Why Tencent Music Stock Sank This Week

Tencent Music (NYSE: TME) stock saw a significant pullback this week, even though the company reported better-than-expected quarterly results. The company's share price closed out the week down 7.2%.

Tencent Music released its Q2 results on Wednesday, reporting sales and earnings that beat Wall Street's forecasts. On the other hand, investors appear to have been more concerned with the business's operating expenses increasing significantly and declining performance for the company's social entertainment services unit.

Tencent Music posted Q2 results that narrowly beat Wall Street's targets

Tencent recorded non-GAAP (adjusted) earnings per American depositary share on sales of $1.32 billion. The company adjusted earnings per American depositary share beat the average analyst target by $0.01, and its sales topped the average Wall Street target by approximately $20 million.

Sales were up roughly 5.8% year over year, gross profit increased roughly 13%, and operating income was up 9%. On the other hand, the company's operating income margin in the quarter declined from 38% to 37%, and its gross margin declined from 44.4% in last year's quarter to 44.2% in this year's period.

Investors focused on potential problem points in the Q2 report

Along with declines for Tencent Music's operating income margin and gross margin in Q2, the company's operating expenses as a percentage of revenue rose to 14.5% from 13.7% in last year's quarter. While music-related services recorded roughly 11% annual growth in Q2, revenue from social entertainment services declined approximately 16%.

Tencent Music's Q2 report wasn't bad, but it also didn't deliver much to spur a surge in bullish sentiment. In addition to the company's quarterly report not being particularly exciting, there has also been broader selling momentum out of Chinese tech stocks recently. Sales and earnings looked solid in the second quarter, but stronger results or a market shift in the approach to valuing Chinese stocks may be needed to energize the company's share price in the near term.

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.