Music stocks are a buy as song publishers see huge growth

Many investors have refrained from buying shares of the country’s biggest music publishers since the start of the Covid-19 pandemic. This includes Sony Company (NYSE:SONY). SONY’s stock price has risen 259% over the past five years. Yet no one seems to notice.

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Much of this investor apprehension likely stems from a series of regulatory defeats. But despite their lack of success in Washington, the biggest music stocks are in good shape and will continue to do well. So, it’s time to settle your wallet with some music publishers.

Legal battles in the music industry

Certainly, the pandemic has put a damper on musical values. Investors feared that Washington would refuse to grant music publishers and venues a series of bailout requests. It would sink the industry beyond repair. Yet musical values ​​continued to buzz.

Other regulatory concerns have also dissipated. In the final days of former President Donald Trump’s term in office, the Justice Department decided do not alter or eliminate federal antitrust agreements.

These prevented ASCAP and BMI – two organizations that manage music publishing – to exercise market power to unilaterally raise licensing prices. This meant that they would not be able to significantly increase the costs of radio stations.

The administrations of Trump and former President Barack Obama have rejected similar attempts by major music publishers to circumvent antitrust laws and raise prices for individual streaming services.

Last year, the DC Circuit Court of Appeals also reversed an earlier ruling allowing massive increases mechanical royalties paid to music publishers by streaming services. Some investors saw the failures as a harbinger of tough times for music stocks.

New data alleviates concerns

Marketers’ concerns about the publishers’ ineffective political agenda may have seemed logical. But new data of the National Music Publishers’ Association (NMPA) suggests that these fears were unfounded. Music values ​​were not financially affected by these regulatory failures. They never needed help from Washington to remain viable investment options in the first place.

In 2020, many other entertainment industry stocks struggled. Individual artists and songwriters have witnessed real hardship. Yet the publishing industry grew its revenue by 9.6% year-over-year (YOY).

Revenue growth was led by the largest music publishing companies. These figures match company-specific earnings reports that have been made public in recent weeks. Here are reports from four of the biggest music publishers:

  • Sony saw 36.6% year-over-year growth from 2019 to 2020. In the second quarter from 2021, its music business and visual media/platform revenue increased by 17.6%.
  • Warner Music Group (NASDAQ:WMG) had a strong Q3 2021with the highest quarterly revenue in its 17 years as a stand-alone business.
  • Bertelsmann Music Group reported 9% revenue growth in the first half of 2021 – its best results in the first half.
  • Universal Music Group (OTCMKTS:UMGNF) saw a 15.5% year-over-year increase recorded music revenue in the third quarter of 2021.

The bullish case ahead for music stocks

The big music publishers should continue to do well for the same reasons they weathered the pandemic. Strong radio and streaming returns as well as new creative revenue streams will continue to contribute to the bottom line.

Music publishers have particularly benefited from the streaming industry Gains of 13.4% YoY from 2019 to 2020. Data from 2021 already indicates that this boom is not going away anytime soon.

In the first half of 2021, the average number of on-demand music streaming paid subscriptions reached 82 million. This is a 13% increase from the first six months of 2020.

The effect of the increase is very apparent in the publisher’s recent revenue reports. Sony’s revenue from digital streaming services increased 43% in Q2 2021 compared to Q2 2020. UMG achieved a 14% increase in subscription and streaming revenue compared to its Q3 2020.

The biggest publishers are taking their pandemic windfalls and reinvesting them into future revenue. GMB recently purchased Tina Turner’s catalog for $300 million. Universal Music Group nabbed Bob Dylan for an estimated price of above this number.

This effectively cuts out the middleman from songwriting. It sets up a higher revenue intake in the years to come. No more sharing future royalties with the songwriter. Publishers can take 100% of a song’s future revenue by buying the songwriter’s catalog directly.

These investments make considerable financial sense. This will make future earnings reports look even better, especially given the influx of cash in the music publishing industry.

What Wall Street says about music stocks

The street has noticed and get into the game. KKR bought a catalog of works by Ryan Tedder, the singer of OneRepublic.

Blackstone has invested in catalogs that include songs by The Lumineers and Snoop Dogg. They also acquired SESAC, a performing rights collective that secures and distributes performing royalties.

The biggest publishers are also expected to reap huge dividends from China. The growth of digital music revenue in the country is exploding. It is expected to grow from just 4.7 billion yuan in 2017 to 20.6 billion yuan by the end of 2021.

The main takeaway is that the music publishing industry has thrived throughout the pandemic. It looks set for continued gains in the future.

The string of recent policy failures by publishers in Washington has little bearing on the outlook for the industry. Investors should buy music stocks with confidence.

As of the date of publication, Tim Biggam had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to publishing guidelines.

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Chief Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. Tim has appeared on PBS and the Nightly Business Report, while maintaining a weekly appearance on Bloomberg TV and CBOE-TV to discuss everything from volatility to LEAPs. Tim has also been a guest for recurring appearances on CNBC’s Volatility Playbook.