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On Tuesday, Barclays (LON:BARC) reiterated its Overweight rating on Tencent Music Entertainment Group (NYSE:TME) stock, maintaining a price target of $16.00. The target aligns with broader analyst sentiment, as InvestingPro data shows consensus targets ranging from $13.04 to $19.17. Barclays’ analysis acknowledged that Tencent (HK:0700) Music had a modestly successful quarter, slightly surpassing revenue and average revenue per user (ARPU) expectations compared to Barclays and Bloomberg consensus. However, the firm noted a shortfall in the growth of paying subscribers, with an increase of 1.9 million users versus the expected 2.1 million. The company, now valued at $23.32 billion, has shown strong momentum with a 31% gain year-to-date.
Tencent Music’s strategy in the first quarter of 2024 involved aggressive investments in acquiring paying users, offering very low introductory prices for memberships. This strategy led to a significant addition of over 6.8 million paying users in a single quarter. Despite this growth, retention rates were low, as many customers left the platform once the promotional offers ended. According to Barclays, competitors have now adopted similar tactics, prompting Tencent Music’s management to strategically shift focus away from competing for the same low-value users. The company is now concentrating on organic growth. InvestingPro analysis indicates the company maintains strong financial health with a "GREAT" overall score, supported by robust metrics including a healthy current ratio of 2.09 and more cash than debt on its balance sheet.
Barclays highlighted that while the growth of paying users was softer this quarter, Tencent Music has the potential to adjust its strategy to attract more paying users when management believes the return on investment justifies such a move. The firm has several options available to stimulate paying user growth when deemed necessary. However, given the current trend, Barclays has revised its forecast for paying user growth in the fiscal year 2025, reducing the expected number from 8 million to 6 million.
Tencent Music’s decision to prioritize organic growth over aggressive promotional tactics appears to be a response to the broader market dynamics and the actions of its competitors. This strategic pivot is seen as a way to build a more sustainable and high-quality user base, even if it means slower growth in the short term. Barclays’ maintained rating and price target reflect confidence in the long-term value proposition of Tencent Music, despite the near-term challenges in user growth.
In other recent news, Tencent Music Entertainment Group reported its first-quarter results for 2025, showing a revenue increase of 8.7% year-over-year to RMB7.36 billion ($1.01 billion), surpassing analyst expectations of RMB7.27 billion. The company’s non-IFRS diluted earnings per ADS were RMB1.37 ($0.19), beating the forecast of RMB1.32. The growth was largely driven by a 15.9% increase in the online music services segment, with music subscription revenue rising 16.6% to RMB4.22 billion ($581 million). However, revenue from social entertainment services declined by 11.9% due to changes in live-streaming features and compliance procedures.
Additionally, Jefferies analyst Thomas Chong raised the price target for Tencent Music to $17.00, citing revenue acceleration and margin expansion expectations by 2025, while maintaining a Buy rating. Morgan Stanley (NYSE:MS) also adjusted its price target to $16.50, considering strategic investments and an updated currency exchange rate forecast, and maintained an Overweight rating. Both analysts noted Tencent Music’s strategic investments, including stakes in Spotify (NYSE:SPOT) and Universal Music Group (AS:UMG), as contributing factors to the revised valuations. These recent developments indicate a focus on growth strategies and financial performance improvements for Tencent Music.
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