Universal Music Group: Buy The Leader Of The Music Industry Ahead Of Earnings

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Universal Music Group (OTCPK:UMGNF) provides investors pinch nan opportunity to use from nan occurrence of nan champion artists worldwide. As a European stock, nan deficiency of organization sum provides individual investors a unsocial action to put in nan leader of a very accelerated increasing manufacture beneath its adjacent value. I find UMG's shares to beryllium trading astatine a discount of 22%, based connected a DCF valuation and aggregate analysis. I judge nan euphony industry's hyper maturation mode isn't going to slow successful nan foreseeable future. For these reasons, UMG is simply a Strong Buy.

Company Overview

Universal Music Group is simply a world leader successful euphony entertainment. The institution has section beingness successful 60 geographies and covers much than 200 markets. Universal is nan largest euphony institution successful nan world pinch much than 3 cardinal recordings and 4 cardinal publishing titles nether its belt. Some of its celebrated grounds labels see Abbey Road, EMI, Decca, Geffen, and Virgin. UMG represents nan world's astir renowned artists for illustration Rihanna, The Beatles, Taylor Swift, Drake, Queen, Kendrick Lamar, Guns N' Roses, Justin Bieber, Aerosmith, BTS, The Weekend, Ariana Grande and nan database goes connected and on. In 2021, UMG had 4 of nan apical 5 artists connected Spotify (SPOT), it represented Apple Music's (AAPL) creator of nan twelvemonth and songwriter of nan year, and it had 8 of nan apical 10 artists successful nan U.S Billboard charts. Overall, nary different institution comes adjacent to UMG's beingness successful nan euphony industry.

Business Model

It's important to understand nan ineligible model of nan euphony business successful bid to understand nan quality betwixt nan company's business segments, which are akin to those of Warner Music Group (WMG) and Sony Music (SONY), nan different 2 main players successful nan industry. Generally, a opus is made of 2 abstracted sets of rights. The first is publishing rights, which are protecting nan creation and nan lyrics. The 2nd is signaling rights, which are protecting nan maestro operation arsenic it was recorded. In immoderate cases, some sets of authorities beryllium to nan aforesaid entity, for illustration erstwhile nan songwriter and compositor is besides nan signaling artist. In different cases, those authorities are split. UMG and its artists disagreement nan ownership of those authorities betwixt them done contracts. Famous artists for illustration Drake and Taylor Swift logically person amended position and much ownership, while opening artists and younger up and comers will get less. Much for illustration investing successful nan banal market, erstwhile UMG deals pinch already successful artists for illustration Eminem and ABBA, nan return connected finance would beryllium little successful percentages but astir apt higher successful absolute numbers. However, erstwhile UMG observe and create a young creator from scratch, nan ROI could beryllium very precocious (or non-existent).

UMG operates nether 3 business segments - Recorded Music, Music Publishing, and Merchandising. The Recorded Music conception is dedicated to discovering and processing signaling artists and marketing, promoting, distributing, selling, and licensing nan euphony they create. The Music Publishing Segment is committed to acquiring and administering authorities to philharmonic compositions and licensing them for usage successful aggregate formats. The Merchandising Segment ('Bravado') represents nan merchandising authorities of artists and intermezo brands and properties. Providing an end-to-end merchandising ecosystem, Bravado offers services including sales, licensing, branding, marketing, eCommerce and imaginative resources for its clients and innovative experiences for fans worldwide.

As a European company, UMG discloses afloat financial reports connected a semi-annual basis. Below is simply a conception breakdown of revenues and EBITDA for H1-22:

Created by writer utilizing information from UMG's financial reports

Revenue Streams

Often times investors who are very bullish connected a institution can't really explicate what makes nan institution money. Due to immoderate complexity, I deliberation it's important to shed immoderate ray connected what really makes UMG money.

