Tencent Music Entertainment Group’s stock price has surged to a price of $7.99 today. With their 9.7% increase, TME shares outpaced both the S&P 500 and Dow Industrial composite indices by 0.0%, closing in on their 52 week high of $9.29 Over the last 12 months, Tencent Music Entertainment is up 75.4%, and has outperformed the S&P 500 by 73.0%. Now, the mid-cap Consumer Discretionary company is 13.77% below its average target price of $9.26 and has an average analyst rating of buy.
Tencent Music Entertainment's trailing 12 month price to earnings (P/E) ratio is 23.5, which is its share price divided by its trailing earnings per share (EPS) of $0.34. The company has a forward P/E ratio of 15.1 based on its forward EPS of $0.53 -- which is an estimate of future earnings provided by management. The P/E ratio tells us how much investors are willing to pay for each dollar of the company's net earnings from its sales operations. By way of comparison, the average P/E ratio of the Consumer Discretionary sector is 22.33, but a company's price can remain stable for a long time even if it is over or undervalued.
Company accountants calculate earnings by subtracting the costs of sales and overhead from its revenues. These metrics focus on the sales side of the company only -- it's important to remember that companies can have many other costs and sources of income that are independent from its core business. For example, a company may have extensive expenses such as rent and debt servicing, and on the other hand it may receive additional income from its investments and intellectual property.
So the earnings picture only shows a slice of the company's financial health. They also don’t represent actual inflows of cash, since revenues are calculated on the basis of product or service deliveries, as opposed to actual payments received. The importance of earnings is that they enable us to analyze the company’s growth and profitability over time.
Here is an overview of Tencent Music Entertainment’s operating margins, which are the percentage of net profit compared to total revenues:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 28,339,000 | 5,557,000 | 11.35 | 30.46 |
| 2021-12-31 | 31,244,000 | 6,687,000 | 8.7 | -31.92 |
| 2020-12-31 | 29,153,000 | 5,576,000 | 12.78 | -17.28 |
| 2019-12-31 | 25,434,000 | 4,744,000 | 15.45 | n/a |
- Average operating margins: 12.1 %
- Average operating margins growth rate: -7.4 %
- Coefficient of variability (the lower the better): 23.3 %
Let’s contrast the operating margins with an overview of Tencent Music Entertainment’s gross margins, which only take into account expenses directly related to producing revenue (i.e. without overhead):
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 28,339,000 | 19,566,000 | 30.96 | 2.86 |
| 2021-12-31 | 31,244,000 | 21,840,000 | 30.1 | -5.67 |
| 2020-12-31 | 29,153,000 | 19,851,000 | 31.91 | -6.42 |
| 2019-12-31 | 25,434,000 | 16,761,000 | 34.1 | n/a |
- Average gross margins: 31.8 %
- Average gross margins growth rate: -2.4 %
- Coefficient of variability (the lower the better): 5.4 %
Another metric for valuing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ wildly based on who is doing the counting. Tencent music entertainment's P/B ratio of 0.26 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock.
TME's average free cash flow over the last few years is $5.95 Billion, which represents the sum of inflows and outflows of cash from all sources, including capital expenses. This is the pool of liquidity that the company can use to reinvest in its business or pay out to its equity investors in the form of a dividend. Despite having cash on hand for this purpose, Tencent music entertainment has not offered a dividend within the last twelve months.
Since it has a an average P/E ratio, an exceptionally low P/B ratio, a steady stream of strong cash flows, and average operating margins, Tencent Music Entertainment is probably undervalued at current prices. Make sure to complement this brief quantitative review with a qualitative analysis of your own!
