What happened
Shares of Tencent Music Entertainment Group (NYSE:TME) fell 15% in April, according to data provided by S&P Global Market Intelligence. The dominant Chinese music streaming app’s decline followed an epic fall in March, when Archegos Capital Management, a multi-billion-dollar family office, had a huge margin call on its stock portfolio. Archegos’ lenders seized its holdings, which included Tencent Music, and sold them en masse stock after a big run-up during February and March.
In April, the company quickly became the target of a new Chinese antitrust campaign.
Image source: Getty Images.
So what
Tencent Music was originally formed through a series of acquisitions by Tencent Holdings, which consolidated leading music apps KuGou and Kuwo with its QQ Music. As a result, Tencent Music was able to achieve a dominant 75%-plus market share in Chinese music streaming in recent years.
It’s no surprise that Tencent Music would become a potential target for Chinese antitrust regulators, which began a campaign to reign in dominant tech platforms in recent months. Earlier in April, Chinese antitrust regulators slapped Alibaba Group with a $2.75 billion fine for demanding exclusive deals with certain brands on its platform.
Later in the month, Reuters reported that antitrust regulators were now turning their sights on Tencent’s sprawling internet businesses. Two people familiar with the matter said part of the focus was on Tencent Music, with a potential focus on exclusive record deals. It’s also possible regulators may break Tencent Music back up into its parts, Reuters said.
Now what
It’s never great when a company is forced to give up a dominant market share position and become more competitive, so it’s no surprise to see Tencent Music sell off on the news.
Tencent Music had long been more profitable than other streaming platforms like Spotify. That’s in part due to its higher-margin karaoke platform, but it could also be due to strong-arming labels into lower royalty fees. It’s unclear from just looking at the overall income statement.
While Tencent Music enjoys a dominant position in a growing market, it’s still trading at a somewhat high 42 times earnings, even after the recent sell-off. As such, investors will have to deal with the a lot of uncertainty until there’s more clarity from the Chinese antitrust agency.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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