This analyst has watched Universal Music Group closely for years (and hasn’t always been mega-positive). He just upgraded UMG’s stock for the second time in 12 months.

There are few financial analysts that have observed the music business – particularly Universal Music Group – for as long, and as closely, as William Packer of BNP Paribas Exane.

London-based Packer’s history of analyzing UMG’s stock price (and its potential stock price) pre-dates the music company’s flotation on the Amsterdam Euronext in 2021 by many years.

Throughout Packer’s tenure of watching UMG’s fortunes, he’s been typically bullish on the future of the company, and the future of music rights more generally.

That confidence in UMG’s future took a tumble in April last year, however, as Packer double-downgraded UMG’s stock, expressing concerns over – amongst other things – the potential of AI to harm the value of copyright, plus TikTok’s global influence on music consumption.

Six months after that double-downgrade, in October 2023, Packer then re-upgraded UMG’s stock slightly to “neutral” from “underperform”.

While remaining circumspect of threats to major music companies, Packer acknowledged that recent label-friendly actions from DSPs (including “artist-centric” royalty models) had left him feeling more optimistic about the future path for UMG’s stock.

Today (August 29), Packer has tweaked his view of Universal Music Group’s stock once more, and it’s good news for Sir Lucian Grainge and co: Packer has again upgraded his stock rating, this time from “neutral” to “outperform”.

To be clear, Packer’s new upgrade has been informed by a drop in UMG’s share price since the company announced its Q2 2024 results last month.

In those results, UMG’s overall revenues were up by around 10% YoY, but a 6.9% YoY (constant currency) rise in streaming subscription revenues missed analyst expectations, leading to a sharp fall in share price on the Euronext.

In Packer’s view, UMG’s current share price (EUR 24.05) is attractive for would-be investors: he has today placed a EUR 27.50 price target on the stock.

“Weak Q2 results from Universal Music Group (UMG) have turned up the volume on industry and investor fears around growth in music streaming…but we see opportunity amidst the noise,” wrote Packer in his research note.

Packer saw UMG’s subscription performance in Q2 as reasonably predictable, he says – what he calls the “crystallisation of streaming dynamics we have been witnessing since 2022”.

However, following several analysts’ downgrading of UMG stock post-Q2, Packer now sees more reasons to be cheerful about UMG’s potential.

“We have been cautious on subscription streaming volumes, pricing, TikTok and artist cost headwinds for 18m+. With expectations [over UMG’s stock] now rebased and streaming still well placed to deliver healthy (albeit lower than previously expected) revenue growth for the medium term, we see the de-rating as an attractive opportunity. Furthermore, we think the recent upheaval and evidence of volume maturity could act as a positive catalyst for a reset in DSP/label relations driving a new ‘grand bargain’ of more pricing for a more even distribution of economics. [This] could drive significant upside to current forecasts for both DSPs and labels.”

William Packer, BNP Paribas Exane

Packer says there are “prospects for a ‘grand bargain’ between platforms (DSPs) and labels,” driven by factors including decelerating subscriber growth in mature markets.

This ‘grand bargain’, he says, would see subscription price rises at the likes of Spotify, in exchange for these DSPs receiving “a more even distribution of economics” – i.e. the labels granting Spotify et al. a larger share of streaming’s revenue ‘pie’ as a reward for charging consumers higher prices for their subscriptions.

This ‘bargain’ could “drive further upside” for both DSPs and UMG, says Packer.

(Relevant: Universal Music Group’s current global licensing deal with Spotify is understood to begin a renegotiation process next year.)

Furthermore, outside of this potential ‘bargain’, Packer and his team believe that UMG is “still well placed to deliver healthy (albeit lower than previously expected) [streaming] revenue growth for the medium term”.

Indeed, BNP Paribas Exane now projects that UMG’s subscription streaming revenues will grow at a YoY rate of +7.6% between 2024 and 2026.

However, with a “grand bargain” new deal between UMG and DSPs like Spotify, says BNP, that YoY rate could increase to +9.1%.

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Packer notes that, for 18 months, BNP Paribas Exane has pointed to risk factors for UMG (including TikTok, subscription streaming rates, and artist costs) to inform price targets that have been lower than some of their peers.

However, with consensus over UMG’s stock price now dropping following analyst downgrades elsewhere, Packer believes that BNP’s new forecasts represent a higher-than-consensus outlook.

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Another party who is in bullish mood over UMG’s future stock performance is Bill Ackman – the head of UMG’s 10% stockholder, Pershing Square Holdings.

Earlier this month, Ackman’s PSH noted in a letter to shareholders: “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.”Music Business Worldwide