Unveiling Tencent Music Entertainment Group's Value: Is It Really Priced Right? A Comprehensive ...
Tencent Music Entertainment Group (NYSE:TME) has recently seen a daily gain of 5.23%, although it has experienced a 3-month loss of -17.36%. With an Earnings Per Share (EPS) (EPS) of 0.42, the question arises: is the stock modestly undervalued? This article aims to answer that question by providing a comprehensive valuation analysis of Tencent Music Entertainment Group. Read on to gain valuable insights into the company's financial health and profitability.
Company Introduction
Tencent Music Entertainment Group (NYSE:TME) is the leading online music service provider in China. The company was established in 2016 through the merger of three music streaming platforms: QQ Music, Kuwo Music, and Kugou Music. Tencent, the largest shareholder, holds over 50% of TME's shares and over 90% of its voting rights. Besides music streaming, TME also offers social entertainment services, such as live audio/video broadcasts and online concerts, through its platforms. It also operates an independent platform, WeSing, for online karaoke.
As of September 22, 2023, TME's stock is priced at $6.34, while its GF Value, an estimation of its fair value, is $7.28. Thus, the stock appears to be modestly undervalued.
Understanding the GF Value
The GF Value is a unique measure of a stock's intrinsic value. It is calculated based on historical trading multiples, a GuruFocus adjustment factor that considers the company's past performance and growth, and future business performance estimates. The GF Value Line provides an overview of the stock's fair trading value. If the stock price significantly deviates from the GF Value Line, it may indicate overvaluation or undervaluation, thereby influencing future returns.
According to GuruFocus' valuation method, Tencent Music Entertainment Group's stock is modestly undervalued. Therefore, the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Before investing in a company, it's crucial to assess its financial strength. Companies with poor financial health pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage can provide insights into a company's financial strength. Tencent Music Entertainment Group has a cash-to-debt ratio of 3.75, ranking it lower than 56.94% of the companies in the Interactive Media industry. However, the overall financial strength of Tencent Music Entertainment Group is strong, with a score of 8 out of 10.
Profitability and Growth
Investing in profitable companies carries less risk, especially those that have demonstrated consistent profitability over the long term. Companies with high profit margins typically offer better performance potential than those with low profit margins. Tencent Music Entertainment Group has been profitable for 7 years over the past 10 years. During the past 12 months, the company had revenues of $4.10 billion and an EPS of $0.42. Its operating margin of 16.15% is better than 75.9% of the companies in the Interactive Media industry. Overall, GuruFocus ranks Tencent Music Entertainment Group's profitability as strong.
Growth is a pivotal factor in a company's valuation. Research by GuruFocus has found that growth is closely correlated with the long-term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Tencent Music Entertainment Group is 5.1%, ranking it lower than 57.09% of the companies in the Interactive Media industry. The 3-year average EBITDA growth rate is 4.3%, ranking it lower than 56.33% of the companies in the Interactive Media industry.
ROIC vs WACC
A company's profitability can also be evaluated by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, Tencent Music Entertainment Group's ROIC was 9.34 while its WACC was 6.3.
Conclusion
In conclusion, the stock of Tencent Music Entertainment Group (NYSE:TME) is believed to be modestly undervalued. The company's financial condition is strong, and its profitability is robust. However, its growth ranks lower than 56.33% of the companies in the Interactive Media industry. To learn more about Tencent Music Entertainment Group stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
