The online music segment is a tricky space, with a handful of very big competitors going at it around the world, explains growth stock expert Mike Cintolo, editor of the industry-leading trading service Cabot Top Ten Trader.
That competition hasn’t hurt growth in the sector, but it has contained investor perception; Spotify (SPOT), for instance, has fallen flat as a stock in recent months as investors fret about the sustainability of growth with music services from Apple (AAPL) and others fighting it out.
So why is Tencent Music (TME) so strong? First, it’s based mostly in China, with a whopping 800 million monthly users, away from much of the intense competition.
Second and more important, is its business model — just 3% or so of those users pay monthly, and music-related revenue (subscriptions, advertising, etc.) bring in just one-third of total revenues.
Instead, the attraction here is WeSing, the firm’s incredibly popular karaoke app, which allows users to record and send live steams of their own performances, and of course view others recordings as well.
While much of the app is free, virtual gifts (sounds odd, but it’s a huge deal over in China) are a big growth driver, with Tencent Music taking a cut of those gifts, driving revenues higher.
Obviously, the relationship with is parent — Tencent (TCEHY) still owns more than half the firm — including its tie in to WeChat (the most popular messaging app in China), is a big help, too. Growth has been rapid, and analysts see the top line pushing ahead another 39% this year, with earnings picking up steam, too.
IPOs can be tough to handle, but so far, TME is displaying many of the characteristics you’d want to see in a potential new winner. The stock came public in early December and got hit during the market’s downtrend, but not too badly.
While it sagged earlier this month, it held its December lows, and now the buyers are showing up — TME burst out of its IPO base on many days of excellent volume last week before a quick dip today. Given the stock’s huge percentage swings, we advise keeping the position small.
