Universal Music Group‘s Q2 revenues, announced last month, were up by around 10% YoY – but that didn’t stop the market from responding negatively.
Wall Street analysts were disappointed that UMG’s subscription streaming revenues ‘only’ grew 6.9% YoY in the quarter. Several downgraded their ratings of the company’s stock, and UMG’s share price remains around 17% lower than it did pre-Q2 earnings.
One person who isn’t worried about UMG’s single-digit subscription revenue growth – nor the consequent share price tumble – is Bill Ackman.
Ackman’s Pershing Square Holdings, which owns approximately 10% of UMG’s equity, recently published its interim financial report for the first half of 2024. In it, the company expressed confidence in UMG’s long-term prospects.
“We believe that UMG’s underperformance [in Q2] will prove to be short-term in nature and does not impact our view of UMG’s medium and long-term growth prospects,” the company wrote in its fiscal update.
It also said it believes music has “a long runway of future growth, as it remains under-monetized relative to history and when compared to other forms of media”.
Pershing Square also suggests in the report, which was published the other week, that the stock market overreacted to UMG’s subscription streaming revenue growth.
The company added: “Similar to how investors initially overreacted to concerns about the potential negative impact from AI, only to see UMG shares quickly recover as the market better understood the AI risk, we believe that as investors better understand UMG’s path to higher revenue growth and regain confidence in the long-term health of the industry, the company’s share price is likely to increase significantly from its current levels.”
Pershing Square boss Bill Ackman, in his letter to PSH shareholders printed at the top of the report, had this to say about the current stock market environment: “Equity markets have exhibited an enormous amount of single-name stock price volatility for even the largest companies when they surprise investors with even minimally below-expectation overall results or small misses on certain closely followed business metrics, with Universal Music Group being one such example in our portfolio.”
Elsewhere in the interim report, Pershing Square told its shareholders that it “expect[s] the industry to improve monetization through new products and services” and pointed to “better segmentation of customers” with the likes of “higher-priced tiers and increased subscription prices”.
Spotify CEO Daniel Ek confirmed during the streaming company’s earnings call last month that it is working on a higher-priced “Deluxe” tier, which will cost around $17/$18-per-month.
Universal’s leadership team cited a stat on its Q2 earnings call that suggests one in five Spotify subscribers could be willing to pay for a pricier ‘Super Premium’ tier.
UMG’s CFO and President of Operations Boyd Muir told analysts: “Our research and analysis indicate that as many as 20% of the current subscriber base could upgrade to a super-premium tier at a meaningfully higher price point for a compelling product configuration, one which offers enhanced features and exclusive access to content.”
It is expected that Spotify’s ‘Deluxe’ tier could include additional product features such as ‘superfan’ experiences and HiFi audio.
Meanwhile, commenting on the potential for additional music subscription price increases, Pershing Square argued in its report that “there is ample room to increase pricing in the coming years as music subscriptions have been kept at flat prices for nearly a decade until some recent increases”.
It added: “As the industry matures in developed markets, ad-supported users who today receive free music can be charged a monthly subscription fee, as is typically the case in the video streaming industry.”
MBW asked earlier this month if Universal and its rivals could soon turn the screw on Spotify’s free ad-supported tier.
In the second quarter of 2024 (the three months to end of June), UMG beat analyst expectations, posting USD $3.15 billion (EUR €2.932bn) across all of its divisions (including recorded music, publishing and more), which was up 9.6% YoY at constant currency.
Another key highlight from the quarter: adjusted EBITDA growth of 11.3% YoY to EUR €649 million (USD $699m).
Despite those strong overall revenues, UMG missed analysts’ estimates for its subscription streaming revenues which, as mentioned, were up 6.9% YoY (at constant currency). Some analysts were looking for around 11% YoY growth.
Analysts from Guggenheim, Citi, Barclays, and Wells Fargo downgraded UMG’s stock following the Q2 announcement.
UMG’s stock price fell just over 23% on the Amsterdam Euronext the day after the company’s results came out (July 25).
Pershing Square holds some 10.25% of UMG and is the third largest shareholder behind Tencent-led consortium Concerto Partners (which holds around 20%) and former Vivendi President Vincent Bolloré (who holds 18%).