In nan Recorded Music Segment, UMG derives revenues from integer and beingness depletion of its music, and from licensing agreements. Digital depletion includes listening to euphony via streaming services for illustration Apple Music, Spotify and Deezer. UMG gets paid for each stream, whether nan listener is simply a premium subscriber of nan work aliases utilizing an ad-supported version. In addition, integer depletion includes nan downloading of an medium aliases a opus connected a pay-to-listen work (like nan aged iTunes), and erstwhile its euphony is utilized connected societal media, for illustration Instagram Reels aliases TikTok. Physical depletion is nan old-school CD aliases Vinyl sales. Licensing includes nan usage of UMG's euphony successful TV shows, movies, video games and advertisements.

In nan Music Publishing segment, gross streams are fundamentally nan same. The only quality is that they travel from nan usage of nan publishing rights, alternatively of nan signaling rights. Unique to nan publishing conception is revenues from unrecorded performance, which includes concerts and broadcasts (radio aliases TV).

The Merchandising conception needs nary explanation. UMG makes money from trading merchandise related to its artists.

Market Outlook & Growth Drivers

The global recorded euphony industry generated revenues $25.9B successful 2021, representing 18.5% maturation from anterior year. More than 71% came from integer consumption, either done streaming, downloads, aliases synchronization. This is materially different from really nan manufacture looked astatine its 90's peak, erstwhile 100% of revenues came from beingness depletion of music. Between 1999-2014, nan euphony manufacture knowledgeable a crisp decline, chiefly arsenic a consequence of piracy. 2015 marked a important alteration successful user behavior. It wasn't a consequence of businesslike warfare against piracy. Actually, group were yet consenting to salary for their euphony depletion because of nan precocious value and convenience services for illustration Spotify and iTunes provided. Today, group listen to 20.1 hours of euphony a week. It is estimated that location are much than 616 cardinal euphony streaming subscribers worldwide. The manufacture is experiencing important growth, moreover though 30% of euphony listeners are still utilizing unlicensed aliases forbidden ways to get music.

While companies for illustration Spotify spot nan maturation only successful their apical line, companies for illustration UMG and WMG spot their profits soaring. Between 2018-2021, UMG and WMG grew EBITDA astatine a CAGR of 19.86% and 19.15%, respectively. This demonstrates nan equilibrium of powerfulness successful nan industry. Services for illustration Spotify are struggling to make profit, chiefly because of aggravated title from nan likes of Apple Music, Amazon Music (AMZN) aliases Google's (GOOG) YouTube Music. The existent beneficiaries of this title are nan grounds labels, who are excited to spot their manufacture surpassing its 1999 peak:

Created by writer utilizing information from IFPI reports

There is nary signs of slowdown either. YouTube has precocious announced it has surpassed 80 cardinal euphony and premium subscribers globally and Spotify is projecting 11 cardinal nett caller MAUs for Q1-2023, and 2 cardinal nett caller premium subscribers. Not only subscribers are projected to proceed to turn for each nan streaming services, but prices are besides increasing. This will straight consequence successful higher revenues for nan euphony labels. In addition, caller gross streams that are only astatine nan improvement stage, for illustration TikTok and Instagram Reels, will beryllium different maturation engine.

Overall, nan euphony manufacture is successful a hyper-growth stage, and nary institution different than UMG is amended positioned to use from this trend.

Competitors & Multiple Analysis

The grounds explanation manufacture is dominated by an oligopoly of 3 companies which ain a mixed 83% of marketplace share. UMG has 37.54% of nan market, compared to Sony's 26.87% and WMG's 19.05%. Since Sony Music is only a conception successful nan immense Sony enterprise, nan only comparable adjacent is WMG. Let's return a look astatine nan numbers:

*P/E & EV/EBITDA are estimated. Data arsenic of February 19th, 2023.

Even though UMG is simply a larger institution successful position of sales, it's still capable to turn faster than WMG. For nan first 9 months of 2022, UMG generated €7.4B successful revenues, which adjacent to a 23.6% summation YoY, whereas WMG generated income of $4.3B, an 8.5% summation YoY. Overall, I find UMG's results to beryllium superior. This is simply a showcase to nan value of UMG's existent creator portfolio and its new-artist find and improvement capabilities.

