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Why Growth Investors Should Consider Tencent Music Entertainment Group

Published October 23, 2024

Growth stocks attract many investors due to their above-average financial growth, which often catches the market's attention and leads to exceptional returns. However, identifying a growth stock that realizes its full potential can be challenging.

Growth stocks are inherently volatile and carry a higher level of risk. Investors may find themselves facing losses if they invest in a stock whose growth narrative is about to end or has already plateaued.

Luckily, the Zacks Growth Style Score—part of the comprehensive Zacks Style Scores system—provides an effective way to assess a company's true growth potential beyond typical metrics.

Currently, Tencent Music Entertainment Group (NYSE:TME) stands out as a recommended stock within this system. The company not only boasts a favorable Growth Score but also holds a top Zacks Rank.

Research has consistently demonstrated that stocks exhibiting robust growth characteristics tend to outperform the broader market. Stocks earning a combination of a Growth Score of A or B and a Zacks Rank of #1 (Strong Buy) or #2 (Buy) typically see even greater returns.

Earnings Growth

Earnings growth is arguably the most critical factor for investors. Strong profits reflect a company’s financial health, and for growth investors, double-digit earnings growth is especially appealing as it hints at potential stock price appreciation.

Tencent Music Entertainment Group has shown a historical earnings per share (EPS) growth rate of 8.8%. However, the focus should be on projected growth, with expectations indicating a remarkable 28.3% EPS growth this year, surpassing the industry average forecast of 22%.

Cash Flow Growth

Cash flow is vital for any company, but it is especially important for growth-oriented businesses. Higher cash flow enables these companies to invest in new opportunities without resorting to costly outside financing.

Currently, Tencent Music Entertainment Group has a year-over-year cash flow growth rate of 18.1%, significantly better than many peers. In contrast, the industry average reflects a decline of -9.4% in cash flow growth.

Evaluating the historical context is also essential. Over the past 3-5 years, Tencent Music has achieved an annualized cash flow growth rate of 19.1%, compared to the industry average of 18.1%.

Promising Earnings Estimate Revisions

Another key aspect to examine is the trend in earnings estimate revisions. Positive revisions indicate growing confidence from analysts, which often correlates with upward stock price changes.

Recently, there have been upward adjustments in earnings estimates for Tencent Music. The Zacks Consensus Estimate for the current fiscal year has increased by 0.8% in the past month, suggesting a positive outlook.

Conclusion

In summary, despite the fluctuations typical of the stock market, Tencent Music Entertainment Group has become a Zacks Rank #2 stock due to favorable earnings revisions and a strong Growth Score of B. These elements together make Tencent Music a promising pick for growth investors.

With its solid fundamentals and growth prospects, Tencent Music is a stock that growth investors should closely consider.

growth, investment, stocks