Rupert Morley, Chairman of the Pershing Square Board, in a statement to PSH shareholders printed at the top of the company’s interim fiscal report, noted that, “each of PSH’s portfolio companies has continued to make good business progress during the first half of the year and their intrinsic values remain sound”.
Morley noted, however, that “Subsequent underperformance in [PSH’s] NAV relative to the S&P 500 Index was driven primarily by a significant decline in the stock price of PSH’s largest holding, Universal Music Group”.
Pershing Square Holdings’ interim fiscal report and update on UMG followed the news that Bill Ackman’s Pershing Square Capital Management pulled the plug on the initial public offering (IPO) of its new US-based closed-end investment management fund.
The withdrawal followed reports of regulatory scrutiny from the US Securities and Exchange Commission (SEC), which was expected to require additional details about the closed-end fund before approving the IPO price.
YOu can read Pershing Square’s full H1 2024 investor update on UMG below:
UMG’s shares experienced a sharp drop when the company reported results last month. While the company’s overall revenue growth of 10% and operating income growth of 11% were both strong, subscription and streaming revenue growth, a key metric, decelerated during the quarter from its recent double-digit growth rate to mid-single digit growth. We believe the quarter’s disappointing subscription and streaming growth is due to certain idiosyncratic factors unique to UMG combined with some weakening in the overall economic environment. As evidenced by UMG’s peers’ results however, music streaming is still growing at a healthy rate.
We believe that UMG’s underperformance this quarter will prove to be short-term in nature and does not impact our view of UMG’s medium and long-term growth prospects. We continue to believe that music has a long runway of future growth, as it remains under-monetized relative to history and when compared to other forms of media. We expect the industry to improve monetization through new products and services, with better segmentation of customers including higher-priced tiers and increased subscription prices.
UMG’s subscription revenue growth of 7% slowed from 13% last quarter, as the company began to lap last year’s price increases. Slower growth at certain digital service providers (“DSPs”) offset strong growth at Spotify and YouTube. While quarterly performance can fluctuate, we believe that each of UMG’s core DSPs has a healthy business and that UMG can further drive streaming and subscription growth by working with its DSP partners to improve their offerings. The company is now working with Spotify in launching a premium offering for superfans which UMG estimates could ultimately be adopted by as much as 20% of Spotify’s subscriber base.
We believe there is ample room to increase pricing in the coming years as music subscriptions have been kept at flat prices for nearly a decade until some recent increases. As the industry matures in developed markets, ad-supported users who today receive free music can be charged a monthly subscription fee, as is typically the case in the video streaming industry. While each of the major DSPs increased prices for individual subscriptions from $9.99 to $10.99, only Spotify and Deezer have raised prices to $11.99 and only in certain geographies and for certain plans.
During the quarter, UMG’s streaming revenues (revenues from ad-supported music) declined by 4%, a sharp deceleration from double-digit growth last quarter, as economic uncertainty caused a slowdown in advertising revenues from its largest partners. The decline was also caused by the absence of revenues from TikTok while a new deal was being negotiated which did not start until the beginning of May. UMG’s revenues from Meta also decreased temporarily while the companies worked together on a more holistic deal that will grow other aspects of their relationship. While streaming revenues are less predictable because they are much more susceptible to economic conditions, we believe that over the long term they should grow at a similar or higher rate than subscription revenue growth.
UMG’s management team led by Sir Lucian Grainge has a long track-record of growing and shaping the music market by working with its partners in innovating creative solutions to drive growth. For example, UMG’s efforts led to the industry-wide adoption of “artist-centric” initiatives that will result in a greater share of streaming royalties for its artists. UMG is also leading the industry by working with partners to launch new products to harness AI’s growth opportunities while also ensuring regulatory and legal protection for its artists.
Similar to how investors initially overreacted to concerns about the potential negative impact from AI, only to see UMG shares quickly recover as the market better understood the AI risk, we believe that as investors better understand UMG’s path to higher revenue growth and regain confidence in the long-term health of the industry, the company’s share price is likely to increase significantly from its current levels. To that end, the company is hosting a Capital Markets Day in September which is the ideal forum for management to provide investors with more details on its business and the long-term growth opportunity. Given UMG’s strong market position and long runway for sustained earnings growth, we believe that the company’s current valuation represents a deep discount to its intrinsic value.
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