The Rolling Stones, ABBA, Taylor Swift, Justin Bieber, Andrea Bocelli: you canidolize 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’ togetherwith Warner Music Group and Sony. Headquartered in Hilversum, the companymainly operates from New York and Santa Monica, California.
Exactly one year ago, the company went public in Amsterdam. In December, itwas already promoted from the Midkap to the AEX – the market value was then 45billion euros. At the time of the IPO, the share was worth 23 euros, whichthen 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 orCDs. UMG’s revenue today comes largely from streaming platforms, as well asfrom games and fitness apps that use music. The newest offshoot of the revenuemodel are NFTs.
“Music has shown great resilience in past economic crises,” said CEO LucianGrainge at the presentation of the second-quarter figures. In other words: UMGinvestors do not have to fear an impending recession, according to Grainge.
Analyst Thomas Singlehurst of Citi is less certain about this. Looking back atthe past few decades, which included two major recessions, the music industryhas definitely struggled, he says. “It is uncertain. We don’t really know howcyclical the music industry will be.”
For example, some of the new platforms UMG sells music to run onadvertisements, and that is indeed a cyclical market.
Singlehurst also sees a potential risk for UMG in another area. It is oftensaid that the music industry is a global industry, but that is only partlytrue, 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 localmarkets. And I wonder if UMG is very competitive at this level,” saidSinglehurst. And it is precisely there that competition is increasing due tothe digitization of the music industry.
“UMG has been able to maintain its market share in recent years,” Singlehurstcontinues. “If the global music market grows 12 percent, UMG will grow 10percent. A little less, but still a lot and in line with the total growth ofthe market.” But what if we end up in a situation where the global market isonly growing by a few percent? “Then there will be little left of UMG’sgrowth.” So far it’s not an issue, but it’s a factor that Singlehurst iskeeping an eye on.
How does he actually look back on Universal’s first year on the stockexchange? „There was a lot of enthusiasm at the IPO, everyone was singingalong , to stay in musical terms. But during the year, some doubts started toarise among investors.” According to Singlehurst, these doubts are mainlyabout UMG’s ability to simultaneously achieve the three targets it announcedat the time of the IPO: revenue growth, higher profit margins and more cashflow. If that doesn’t work, the question arises as to which goal the companycan best let go of. According to Singlehurst, the tension around the varioustargets can be read from the current share price. Investors may have beenover-optimistic at first and now fear that a disappointment may be on the way.
