Universal Music Earnings: Benefits From Streaming for Universal Music Are Increasing

Universal Music UMG continued its impressive top-line growth and adjusted EBITDA margin expansion in the third quarter. Top-line growth was driven mainly by an increase in recorded music and music publishing revenue, in constant currency. Revenue growth also created operating leverage, which more than offset the impact of a mix-shift toward lower-margin merchandise revenue and expanded adjusted EBITDA margin impressively. The growth is likely to accelerate in the fourth quarter and the first half of 2024 due to the price increase implemented by the music streaming providers. We did not make significant adjustments to our model and are maintaining our EUR 31 fair value estimate on the shares of narrow-moat Universal Music, which remain undervalued.

We were pleased with management’s continuing efforts to strengthen its relationship with artists. The firm recently introduced a different music streaming model which has a higher payout for professional or very popular artists. The firm is partnering with the music streaming provider Deezer to implement such a model, which it refers to as an artist-centric model. Whether the leading music streaming provider Spotify will follow remains to be seen, but its CEO Daniel Ek has downplayed the new model and believes it does not provide much upside to the professional artists’ earnings.

Recorded music revenue increased by 5% on a constant-currency basis year over year, with subscription and ad-supported streaming growth at 13% and 5%, respectively. In addition to the continuing increase in subscribers, higher prices by Apple and Amazon drove growth in subscription revenue. This likely will continue as other platforms such as Spotify and YouTube Music increase prices in more markets. Ad-supported streaming revenue increased 5% in constant currency, indicating a steady state in demand for advertising, although as management stated, it varies by market.