How & Why I Successfully Traded TME Today
By: Steve Smith
The saying, “Don’t believe everything you read” was a typical warning mostly applied to opinion pages and more recently, anything on social media.
However, one felt that one corner of the world was safe unless a company was engaged in outright criminal behavior, i.e. faking test results or using deceptive accounting, one could trust or believe the numbers reported by companies in their quarterly reports.
Last night, Tencent Music Entertainment Group (TME) reported earnings in which revenues and bottom line eps were mostly in line with estimates. But, given Earnings360 had taken a bullish position, I dug a bit deeper beyond the headline number. New monthly subscribers and average revenue derived were the crucial metrics I wanted the facts on. Two reputable financial news agencies reported the following:
Reuters reported that Tencent Music revealed a 6.4% decline in monthly mobile music users excluding the ones on social media — in Q1, even as revenue rose a better-than-estimated 24%.
Bloomberg reported that Online music paying users rose 42.6% year-over-year to 60.9M; up 4.9M from last quarter — the largest sequential net gain since 2016.
The Reuters news broke first and TME shares initially dropped 1.5%. Then came the more detailed coverage from Bloomberg and shares are now up 2.8%, allowing us to scale out of two-thirds of the position with a secured 37% gain. We’re holding 1/3 of the position with a target of 75% return on risk.
The point of this minor tale is that I simply couldn’t trust what should’ve been straightforward reporting of the numbers; were new subs up or down? Instead, I had to spend time listening to the conference call and going through old 10-Ks, to be clear I was understanding the numbers being reported.
It wasn’t a total waste of time. I also learned advertising revenue had doubled this quarter; a key revenue source on a growing user base.
My original bullish position has now shifted beyond a simple earnings trade and I’m looking at establishing a longer-term position.
My point is; I entered the trade mostly on the technical set-up. As I said in the Alert:
“TME operates online music entertainment platforms that provide music streaming, online karaoke, and live streaming services in the People’s Republic of China. It got caught up in the Archego fiasco as its stock magically tripled from $12 to $31 during June to March only to come right down to $14 during those brutal weeks in April.
The $14 level is now a good entry point.”
And indeed it has been, so far. But, if I had trusted the original Reuters report, I might have bailed early. Instead, I let price play out over the first hour of trading and as mentioned, the position is solidly profitable.
The other story making the rounds is that Michael Burry of “The Big Short” housing crisis fame took a $500 million bearish position in Tesla (TSLA). Notably, this ‘big’ short was done through the purchase of puts which had a total cost of about $57,000 — his total risk, assuming he did no other hedging. The $500 million number being bandied about is based on the puts’ notional value if they all came in-to-the-money. Remember, each option contract represents the potential to control 100 shares.
Again, don’t believe everything you read. Or more importantly, trust only in price. It may be fleeting, but it tells the truth at any given moment in time. This is why all Option360 trades are primarily based on price and chart setups. It tells me what my defined risk/reward is and minimizes second-guessing on the legitimacy of what I’m reading.
PS: The above offer is ostensibly for being done as a “gift” for my upcoming birthday. But, it’s also something special we want to offer to honor Memorial Day.**
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