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Why Tencent Music Entertainment Stock Dropped Today

Rich Smith, The Motley Fool

What happened

Barely four months after its IPO on the NYSE, Chinese streaming music specialist Tencent Music Entertainment (NYSE: TME) made its first earnings report as a public company last night.

As of 2 p.m. EDT, the stock is down 9%.

Falling stock chart superimposed over columns of blue numbers

Image source: Getty Images.

So what

Why? On the one hand, Reuters says Tencent appeared to have met analyst targets for earning 0.57 yuan "before items" per American depositary share. The company beat sales estimates for 5.3 billion yuan, posting revenue of 5.4 billion yuan instead, or roughly $785 million -- a 50.5% increase year over year.

On the other hand, including those one-time "items," Tencent actually had a loss of 875 million yuan for the fourth quarter. The company ascribed the loss -- $127 million -- to "mostly ... a one-off RMB1.52 billion (US$221 million) share-based accounting charge related to the Company's equity issuance to Warner Music Group and Sony Music Entertainment."

Fiscal full-year 2018 numbers were a bit brighter. Revenue grew 73% to $2.8 billion, and profits came in at $267 million -- and would have been closer to $488 million but for the aforementioned charge to earnings.

Now what

None of this news sounds particularly bad (well, except for the net loss in Q4). So why is Tencent stock down today?

Although sales were up a very respectable 50% in Q4, this was a slowdown from earlier in the year. Also, some analysts are pointing to a big jump in the cost of that revenue (fees paid for content and revenue-sharing costs) as reason to worry about Tencent's future. The company's cost of revenue rose more than 62% year over year, and is therefore actually growing faster than sales, depressing profit margin and making it tougher for Tencent to earn a profit.

Can Tencent reverse this trend, and earn a bigger profit this year -- then grow its profit as fast as it's growing revenue? Wall Street thinks so, and predicts Tencent will earn $0.41 per share this year, and grow that number 44% to $0.59 in 2020. But as we're seeing today, not everyone's interested in waiting around to see if they're right about that.

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Rich Smith 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.