On Friday, Mizuho Securities has increased the price target for Tencent (HK:0700) Music Entertainment Group (NYSE:TME) to $15.00, up from the previous target of $13.00, while retaining a Buy rating on the stock. The firm's decision follows observations of robust growth in music subscriptions, which are expected to contribute to positive revenue trends and margin expansion in the third quarter and full year of 2024.
The firm's analysis indicates that Tencent Music's performance this quarter is surpassing consensus expectations in terms of revenue and profits, propelled by effective subscriber conversion and strong advertising sales. As a result, Mizuho has updated its revenue forecasts for the fiscal years 2025 and 2026, projecting a 1% and 2% increase, respectively. Additionally, the firm anticipates a 3% upward adjustment for EBITDA in both years.
Mizuho's analysts highlight that Tencent Music is currently trading at an attractive valuation, specifically 10 times its estimated 2026 enterprise value to EBITDA ratio, which stands in contrast to Spotify (NYSE:SPOT)'s 24 times. This valuation perspective has influenced the firm's decision to raise the price target, transitioning the valuation basis to the fiscal year 2026 estimates while maintaining a 12 times multiple.
The firm maintains a positive outlook on Tencent Music, expecting the company to continue its trajectory of revenue growth and margin expansion throughout 2024. The updated estimates and valuation rollover are reflective of the company's strong performance and potential for continued improvement in the paying ratio.
InvestingPro Insights
In line with Mizuho Securities' positive outlook on Tencent Music Entertainment Group (NYSE:TME), current InvestingPro data and tips further enrich the narrative of the company's promising financial trajectory. TME holds a market capitalization of $20.86 billion, with a P/E ratio of 30.57 as of the last twelve months ending Q4 2023. This is complemented by a PEG ratio of 0.84, suggesting that the company's earnings growth could be undervalued relative to its future growth potential.
An InvestingPro Tip highlights that Tencent Music is trading at a low P/E ratio relative to near-term earnings growth, which aligns with Mizuho's valuation analysis. Additionally, analysts have revised their earnings upwards for the upcoming period, signaling confidence in the company's financial prospects. Notably, TME's strong return of 91.14% over the last year and its current price standing at 97.95% of its 52-week high, demonstrates the stock's robust performance and investor optimism.
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