Valuation & Near Term Expectations

I utilized a discounted rate travel methodology to measure UMG's adjacent value. I presume UMG will spot revenues turn astatine a CAGR of 10.6% betwixt 2022-2027, which is somewhat higher than nan company's semipermanent guidance of precocious azygous digit growth. I judge revenues will turn astatine this gait owed to value increases of streaming services, an summation successful full world subscribers, and nan betterment of monetization successful societal media. I task EBITDA margins to summation incrementally up to 23.6% successful 2027. While this is simply a 3-point summation compared to its 2022 margins, it is beneath nan management's guidance of mid-twenties. I judge margins will amended owed to amended operation betwixt beingness and integer consumption, arsenic good arsenic a little percent of merchandising revenues.

Created by writer based connected UMG's financial reports and author's projections

Taking a WACC of 7.81%, I find UMG's adjacent worth to adjacent €50.3B, which represents a 22% upside compared to its marketplace worth astatine nan time of writing.

To cheque nan reasonability of my result, I delegate today's guardant P/E aggregate (25.7) to my 2024 EPS projection of €1.09. This results successful a adjacent value per stock of €28.0, which represents 20% upside compared to nan existent marketplace price.

Regarding nan H2-23 net release, which is owed successful nan opening of March, I expect UMG to study revenues of €5.7B and EBITDA of €1.1B, representing a 23.6% and 33.6% YoY increases, respectively. I americium not forecasting EPS because of hard-to-predict volatility successful UMG's equity portfolio, which could materially impact GAAP earnings. As of June 30th, 2022, UMG's equity portfolio had a carrying worth of €636M and consisted of a 3.3% ownership liking successful Spotify, and a 0.75% liking successful Tencent Music Entertainment (TME).

Risks

On nan macro-economic side, galore investors are worried astir little discretionary expenses from customers. I wouldn't interest excessively overmuch astir nan power of deteriorating economical conditions connected nan euphony industry:

Music has been proven to beryllium highly resilient successful economical downturns. I've been done astir 4 of them successful position of world headwinds connected nan macroeconomic side. And that excludes nan piracy and file-sharing crisis. This squad that we person present person managed those headwinds respective times successful nan past. Music is simply a low-cost shape of intermezo pinch what we see unthinkable user worth and we are monetizing contented from much sources than ever before.

--- Lucian Graine, UMG's CEO, Q3-23 Earnings Call

In caller years, financial players, chiefly backstage equities, person entered nan euphony manufacture pinch immoderate awesome headlining deals. While these do impact UMG's expertise to acquisition catalogs, those financial players are usually partnering pinch 1 of nan awesome euphony companies successful bid to negociate nan catalog. As nan leader of nan industry, UMG is usually very alert of each imaginable deal, but nan company's strategy is to beryllium very selective regarding catalog acquisitions:

Now pinch respect to catalog acquisition, I mean, we person seen and we are apt to proceed to spot IP assets coming up for sale. But we're very, very selective successful what we look at. We're only willing successful nan champion of nan best. We're only willing successful those assets wherever we tin control. And what I mean by that is that we are really capable to summation nan monetization of those assets. I deliberation we're smart and strategical successful really we attack them.

--- Lucian Graine, UMG's CEO, Q3-23 Earnings Call

I would besides constituent retired that nan worth of those deals is really a practice to nan worth of catalogs owned by UMG.

The past consequence I would reside is nan increasing spot of nan artist. It could beryllium based on that today, pinch societal media, artists are capable to monetize their euphony without nan backing of a awesome euphony label. While that is existent regarding small-market artists, successful bid to go a worldwide phenomenon, a euphony explanation backing is simply a must. The truth is societal media, currently, is simply a awesome nett affirmative for nan euphony labels.

Conclusion

Universal Music Group is nan leader of nan euphony industry. It represents nan champion artists successful nan world, and owns nan astir renowned grounds labels. Music's stock of people's clip is perpetually growing, and is now opinionated astatine 20.1 hours per week. Music arsenic an manufacture is successful a hyper-growth mode, and nary institution different than UMG is amended positioned to seizure nan worth of this trend. I find UMG to beryllium trading 22% beneath its adjacent value, and task nan March earning study will beryllium excellent. For these reasons, I complaint UMG arsenic a Strong Buy.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

My sanction is Yuval. I activity arsenic a financial expert and I analyse companies which I judge person a important moat,