The "Spotify of China" Just Got a Whole Lot Cheaper

Elon’s “Hidden” Company (From NXT Wave Research)

Tencent Music Entertainment Group (NYSE: TME) is China’s music streaming leader, amassing a huge market share. The entertainment company boasts approximately 528 million monthly active users (MAUs) and generated $1 billion in revenue from online music services in its latest quarter.

Meanwhile, the company’s top competitor, NetEase (NASDAQ: NTES), brought in just $282 million in music revenue. With such a wide lead in revenue share, the “Spotify of China” is a fitting moniker for Tencent Music Entertainment.

However, unlike Spotify Technology (NYSE: SPOT), an emerging competitor is taking serious swings at TME’s dominance, frightening investors. This has been one of the key factors that have caused the stock to fall more than 60% from its 52-week high. However, given this name’s precipitous decline, there is reason to believe markets are overly pessimistic about TME’s future. At current levels, the stock may be able to stage a significant recovery.

Is Bytedance Sinking Its Teeth Into TME’s Users?

In its latest quarter, TME put up solid results. Revenues rose by just under 16% year over year (YOY) to $1.24 billion, exceeding estimates near $1.23 billion. Adjusted earnings per depository share rose by 9% to 23 cents per share, in line with estimates. Despite these figures being well within expectations, shares fell 32% in the two days following the results. Investors seem to be worrying about a threat bubbling under the surface.

Bytedance is one of the largest privately owned companies in the world, recently valued at $550 billion. For reference, this figure is around $100 billion higher than the market capitalization of Costco Wholesale (NASDAQ: COST). The company rose to prominence by creating TikTok.

Bytedance subsidiary Douyin (the Chinese version of TikTok) has been scaling its Soda Music platform at a breakneck clip. Its MAUs reached 120 million in September 2025, good for YOY growth of 90%. Six months later, that figure reportedly has increased to 140 million.

Especially when considering the trajectory of TME’s user base, it makes some sense why market participants are running for the hills. Although revenues rose strongly, Tencent saw a 5% YOY decrease in its MAUs in Q4 2025. This marks a continued acceleration in MAU decline, with the figure dropping by 4.3% in Q3 2025 and 3.2% in Q2 2025.

Many investors are likely worried that these users are defecting to Soda Music and that this decline will gain more momentum. As user count declines, TME’s monetizable base also falls, leading to concerns around the company’s future growth.

However, several factors suggest the reaction to these fears is overblown.

TME’S High Value Strategy Is Translating into Financial Gains

Although Tencent's total MAUs are falling, the company's paying users are on the rise. Paying users increased during the quarter by 5.3% YOY to 127 million. Paying users are also increasing how much they spend. The company’s monthly average revenue per paying user increased by 7.2% YOY to approximately $1.70.

This shows that although low-value, non-paying users are falling, high-value paying users continue to increase. This dynamic is generating growth and greater profits at Tencent, despite what is happening at Soda Music. This comes as Soda specifically targets free and low-tier users, and the company has a “far inferior” content library compared to Tencent.

Rather than licensing large amounts of full-scale albums and rights, the firm leverages Douyin for much of its content. When Douyin creators release short-form videos featuring songs, users can seamlessly transition to Soda Music to listen to the whole track. In contrast, TME invests heavily in relationships with top-tier music labels and artists.

TME is offering a premium service, while Soda Music is attracting users further down the value chain. As the companies are targeting two fundamentally different types of listeners, it stands to reason that both firms can continue to grow in their niches. This is especially true for TME, considering that although total users are falling, they still far exceed paying users. At 528 million total users versus 127 million paying users, the firm still has a very large pool of more than 400 million non-paying users it can convert.

Still, there is a threat that Soda Music could look to target high-value users over time by expanding its offerings.

TME: Further Growth Could Lead to Significant Gains

Overall, TME’s ability to continue growing is key when considering its valuation. Shares have fallen so far that they suggest the firm will see negative free cash flow growth over a multi-year period. Meanwhile, free cash flow has grown at a compound annual rate of around 11% over the past few years. However, growth did slow to 7.3% in 2025.

Still, markets seem to be pricing in a situation that is more bearish than the evidence suggests. With TME continuing to grow revenue and profits through high-value users, there is a significant chance that free cash flow can continue expanding as well. Should this play out, substantial long-term upside could be in store.

Notably, Wall Street analysts disagree on TME’s outlook. The MarketBeat consensus price target near $22 implies huge upside near 140%. However, targets updated after the company’s earnings report range from $12 to $23. The average of these targets is above $17, still implying more than 80% upside.

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