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Why Tencent Music Entertainment's Stock Fell 23% In May

Anders Bylund, The Motley Fool

What happened

Shares of Tencent Music Entertainment (NYSE: TME) lost 23% of their value in May 2019, according to data from S&P Global Market Intelligence. A solid first-quarter report failed to support the stock price of the Chinese music streamer, and concurrent with the report, the company also announced it was losing a top executive. Taken together, these two events drove Tencent Music's stock more than 10% lower in a single day.

So what

In Q1, Tencent Music's sales rose 39% year over year, landing at 5.74 billion renminbi. In U.S. dollars, that's roughly $830 million at today's exchange rates. Adjusted earnings came in at $0.11 per American Depositary Share, roughly even with the year-ago result. The average analyst was expecting earnings near $0.10 per ADS on revenues of about $850 million.

A smiling young Chinese man, wearing headphones plugged into his laptop.

Image source: Getty Images.

Now what

Tencent Music is still a relatively small but rapidly growing company with plenty of runway ahead of it. That being said, the stock is behaving like a classic hypergrowth ticker -- it's priced at a nosebleed-inducing 76 times earnings, even after May's big drop, and it's prone to wild swings on the slightest of disappointments. Co-President Guomin Xie left the company for "personal reasons," and that type of language around a departure can make investors nervous. Was it cover for a more dramatic situation behind the scenes? Reading the available tea leaves has convinced my fellow Fool Rich Smith that Xie really is stepping away for his own drama-free reasons, and that investors should focus on Tencent Music's healthy growth instead. I agree wholeheartedly.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.