Additionally, TME's 4Q18 report -- its first report as a public company -- failed to impress as it barely edged out consensus estimates while also showing a steep deceleration in growth. The ongoing trade issues, combined with the company’s slowing growth rates, helps explain why the stock is down about 15% from early April.
However, this pull-back in the stock presents a much more appealing set-up compared to the last time TME reported earnings. Heading into its Q4 report on March 19, the stock had rocketed higher by about 67% off its post-IPO lows, creating an opening for a profit-taking, sell-the-news reaction following the print. And that is exactly what happened as TME tanked by 10% the following day.
As for Q1 expectations, the Street is forecasting EPS of RMB0.69 and revenue of RMB5.8 bln, equating to yr/yr growth of 41%. While still solid, its revenue growth has been trending lower, going from 71% in 3Q18 to 51% last quarter; 41% growth is expected for this quarter.
On its own, a top-line slowdown isn't overly concerning and is normal as the company's revenue base expands. But under the surface, TME's Q4 report indicated that there could be other issues at play besides a natural deceleration due to a maturing business.
For instance, its music mobile monthly average users (MAUs) declined sequentially to 644 mln from 655 mln and were up a modest 6.8% yr/yr. Additionally, its monthly average revenue per user for online music slipped by 1.1% yr/yr to RMB8.6 and its gross margin declined to 34% from 38.8% in the year ago period.
The slide in gross margin was attributable to rising royalty and content costs, which isn't a challenge unique to TME. Fellow streaming music companies Spotify (SPOT) and Pandora face the same pressures, making it very difficult to operate a profitable business model.
On the positive side, TME is finding success in its efforts to monetize its users. In Q4, paying users for its online music business jumped by 39% to 27 mln. TME credits its new promotional subscription packages with automatic renewal as one cause to the improvement.
Also, it has expanded and broadened its content while adding new interactive features with artists and performers that enhance the user experience.
Key Takeaways: To conclude, a mix of factors is worth consideration heading into TME's Q1 report tonight, including the escalating trade dispute and the effect of if on the Chinese consumer, the company’s slowing user growth, rising content costs, and improving user monetization.
There may be some fundamental concerns, but these seem to be at least partially baked into the stock already, as it has slid lower over the past few weeks. This makes it a decent candidate for a post-earnings pop higher if it manages to outperform expectations.