The entertainment industry is evolving with changing consumer preferences. Despite macroeconomic challenges, the sector’s growth prospects are promising, thanks to the proliferation of digital technology and the surging demand for digital entertainment.
Hence, I think quality entertainment stock Tencent Music Entertainment Group (TME) could be an ideal buy. However, I think it could be wise to wait for a better entry point in Sony Group Corporation (SONY), considering its weak fundamentals.
While the entertainment business faced challenges in recent years, there is a growing recognition of the factors influencing the industry's trajectory. This awareness is empowering entertainment businesses to navigate the changing landscape more effectively and capitalize on emerging opportunities.
OTT media services have emerged as a major disruptor, revolutionizing the industry and offering new avenues for content creators and distributors to thrive. The global entertainment and media market is expected to expand at a CAGR of 6.3% to reach $3.36 trillion by 2027.
Moreover, streaming media is on the path to becoming fundamental to the entertainment and media landscape currently. Furthermore, reality and live content continue to grow, facilitated by on-demand services and social media platforms.
However, with the cost of living continuing to rise, many consumers are trying to cut back on spending. The impact of this reduced spending could result in consumers canceling some subscription services to save money which would impact the entertainment industry.
Stock to Buy:
Tencent Music Entertainment Group (TME)
Based in Shenzhen, China, TME operates online music entertainment platforms to provide music streaming, online karaoke, and live streaming services in the People's Republic of China.
Its trailing-12-month EBIT margin of 14.27% is 69.3% higher than the 8.43% industry average. Its trailing-12-month net income margin of 14.69% is 422.6% higher than the 2.81% industry average.
TME’s total revenue increased 5.4% year-over-year to RMB2.60 billion ($368 million) in the fiscal first quarter, which ended March 31, 2023. Net profit attributable to equity holders of the company increased 88.5% year-over-year to RMB1.15 billion ($163 million) and its earnings per share for Class A and Class B ordinary shares rose 100% year-over-year to RMB0.36.
Analysts expect TME’s revenue for the fiscal second quarter ending June 2023 to increase 3.4% year-over-year to $1.05 billion. The company’s EPS for the same quarter is expected to increase 51.7% year-over-year to $0.14. Additionally, it has topped consensus EPS and revenue estimates in each of the trailing four quarters, which is impressive.
The stock has gained 82.3% over the past year to close the last trading session at $7.40.
TME’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
TME also has a B grade for Sentiment. It is ranked first out of 14 stocks in the Entertainment - Media Producers industry.
To access additional ratings for TME’s Value, Stability, Growth, Quality, and Momentum, click here.
Stock to Hold:
Sony Group Corporation (SONY)
Headquartered in Tokyo, Japan, SONY designs, develops, produces, and sells electronic equipment, instruments, and devices for the consumer, professional, and industrial markets in Japan, the United States, Europe, China, the Asia-Pacific, and internationally.
On May 18, 2023, SONY’s division Sony Music Masterworks, announced a majority investment in Barcelona-based Proactiv Entertainment, a leading producer of live music and experiential events around the world.
On May 8, 2023, SONY announced two new wireless speakers, the SRS-XV800 and the SRS-XB100. The new SRS-XV800 speaker is built to party with loud and clear sound. Whether hosting an epic party or enjoying a movie or TV show, this speaker provides a powerful, room-filling sound. The new SRS-XB100 is a small wireless speaker that packs a powerful, clear sound with incredible portability.
By expanding the product lineup with these new wireless speakers, SONY demonstrates its commitment to meeting diverse consumer demands and staying competitive in the audio market.
While SONY’s trailing-12-month gross profit margin of 27.25% is 22.7% lower than the 35.24% industry average, its trailing-12-month net income margin of 8.12% is 87.4% higher than the 4.33% industry average.
SONY’s total sales and financial services revenue increased 29.5% year-over-year to yen3.06 trillion ($21.82 billion) in the fiscal fourth quarter that ended March 31, 2023. Its net income per share attributable to SONY’s stockholders rose 16.4% year-over-year to Yen103.53. Yet, its total costs and expenses increased 38.1% year-over-year to yen2.94 trillion ($20.95 billion).
SONY’s revenue is expected to decline marginally year-over-year to $17.22 billion for the fiscal first quarter ending June 2023. Also, its EPS is expected to decline 22.8% year-over-year to $1.02 in the same quarter.
The stock has gained 25.8% year-to-date to close the last trading session at $95.98. However, the stock declined marginally intraday.
The stock has an overall C rating, equating to a Hold in our proprietary rating system.
SONY also has a C grade for Stability, Quality, and Value. It is ranked #6 in the same industry.
Click here to see the additional POWR Ratings for SONY (Sentiment, Momentum, and Growth).
What To Do Next?
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TME shares were trading at $7.15 per share on Tuesday morning, down $0.25 (-3.38%). Year-to-date, TME has declined -13.65%, versus a 10.50% 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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