This analyst has watched Common Music Group intently for years (and hasn’t all the time been mega-positive). He simply upgraded UMG’s inventory for the second time in 12 months.

There are few monetary analysts which have noticed the music enterprise – significantly Common Music Group – for as lengthy, and as intently, as William Packer of BNP Paribas Exane.

London-based Packer’s historical past of analyzing UMG’s inventory worth (and its potential inventory worth) pre-dates the music firm’s flotation on the Amsterdam Euronext in 2021 by a few years.

All through Packer’s tenure of watching UMG’s fortunes, he’s been usually bullish on the way forward for the corporate, and the way forward for music rights extra usually.

That confidence in UMG’s future took a tumble in April final 12 months, nonetheless, as Packer double-downgraded UMG’s inventory, expressing issues over – amongst different issues – the potential of AI to hurt the worth of copyright, plus TikTok’s international affect on music consumption.

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

Whereas remaining circumspect of threats to main music corporations, Packer acknowledged that current label-friendly actions from DSPs (together with “artist-centric” royalty fashions) had left him feeling extra optimistic concerning the future path for UMG’s inventory.

At present (August 29), Packer has tweaked his view of Common Music Group’s inventory as soon as extra, and it’s excellent news for Sir Lucian Grainge and co: Packer has once more upgraded his inventory score, this time from “impartial” to “outperform”.

To be clear, Packer’s new improve has been knowledgeable by a drop in UMG’s share worth for the reason that firm introduced its Q2 2024 outcomes final month.

In these outcomes, UMG’s total revenues had been up by round 10% YoY, however a 6.9% YoY (fixed forex) rise in streaming subscription revenues missed analyst expectations, resulting in a pointy fall in share worth on the Euronext.

In Packer’s view, UMG’s present share worth (EUR 24.05) is enticing for would-be traders: he has at the moment positioned a EUR 27.50 worth goal on the inventory.

“Weak Q2 outcomes from Common Music Group (UMG) have turned up the quantity on business and investor fears round progress in music streaming…however we see alternative amidst the noise,” wrote Packer in his analysis notice.

Packer noticed UMG’s subscription efficiency in Q2 as moderately predictable, he says – what he calls the “crystallisation of streaming dynamics we’ve got been witnessing since 2022”.

Nonetheless, following a number of analysts’ downgrading of UMG inventory post-Q2, Packer now sees extra causes to be cheerful about UMG’s potential.

“Now we have been cautious on subscription streaming volumes, pricing, TikTok and artist price headwinds for 18m+. With expectations [over UMG’s stock] now rebased and streaming nonetheless effectively positioned to ship wholesome (albeit decrease than beforehand anticipated) income progress for the medium time period, we see the de-rating as a gorgeous alternative. Moreover, we expect the current upheaval and proof of quantity maturity might act as a optimistic catalyst for a reset in DSP/label relations driving a brand new ‘grand discount’ of extra pricing for a extra even distribution of economics. [This] might drive important upside to present forecasts for each DSPs and labels.”

William Packer, BNP Paribas Exane

Packer says there are “prospects for a ‘grand discount’ between platforms (DSPs) and labels,” pushed by elements together with decelerating subscriber progress in mature markets.

This ‘grand discount’, he says, would see subscription worth rises on the likes of Spotify, in trade for these DSPs receiving “a extra even distribution of economics” – i.e. the labels granting Spotify et al. a bigger share of streaming’s income ‘pie’ as a reward for charging customers increased costs for his or her subscriptions.

This ‘discount’ might “drive additional upside” for each DSPs and UMG, says Packer.

(Related: Common Music Group’s present international licensing take care of Spotify is known to start a renegotiation course of subsequent 12 months.)

Moreover, outdoors of this potential ‘discount’, Packer and his workforce imagine that UMG is “nonetheless effectively positioned to ship wholesome (albeit decrease than beforehand anticipated) [streaming] income progress for the medium time period”.

Certainly, BNP Paribas Exane now tasks that UMG’s subscription streaming revenues will develop at a YoY charge of +7.6% between 2024 and 2026.

Nonetheless, with a “grand discount” new deal between UMG and DSPs like Spotify, says BNP, that YoY charge might improve to +9.1%.

Packer notes that, for 18 months, BNP Paribas Exane has pointed to danger elements for UMG (together with TikTok, subscription streaming charges, and artist prices) to tell worth targets which were decrease than a few of their friends.

Nonetheless, with consensus over UMG’s inventory worth now dropping following analyst downgrades elsewhere, Packer believes that BNP’s new forecasts characterize a higher-than-consensus outlook.

One other get together who’s in bullish temper over UMG’s future inventory efficiency is Invoice Ackman – the top of UMG’s 10% stockholder, Pershing Sq. Holdings.

Earlier this month, Ackman’s PSH famous in a letter to shareholders: “Much like how traders initially overreacted to issues concerning the potential damaging affect from AI, solely to see UMG shares rapidly get well because the market higher understood the AI danger, we imagine that as traders higher perceive UMG’s path to
increased income progress and regain confidence within the long-term well being of the business, the corporate’s share worth is more likely to
improve considerably from its present ranges.”Music Enterprise Worldwide