In this piece, I evaluated whether China-based entertainment stock Tencent Music Entertainment Group (TME) is a better buy than the entertainment giant Walt Disney Co. (DIS). After thoroughly evaluating these stocks, I think TME might be a better buy for the reasons discussed in this article.
Virtual reality is increasingly being adopted by the TV and radio broadcasting industry to create a potential impact on audiences. Live events such as sports and music are expected to boost the demand for VR adoption by helping audiences to connect with major events through a dynamic environment.
The media market is expected to grow at a CAGR of 7.8% until 2027.
Also, the rising penetration of digital platforms and the growing use of smart music devices are anticipated to boost the music market’s growth. These platforms are gaining popularity owing to features such as song recommendations, automatic playlist personalization, and hassle-free connectivity on apps and browsers.
The global music streaming market is expected to expand at a CAGR of 14.7% until 2030.
TME is a clear winner in terms of price performance, with 98.2% returns over the past nine months compared to DIS’ 6.2% decline. TME gained 78.2% over the past year compared to DIS’ 3.5% decline.
Here are the reasons why I think TME could perform better in the near term:
Recent Developments
During the recent quarter, TME unveiled a new initiative on Tencent Musician Platform, the “Emerging Force Program.” The program offered various artist services, including traffic support, revenue sharing, and on- and off-line performance opportunities.
Through this initiative, TME intends to increase the exposure and popularity of quality songs while amplifying artists’ influence, thereby improving the vitality of the musician ecosystem on its platform.
Moreover, in the same quarter, TME teamed up with Billboard China to hold its first original music contest, “THE ONE,” featuring a distinguished panel of singers and songwriters in both China and abroad, including Greyson Chance, Lenka, MIKA, and TIA RAY. TME’s mission is to discover emerging artists with the ability to produce high-quality original Chinese music and expand their global reach.
Conversely, the wrters’ strike continues to impact entertainment giant DIS. On May 17, 2023, DIS’s CFO Christine McCarthy said at MoffettNathanson’s Inaugural Technology, Media and Telecom conference that the entertainment giant’s content spending will hit around $30 billion this year. Still, she warned the strike could impact spending for the remainder of the fiscal year.”
Recent Financial Results
During the fiscal first quarter ended March 31, 2023, TME’s revenues increased 5.4% year-over-year to RMB7 billion ($1.02 billion). Non-IRFS net profit rose 55.8% year-over-year to RMB1.46 billion ($213 million). Also, its non-IRFS earnings per share for Class A and Class B ordinary shares came in at RMB0.45, representing an increase of 66.7% year-over-year.
On the contrary, DIS’ segment operating income decreased 11.2% year-over-year to $3.29 billion for the second quarter that ended April 1, 2023. Its linear networks revenue decreased 6.9% year-over-year to $6.63 billion. Net income came in at $1.49 billion, and earnings per share attributable to DIS came in at $0.69.
Past And Expected Financial Performance
Over the past five years, TME’s revenue grew at a 17.4% CAGR. Analysts expect TME’s revenue to rise 1.7% this year. Its EPS is expected to grow by 8.9% in the next year, 1.5% in the -to-be-reported quarter ended June 2023, and 2.7% in the current quarter.
Conversely, DIS’s revenue increased at a CAGR of 8.9% over the past five years. Its revenue is expected to increase 8.2% this year, 5.2% in the to-be-reported quarter, and 7.1% in the current quarter. However, its EPS is expected to fall 4.3% in the to-be-announced quarter.
Valuation
TME’s forward non-GAAP P/E multiple of 13.94 is lower than DIS’s 23.03. Additionally, TME’s forward EV/EBIT ratio of 13.08x is lower than DIS’s 16.49x.
Thus, TME is relatively more affordable.
Profitability
TME is more profitable, with a trailing-12-month net income margin of 14.7%, higher than DIS’ 8.56%. In addition, TME’s trailing-12-month levered FCF margin of 11.06% compares to DIS’ 6.02%.
Furthermore, TME’s trailing-12-month ROCE, ROTC, and ROTA of 8.48%, 4.55%, and 6.10% are higher than the DIS’s 4.37%, 2.95%, and 2.01%, respectively.
POWR Ratings
TME has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Conversely, DIS has an overall rating of D, translating to a Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. TME has a B grade for Sentiment, which is consistent with its favorable analysts’ expectations. However, DIS’ C grade in Sentiment is in sync with its mixed analysts’ expectations.
Among the 13 stocks in the Entertainment - Media Producers industry, TME is ranked first, while DIS is ranked #9.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum Stability, and Quality. Get all TME ratings here. Click here to view DIS ratings.
The Winner
Virtual reality and smart music devices are expected to impact audiences potentially, aiding in revenue growth. Industry players such as TME and DIS should benefit from the industry tailwinds.
However, given DIS’ relatively weak financial performance, low profitability, and elevated valuation multiples, its competitor TME emerges as a more favorable investment choice.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Entertainment - Media Producers industry here.
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TME shares were trading at $7.42 per share on Monday morning, down $0.17 (-2.24%). Year-to-date, TME has declined -10.39%, versus a 18.66% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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