Chinese music streaming company Tencent Music Entertainment (TME) was minding its own business in March — showing off strong 2020 earnings and announcing a partnership with Warner Music Group — when it was blindsided by one of 2021’s oddest financial stories.
Out of nowhere, TME shares plummeted 29% — from $32.25 on March 23 to $22.84 the following day. As of Tuesday (April 20), when TME shares closed at $16.99, it had fallen a steep 47.3% from March 23. In a coincidentally timed 2020 earnings release, also on March 23, Tencent Music announced a net profit — yes, profit in a business with little of it — of $641.4 million on revenues 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 shy of Spotify’s $52.6 billion enterprise value 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 shrunk slightly in 2021, from 34.1% to 31.9%, which was likely enough to turn off a few investors. But the steep drop in TME’s share price is mostly tied to the downfall of Archego Capital Management, which was crushed by its risky investment style and a perfect storm of interwoven factors.
ViacomCBS became the center of the story after it sought to raise $3 billion through a public offering to take advantage of its share price, which surged from $12 to over $100 in the previous year. News of the offering, which arrived on March 22, sent shares to $90 the following day. When the offering was priced at just $85 a share, and some influential analysts downgraded the stock, a selloff dropped ViacomCBS’ share price 52% over the next four days. Tencent Music soon became collateral damage.
The drop in ViacomCBS’s share price led to margin calls — requirements to put more money into a margin account when its value drops — that Archegos could not meet, causing Goldman Sachs, Morgan Stanley and other banks to quickly liquidate $20 billion of Archegos’ shares to cover their losses. Unfortunately for Tencent Music, Archegos was a major TME shareholder, and the banks flooded the market with TME shares on March 24. Goldman Sachs alone liquidated $6.6 billion of three Chinese companies in Archegos’ portfolio –Tencent Music, Baidu and Vipshop Holdings — in trades of large blocks of shares, according to Bloomberg News, and another $2 billion in April, CNBC reported.
Tencent Music’s status as a Chinese music streaming service has not helped its shares to rebound, despite efforts to right the ship. Following the March 24 plunge, TME announced on March 28 that it will 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 buyback plans that day.) Tencent Music could benefit over the long term from buying its shares at a discount, but the announcement did budge its share price.
The Archegos collapse was “the same old song and dance,” to quote an Aerosmith classic, for investment firms laden with dangerous financial instruments. In this case, Archegos used derivatives called “total return swaps” that allow the investor to pay banks a fee in exchange for the returns of a stock or bond without actually owning it. (The term “swaps” entered mainstream lexicon after Wall Street banks’ overuse of “credit default swaps” contributed to the 2008 housing crisis that led to a global recession.) Archegos is “the best example of shadow trading,” Charles Geisst, a historian of Wall Street, told The New York Times, noting the firm is “indicative of the loose regulatory environment over the last several years.”
The financial analysts whose jobs it is to place a value on TME’s share prices are unmoved by investors’ dour sentiment. Of the 23 analysts that follow TME, six have “buy” recommendations and 17 have either “outperform” (a signal to give TME extra weight in a portfolio) or “hold” ratings, according to Refinitiv. The median analyst target price is $29.42, 65% above Monday’s closing price. Even the lowest estimate of $20.04, says Refinitiv, is over $3 above Tuesday’s closing price.
TME’s downturn could be a correction of investor enthusiasm about streaming companies in general. Spotify shares had been soaring since 2020 and reached $365.99 on Feb. 19, giving the company a $69.8 billion market capitalization. But its share price quickly sank to $250.38 on March 29, erasing $22.1 billion from Spotify’s market value, before recovering to $292.02 on April 16. Netflix was also flying high through 2020, rising to $594.34 on Jan. 20 from $431 a year ago. Moreover, on Tuesday, Netflix released disappointing first-quarter earnings and reported slowing subscriber additions, sending shares down 10.5% in after-hours trading – 17.2% below its 2021 high.
Perhaps it’s a case of the vaccine blues; stocks that were flying high because the pandemic drove consumers to streaming media have fallen closer to Earth.
Other stocks hit by Archegos’ implosion are also suffering an extended downturn. 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 selloff and has dropped another 12.9% since then. ViacomCBS closed Tuesday at $37.92, with a market capitalization $36.7 billion lighter since the saga began. For their part, Archegos’ lenders will collectively take an estimated $10 billion hit, according to JP Morgan. Credit Suisse warned it will take a $4.4 billion loss and Nomura revealed it will lose about $2 billion.
Who would have thought that Archegos, a firm with just $10 billion under management, could do so much damage?
Tencent Music did not respond to Billboard’s request for comment.
