Will the investor continue to sing along with the music group?

The Rolling Stones, ABBA, Taylor Swift, Justin Bieber, Andrea Bocelli: you can idolize or loathe, vilify or turn gray. And you can invest in them. At least, in the record company that manages their musical rights: Universal Music Group (UMG).

UMG is the largest music group in the world, forming the ‘Big Three’ together with Warner Music Group and Sony. Headquartered in Hilversum, the company mainly operates from New York and Santa Monica, California.

Exactly one year ago, the company went public in Amsterdam. In December, it was already promoted from the Midkap to the AEX – the market value was then 45 billion euros. At the time of the IPO, the share was worth 23 euros, which then rose slightly to a peak of 27 euros in November. Then it went down a bit, and in the past six months the price dropped below 20 euros a few times.

Music has long ceased to generate money solely through the sale of records or CDs. UMG’s revenue today comes largely from streaming platforms, as well as from games and fitness apps that use music. The newest offshoot of the revenue model are NFTs.

“Music has shown great resilience in past economic crises,” said CEO Lucian Grainge at the presentation of the second-quarter figures. In other words: UMG investors do not have to fear an impending recession, according to Grainge.

Analyst Thomas Singlehurst of Citi is less certain about this. Looking back at the past few decades, which included two major recessions, the music industry has definitely struggled, he says. “It is uncertain. We don’t really know how cyclical the music industry will be.”

For example, some of the new platforms UMG sells music to run on advertisements, and that is indeed a cyclical market.

Singlehurst also sees a potential risk for UMG in another area. It is often said that the music industry is a global industry, but that is only partly true, says Singlehurst. People listen a lot to local musicians. “My point is: the global scale is important, but it is just as important to operate in local markets. And I wonder if UMG is very competitive at this level,” said Singlehurst. And it is precisely there that competition is increasing due to the digitization of the music industry.

“UMG has been able to maintain its market share in recent years,” Singlehurst continues. “If the global music market grows 12 percent, UMG will grow 10 percent. A little less, but still a lot and in line with the total growth of the market.” But what if we end up in a situation where the global market is only growing by a few percent? “Then there will be little left of UMG’s growth.” So far it’s not an issue, but it’s a factor that Singlehurst is keeping an eye on.

How does he actually look back on Universal’s first year on the stock exchange? „There was a lot of enthusiasm at the IPO, everyone was singing along, to stay in musical terms. But during the year, some doubts started to arise among investors.” According to Singlehurst, these doubts are mainly about UMG’s ability to simultaneously achieve the three targets it announced at the time of the IPO: revenue growth, higher profit margins and more cash flow. If that doesn’t work, the question arises as to which goal the company can best let go of. According to Singlehurst, the tension around the various targets can be read from the current share price. Investors may have been over-optimistic at first and now fear that a disappointment may be on the way.

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