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Tencent (TCEHY) Stock Closes up 2.3% on Big Music and Gaming News

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Chinese tech giant Tencent (TCEHY - Free Report) made headlines Monday with news that it is preparing a US IPO of its music business, along with reports that it is expanding its international gaming presence through the launch of its own international PC marketplace platform.

Music Streaming Industry Gets Even Louder

Tencent announced on Sunday that it will sell shares of its music business, Tencent Music Entertainment (TME) on an unnamed major US stock exchange. While further details, including timing of the IPO and valuation of the business have not yet been disclosed, it is believed that it could be as big as industry competitor Spotify (SPOT - Free Report) . The company has dominated domestically, now boasting over 600 million subscribers across its QQ Music, KuGou and Kuwo applications. However, only about 15 million are paying subscribers.

This would not be the first spinoff for Tencent, which saw its e-publishing business China Literature perform very well in its Hong Kong IPO last November. On that day, it rose 86% in intraday trading to HK$102.5, which according to Reuters, made the biggest first-day IPO gain in 2017. Since then, its shares have fallen nearly 34% to HK$76.65. The company, however, has performed well, with total revenues up 60.2%. Meanwhile, its monthly paying user base expanded by 33.7% year-over-year, as of its most recent earnings report.

Tencent and Spotify agreed to swap stakes in their music businesses last December. According to the deal, both Tencent and subsidiary TME would make an undisclosed minority investment in Spotify through new shares, while Spotify would also make a similar investment in TME. TME was valued at about $12 billion at the time of investment.

Streaming revenues grew 41.1%, becoming the largest portion of global recorded music revenues Based on an April report from the International Federation of the Phonographic Industry (IFPI). As of the report’s publishing, there were 176 million paid users of streaming services.

With the industry only continuing to grow, both Tencent and Spotify are poised to make a big splash. However, with other big names like Apple (AAPL - Free Report) also throwing their weight around, they still have quite a bit of work to do.

The Battle for Gamers’ Attention is Only Beginning

The South China Morning Post reported on Monday that Tencent is currently developing a Hong Kong version of “WeGame,” the company’s PC games distribution platform. It already operates in mainland China, boasting a catalog of 220 games, including some from foreign developers. The announcement comes a month after Bellevue, Washington-based Valve Corporation announced that it will officially bring its popular “Steam” platform to China.

Similar to WeGame, Steam is a PC gaming platform that boasts more than 43 million daily active users and a catalog of over 20,000 titles. It was already available in China, however not officially, and could at any point have been blocked by the Chinese firewall that has also prevented users from accessing Facebook (FB - Free Report) , Twitter (TWTR - Free Report) , and other US services from 2009 onwards.

WeGame, the second and beefier version of Tencent Games Platform, went online in September of last year. Its latest move to develop a Hong Kong version is a move meant to begin targeting players overseas and bring more Chinese games to the global market. Tencent’s video game business is the largest in the world by revenue, and will only continue to grow. The global PC video games market is forecast to be worth $28.6 billion this year.

Tencent has multiple major investments in a long list of star-studded developers including Fortnite developer Epic Games, League of Legends developer Riot, and French publisher Ubisoft, to name a few. In the PC gaming sector alone, Tencent earned $2.1 billion in revenue according to its most recent earnings report in May. Tencent is in a unique position in which it can leverage its strategic investments and size to give Steam a run for its money.

Outlook

With a market cap of nearly $500 billion, Tencent has become a tech goliath. Shares of Tencent are down 2% in 2018 but up 45.2% in the last twelve months. While it has taken a hit on trade war concerns, the company is performing quite strongly. In its Q1 FY18 earnings report, the company saw total revenues of $11.7 billion, up an astounding 48% year-over-year. Net margins increased 4% year-over-year to 33%, a healthy indicator that the company is earning money more efficiently.

For investors who may be unaware, the company’s popular application WeChat now boasts over a billion monthly active users and serves as the heart of all communication in China. The firm’s other ventures in cloud computing, advertisement, digital content, and gaming put it in a unique position at the throne of all things tech in the country. As it continues to expand its reach internationally, it will be interesting to see how foreign companies such as Valve react to its seemingly inescapable reach.

The current macroeconomic climate, along with concerns about Chinese government regulation on local firms may leave investors hesitant to consider a firm like Tencent. Still, considering all that it is poised to do, the company is very much worth keeping an eye on moving forward.

Tencent currently sits at a Zacks Rank #3 (Hold).

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