Chinese music streaming company Tencent Music Entertainment (TME) was minding its own business in March – posting strong results in 2020 and announcing a partnership with Warner Music Group – when it was caught off guard by one of the weirdest financial stories of 2021.
Out of nowhere, TME shares fell 29% from $32.25 on March 23 to $22.84 the next day. On Tuesday (April 20), when TME shares closed at $16.99, they were down 47.3% from March 23. Press release, also on March 23, Tencent Music reported net profit — yes, profit in a business that has little — of $641.4 million on revenue of $4.5 billion in 2020, up 14 .3% from 2019. Even though Tencent Music is arguably worth the same as it was on March 23 – $51.8 billion, just below Spotify’s enterprise value of $52.6 billion. dollars at the time – and the global streaming market is booming, its share price has yet to recover.
So what went wrong? Tencent Music’s margins declined slightly in 2021, from 34.1% to 31.9%, which was likely enough to discourage a few investors. But the sharp drop in TME’s share price is mainly related to the fall of Archego Capital Management, which was crushed by its risky investment style and a perfect storm of intertwined factors.
ViacomCBS became the center of the story after seeking to raise $3 billion through a public offering to take advantage of its share price, which rose from $12 to over $100 the previous year. News of the offer, which arrived on March 22, sent shares to $90 the next day. When the offer was priced at just $85 per share and some influential analysts downgraded the stock, a sell-off caused ViacomCBS’s stock price to plummet 52% over the next four days. Tencent Music quickly became collateral damage.
The drop in ViacomCBS’s share price led to margin calls – requirements to put more money in a margin account when its value falls – which Archegos could not meet, forcing Goldman Sachs, Morgan Stanley and other banks to quickly liquidate $20 billion worth of Archegos stock to cover their losses. Unfortunately for Tencent Music, Archegos was a major shareholder in TME, and banks flooded the market with TME shares on March 24. Goldman Sachs alone liquidated $6.6 billion from three Chinese Archegos portfolio companies – Tencent Music, Baidu and Vipshop Holdings – in large block trades, according to Bloomberg News, and another $2 billion in April, CNBC reported.
Tencent Music’s status as a Chinese music streaming service hasn’t helped its shares rebound, despite efforts to right the ship. After the March 24 plunge, TME announced on March 28 that it would repurchase up to $1 billion of its shares – a move that would show confidence and help stabilize its price. (Vipshop and GSX Techedu also announced buyout plans that day.) Tencent Music could benefit long-term from buying its shares at a discount, but the announcement sent its stock price moving.
The Archegos collapse was “the same old song and dance”, to quote one Aerosmith classic, for investment firms loaded with dangerous financial instruments. In this case, Archegos used derivatives called “total return swaps” which allow the investor to pay a commission to the banks in exchange for the return of a stock or bond without owning it. (The term “swaps” entered common lexicon after Wall Street banks’ excessive use of “credit default swaps” contributed to the 2008 housing crisis that led to a global recession.) Archegos is “the best example of parallel trading”. Charles Geisst, a Wall Street historian, Recount the New York Times, noting that the company is “indicative of the loose regulatory environment of recent years.”
Financial analysts whose job it is to assess TME’s stock price are unaffected by dour investor sentiment. Of the 23 analysts who follow TME, six have “buy” recommendations and 17 have either “outperform” ratings (a signal to give TME additional weight in a portfolio) or “hold” ratings, according to Refinitiv. Analysts’ median target price is $29.42, 65% above Monday’s close. Even the lower estimate of $20.04, according to Refinitiv, is more than $3 higher than Tuesday’s closing price.
TME’s slowdown could be a correction in investor enthusiasm for streaming companies in general. Shares of Spotify had been skyrocketing since 2020 and hit $365.99 on February 19, giving the company a market capitalization of $69.8 billion. But its share price quickly fell to $250.38 on March 29, wiping $22.1 billion off Spotify’s market value, before rising to $292.02 on April 16. Additionally, on Tuesday, Netflix reported disappointing first-quarter results and reported a slowdown in subscriber additions, sending shares down 10.5% in after-hours trading – 17.2% below its 2021 peak.
It may be a case of vaccine blues; stocks that were flying high because the pandemic pushed consumers to streaming media moved closer to Earth.
Other stocks hit by the Archegos implosion are also taking a prolonged drop. Baidu is 20.2% below its March 23 closing price and remains 0.3% below its March 26 closing price. Vipshop lost 31.6% of its value the week of the sale and has fallen another 12.9% since then. ViacomCBS closed Tuesday at $37.92, with a lighter market cap of $36.7 billion since the saga began. For their part, Archegos lenders will collectively take an estimated $10 billion hit, according to JP Morgan. Swiss credit warned it will take a loss of $4.4 billion and Nomura revealed it will lose about $2 billion.
Who would have thought that Archegos, a company with only $10 billion under management, could do so much damage?
Tencent Music did not respond to Billboardrequest for comment.