In this article, I have evaluated leading entertainment stocks Japan-based Sony Group Corporation (SONY) and China-based Tencent Music Entertainment Group (TME) to analyze the better buy this week. After thoroughly evaluating these stocks, I think TME might be a better buy for the reasons discussed in this article.

The entertainment industry’s outlook remains optimistic, capitalizing on consumer trends and embracing technological advancements. Moreover, virtual reality’s adoption in TV and radio broadcasting, particularly in live events like sports and music, promises to captivate audiences with dynamic experiences.

In addition, the entertainment industry is set for long-term growth, driven by rapid urbanization, widespread high-speed internet connectivity, higher disposable incomes, and a growing preference for recreational activities.

As a result, the media market is expected to grow at a CAGR of 7.8% until 2027.

Furthermore, the global entertainment industry is experiencing a prominent trend with the rising adoption of 5G connectivity. Also, the rising penetration of digital platforms and the growing use of smart music devices are anticipated to boost the music market’s growth.

The global music streaming market is expected to expand at a CAGR of 14.7% until 2030.

TME is a clear winner in terms of price performance, with 84.3% returns over the past nine months compared to SONY’s 46.3% return. TME gained 52.6% over the past year compared to SONY’s 11.2% gain.

Here are the reasons why I think TME could perform better in the near term:

Recent Developments

On June 6, 2023, SONY announced its partnership with SQUARE ENIX® on the latest standalone title in the esteemed FINAL FANTASY game franchise, FINAL FANTASY® XVI, available exclusively on PlayStation®5 (PS5™).

On May 18, SONY’s division Sony Music Masterworks, announced a majority investment in Barcelona-based Proactiv Entertainment, a leading live music producer and experiential events worldwide.

Conversely, during the recent quarter, TME launched the “Emerging Force Program” on the Tencent Musician Platform, offering various artist services such as traffic support, revenue sharing, and on- and off-line performance opportunities. This initiative aims to boost the exposure and popularity of quality songs, enhance artists’ influence, and foster the musician ecosystem on its platform.

In the same quarter, TME established a strategic collaboration with Rock Records to provide users with iconic Chinese songs and original soundtracks of popular TV dramas, including the works of Chenyue Chang, Emil Chau, Jonathan Lee, Wu Bai, and Mayday.

Recent Financial Results

SONY’s total sales and financial services revenue increased 29.5% year-over-year to ¥3.06 trillion ($21.93 billion) in the fiscal fourth quarter that ended March 31, 2023. Its net income per share attributable to SONY’s stockholders increased 16.4% year-over-year to ¥103.53. Also, its total costs and expenses increased 38.1% year-over-year to ¥ 2.94 trillion ($21.07 billion).

On the contrary, during the fiscal first quarter ended March 31, 2023, TME’s revenues increased 5.4% year-over-year to RMB7 billion ($969.71 million). Non-IRFS net profit rose 55.8% year-over-year to RMB1.46 billion ($202.03 million). Also, its non-IRFS earnings per share for Class A and Class B ordinary shares came in at RMB0.45, representing an increase of 66.7% year-over-year.

Past And Expected Financial Performance

SONY’s revenue increased at a CAGR of 6.2% over the past five years. Its revenue is expected to decline 10.3% in the fiscal third quarter but rise significantly this year. Moreover, its EPS is expected to fall 30.3% in the to-be-announced quarter and 11.4% in the current quarter.

Conversely, over the past five years, TME’s revenue grew at a 17.4% CAGR. Analysts expect TME’s revenue to rise 1.7% this year. Its EPS is expected to grow by 25.6% in the current year, 49% in the -to-be-reported quarter, and 16% in the current quarter.

Valuation

TME’s forward P/E multiple of 16.07 is lower than SONY’s 17.57. Moreover, TME’s forward EV/EBIT ratio of 11.95x is lower than SONY’s 15.56x.

Thus, TME is more valuable.

Profitability

TME is more profitable, with a trailing-12-month gross profit margin of 32.15%, which is higher than SONY’s 27.25%. In addition, TME’s trailing-12-month levered FCF margin of 11.06% compares to SONY’s 9.78%.

POWR Ratings

SONY has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, TME has an overall rating of B, translating to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TME has a B grade in Value. Its forward P/E and trailing-12-month P/B multiples of 16.01 and 1.48 are 13.2% and 11.9% lower than the industry averages of 15.70 and 1.68.

On the other hand, SONY has a C in Value. Its forward multiple of 17.57 is 16.1% higher than the industry average of 16.05. However, its P/E and trailing-12-month P/B of 2.15x is 8.9% lower than the 2.36 industry average.

Among the 13 stocks in the Entertainment – Media Producers industry, TME is ranked first, while SONY is ranked #4.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum Stability, and Quality. Click here to view SONY ratings. Get all TME ratings here.

The Winner

With changing consumer preferences, the entertainment industry is evolving. Moreover, the sector’s growth prospects are promising, fueled by the proliferation of digital technology and the surging demand for digital entertainment. Industry players such as TME and SONY should benefit from the industry tailwinds.

However, given SONY’s relatively low profitability and elevated valuation multiples, its competitor TME emerges as a superior investment choice this week.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Entertainment – Media Producers industry here.

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TME shares were trading at $6.81 per share on Thursday morning, down $0.21 (-2.99%). Year-to-date, TME has declined -17.75%, versus a 19.36% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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