spared from a forced sale, China’s State Administration of Market Regulation determined on Monday that the company must sever its exclusive relationships with record labels.
Tencent Music sits in a web of relationships and ownership stakes with the world’s largest music companies. It has a joint venture with Universal Music Group and an agreement to form a joint record label with Warner Music Group. It also has licensing deals with UMG, WMG, Sony Music and independent label rights group Merlin. What’s more, Tencent Holdings, which owns a majority of Tencent Music, is part of a consortium of investors that owns 20% of Universal Music Group and about 2% of WMG. There is no indication Chinese authorities view Tencent Holdings’ ownership stakes as problematic.
Tencent Music owns three of China’s top music streaming apps — QQ, Kuguo and Kuwo — and accounted for 77% of the country’s monthly active users in December 2020, according to Chinese research company QuestMobile. The company posted 15% revenue growth in 2020 and a 24% year-over-year gain in the first quarter of 2021. Its shares peaked at $23.18 on March 23, valuing the company at $51.8 billion, just shy of Spotify’s $52.6 billion market capitalization.
But Tencent Music was collateral damage in the Archego Capital Management crash in March 2021. Around the same time, Goldman Sachs downgraded TME and cut its 2022 revenue forecast by 10%. Plus, streaming companies appear to have lost some allure in recent months: Spotify’s share price is down 37.2% since March 23 and Netflix has dropped 10.6% from its 52-week high on January 20. As of Friday, the 26 analysts tracked by Refinitiv have a median price target of $21.53 — 83.8% above Friday’s closing price.
