Music is a common language which simply crosses borders, cultures, and generations. This common attraction has made the music {industry} a extremely scalable enterprise, with giant potential for progress. Over the previous few many years, the {industry} has seen giant modifications, shifting from bodily media to digital downloads and now to streaming platforms, see determine 1. At present varied streaming platforms are in a heated battle for customers and market share. On the similar time giant gamers have focussed on proudly owning and monetizing music and don’t care a lot which platform wins. This method, mixed with monopolistic tendencies and annuity-like revenue streams (the place songs proceed producing income years after launch) can flip corporations into attention-grabbing long run investments given the proper value. Common Music Group ($UMG.NV) stands out as one of many largest gamers within the {industry} and would be the important focus of this text because it has proven a stellar 40% common ROE since spin off.
Determine 1: The recorded music {industry} over time, Statista1Â
Enterprise profile
Many impartial artists now launch music straight, however most nonetheless desire working with labels like UMG for the added assist. UMG helps artists give attention to their music whereas offering important providers throughout three key segments:
Recorded Music: UMG’s largest income driver, overlaying artist discovery, music manufacturing, and promotion. It handles digital and bodily distribution, streaming revenues, and monetizes an intensive catalog.
Music Publishing: Manages songwriters’ rights, licenses music for media, collects royalties, and fosters artistic collaborations to maximise alternatives for compositions.
Merchandising and Different: Builds artist manufacturers by means of branded merchandise, concert-related gross sales, and partnerships with main corporations for sponsorships and co-branded ventures.
The funding case
Streaming
Streaming has grow to be the principle manner individuals eat music, however it’s a very fragmented market (see determine 1 and a couple of). Platforms like Spotify are spending billions on advertising to increase their consumer bases. Apparently, this aggressive spending advantages labels like UMG, because it will increase the general measurement of the music market and most of that subscription income is handed on the the labels anyhow.
As streaming turns into extra accessible, UMG stands to achieve considerably with out bearing the price of advertising to develop the pie. Moreover per capita spending stays effectively beneath its 1999 peak. To match these ranges, spending would wish to double, creating substantial room for progress.
Determine 2: Streaming market distribution, Statista2
Aggressive panorama
UMG competes with Warner Music Group and Sony Music in an {industry} the place market shares have remained comparatively secure since UMG’s 2021 spinoff, see determine 3. These corporations function in a aggressive but collaborative setting, prioritizing margins over dangerous market-share battles. This dynamic ensures UMG’s negotiating energy with streaming platforms stays intact. UMG’s negotiating energy was examined when TikTok tried to safe higher phrases final 12 months, however UMG managed to extend royalty charges and strengthen protections towards AI-generated content3.
Determine 3: Market share for music publishers, Statista2
Monetary abstract
Over the previous few years, all segments have proven regular progress, reflecting UMG’s potential to adapt to market traits and increase its international presence. Since its spinoff in 2021, UMG has reported constant will increase in income throughout these segments, supported by sturdy catalog efficiency, streaming progress, and strategic acquisitions. This progress has pushed an increase in internet earnings.
Chart 1: Historic knowledge from UMG monetary stories, in EUR million
Buyers panicked in July final 12 months as a slowdown in streaming progress..
Nevertheless, I imagine this to be a short lived setback fairly than a long-term concern.
UMG’s stability sheet has giant quantities of intangibles and curiosity can simply be lined.
Valuation
For my part an organization being below or overvalued mustn’t hinge on small tweaks in fashions, particularly given all of the uncertainty round future money flows. Due to this fact I take each qualitative and quantitative facets under consideration every time investing resolution. With the intention to get hold of a common thought concerning the valuation of UMG I carry out a easy reverse discounted money circulation (DCF) evaluation and easy annual price of return (ARR) calculation. The idea for each are my very own projections for the subsequent few years, see chart 2, primarily based on {industry} traits, earlier earnings and market forecasts. My intention is to not be spot on with these projections, I nonetheless do attempt to be within the common ballpark of what UMGs prime and backside traces will likely be within the subsequent few years.
Chart 2: Forecasts by the creator
Reverse DCF
The intention is to compute the low cost price the market is offering. This low cost price is known as the interior price of return (IRR). Inputs are future earnings, a 3.5% terminal progress price, internet money and anticipated share counts. I arrive at an ~8.2% IRR.
ARR
An ARR calculation can present a fast perception into the valuation because it illustrates extra clearly what the ending a number of will imply on your funding. The ARR given a a number of compression to 25x 2028 earnings could be ~9.7%, much like the IRR this offers a good margin of security.
2024
2025
2026
2027
2028
Ending EPS
Anticipated ending a number of
Present value
€0.87
€1.00
€1.10
€1.17
€1.32
€1.32
25x
24.22
Desk 1: Creator’s forecasts, value as of writing
One might use NOPAT, FCF or different metrics however I selected to make use of internet revenue for the DCF/ARR.
Dangers and uncertainties
As talked about all through the article the longer term is just not recognized and I sadly am not in possession of a crystal ball. A number of gadgets pose substantial dangers to the funding thesis.
Firm particular (idiosyncratic)
The obvious danger is that UMGs present and future artists won’t carry out effectively. Failure in advertising, music writing, controversies or simply dangerous luck might materialize this danger. Moreover UMG would possibly make missteps in acquisitions or monetary selections.
Trade
Moreover UMG might lose its sturdy negotiation place in direction of platforms similar to Spotify. If such gamers handle to cement their place and labels like UMG grow to be extra depending on them they’ll put strain on UMGs margins. Likewise AI music similar to piracy can demonetize customers.
Macroeconomic
Whereas music is essential to individuals’s lives, no person will hesitate to scale back music spending with a view to purchase meals or pay for utilities. Thus if the worldwide (however particularly UMG core areas just like the US and Europe) economic system weakens this may pose a menace to revenue. Rates of interest influence valuation and the returns of acquisitions and investments carried out by UMG.
Conclusion
Whereas UMG is ready to create important worth, the a number of given doesn’t make it the most cost effective inventory out there. Nonetheless given the chance profile, lack of correlation with different companies and an anticipated 8-9% return with comparatively conservative assumptions I feel UMG is a lovely inventory to have in my portfolio. Much less technical, proudly owning a medium progress, excessive margin enterprise with monopolistic tendencies at a a number of fairly beneath the S&P 500 feels like music to my ears. The cherry on prime being that Dutch dividend withholding is subtracted from my taxes on the finish of the 12 months as a Dutch investor.
This evaluation is for informational functions solely and shouldn’t be thought of monetary
recommendation. The creator of this evaluation holds shares in Common Media Group, which can affect the attitude offered. Please conduct your personal analysis or seek the advice of with a monetary advisor earlier than making any funding selections.
Sources apart from UMG monetary stories used on this article:
Statista (Mar. 2022) Streaming Drives World Music Trade to New Highs https://www.statista.com/chart/4713/global-recorded-music-industry-revenues/
Statista (Dec. 2024) Music {industry} worldwide https://www.statista.com/research/136828/music-industry-worldwide/
WSJ (Might 2024) The Common Music-TikTok Spat Is Over. Right here’s What Artists Gained. https://www.wsj.com/enterprise/media/universal-music-artists-to-return-to-tiktok-after-new-licensing-agreement-4c1d4e42
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