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UMG: “Time to face the music”

April 10, 2023

Universal Music Group (UMG) has suffered a double downgrade from investment bank Exane/BNPP. The bank’s new rating is ‘Underperform’ (from ‘Outperform’) and comes with a target share price that reduced by 24 per cent.

“Following an LA field trip and underpinned by new data products, we see reasons for caution. We expect top-line growth to slow via volume and market share headwinds, with Tiktok hopes to underwhelm. We fear operating leverage will disappoint on deteriorating artist terms, dragging on earnings momentum. While UMG is likely to remain a long-term winner from digitalisation, we think AI music is to emerge as a challenging thematic and drag on elevated multiples. We downgrade to Underperform,” said the bank.

The bank gives its reasons for becoming more cautious. It admits that some 90 per cent of analysts still rate UMG as a ‘Buy’ but says its views are informed by a differentiated network of contact across the [music] industry including access to top management, major labels, and representatives of leading recording artists.

The bank’s report says that it still expects UMG to deliver solid growth, but there are risks ahead. It expects UMG’s revenue growth to be slower and underperform those consensus expectations.

The bank adds that it does not expect repeated price increases to be easy to implement. Specifically, it suggests that within ad-streaming, for example, negotiations with Tiktok will be “hard fought”. It also predicts that artist’s royalties will also grow over the longer term and drag down recorded margins over the next 3 years.

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