The past year has been a cacophony for audio entertainment stocks. Universal Music Group debuted in the market and Warner Music saw its shares soar – then analysts became cautious on both stocks. During this time, SiriusXM was mostly flat and Spotify dropped before regaining its stride later in 2021.
While the growth of music streaming has turned investors’ heads and reignited interest in music and audio stocks, company-specific issues and trends have affected their ebb and flow over the past year.
Universal Music, the label of Lady Gaga, Justin Bieber and Taylor Swift, debuted on Euronext Amsterdam in late September with a pop, gaining 37% on its first day. The music powerhouse’s listing, the largest music IPO in history, valued the company at more than $53 billion and allowed French media company Vivendi, which will retain a stake of ‘about 10% for a minimum period of two years, to enjoy a rebound. sector thanks to the streaming boom.
Since then, the stock has been on a downward trend after hitting a high of 27.96 euros in mid-November. At the close of Wednesday, December 15, it was 4% lower than its open, but 30% higher than its premarket benchmark price.
Another music major also hit a high in the fall before dropping into a bit of funk. Shares of Warner Music Group had closed 2020 at $37.99 and were trading in the $30s until a late summer boom settled by the company’s investor group took it to hit a 2021 high of $50.23 in late October. But that was followed by analysts suggesting it had bottomed, sending its stock lower. It closed at $42.00 on December 15, still up 11% for the year.
Bernstein analyst Todd Juenger, who has a ‘market performance’ rating on the stock, cut his price target from $1 to $45 in mid-November following the major’s latest results. of music, calling the quarter “one where the fastest growing revenue stream becomes the slowest. He explained that the company exceeded revenue estimates, but “missed where it matters most – digital streaming.” He explained, “The main culprit seems to be emerging platforms (i.e. TikTok, Peloton, Twitch, etc.), which investors have viewed as the most incremental, accretive part of the growth and highest in streaming revenue (and where WMG has shown particular leadership in involving).
Juenger also pointed out, “We learned on the (earnings) call that these early trades were mostly fixed rate and short term (i.e. one to two year) trades. . So while most of these platforms are posting strong double-digit growth, Warner Music’s revenue has been flat sequentially (linearly over the term of the deal). When these deals were first signed, going from zero to something was a significant addition to the growth rate. Now they are a drag…until they expire and renew, presumably at dramatically accelerated rates.
Bank of America Merrill Lynch analyst Jessica Reif Ehrlich even downgraded Warner Music from “buy” to “underperform” and lowered its price target from $9 to $42. “While we remain optimistic over the longer term, we believe equities are currently fully priced and there are limited near-term catalysts,” she wrote in her report.
Music streaming giant Spotify’s stock has had a different trajectory in 2021. After some noise earlier in the year due to slower-than-expected average monthly user trends, its third-quarter earnings report at the end of October showed that he had found his rhythm.
“Back on the train,” Morgan Stanley analyst Benjamin Swinburne summed up in his earnings report, reiterating his “overweight” rating. “(We) list Spotify as our top pick in the media and entertainment coverage group,” he pointed out. “This is based on the idea that the total addressable market for global audio streaming is substantial, that Spotify can continue to be the global market leader, and that ultimately this will translate into substantial earning power.”
Wells Fargo analyst Steven Cahall also pointed to Spotify’s growing ad business. “Spotify: Now an Ad Company,” he titled his report, mentioning that it appears to be “a key new area of excitement for investors.” His opinion, however, was more mixed. “It’s a logical strategy given that the ads favor scale, which Spotify has,” explained the analyst who has an “underweight” rating on the company’s stock. “However, it is difficult to assess the market opportunity as Spotify’s ad-supported music business in the US appears quite close in size/scope to Pandora.” And he added the key question to consider: “Does advertising come at the expense of premium (subscribers)?”
But Guggenheim analyst Michael Morris, who has a “buy” rating on Spotify, raised his price target from $45 to $310. “We expect stable premiums and growth in ads beyond current consensus estimates to drive further appreciation in stocks,” he told investors.
Despite more optimism, as of mid-December the stock, at $225.40, remains 28% below its 2020 closing price.
Meanwhile, satellite radio giant SiriusXM, in its first year under new CEO Jennifer Witz, continued to grow, but its stock didn’t show much margin, closing at 6. $38 on Dec. 15, one cent above the end of 2020.
The business has “grew well despite perceived competition in streaming audio,” Cahall noted in a recent report and also noted that investors were concerned for at least part of the year about streaming forecasts. free cash flow from management, which “appears now to be mostly conservatism.”
Given chip shortages amid the global supply chain crisis, car sales have also stagnated in 2021, meaning a more limited pool for potential satellite radio users, which is another puzzle for investors. But Jeffrey Wlodarczak of Pivotal Research Group noted in November that “with signs of increasing US auto production, SiriusXM results should begin to materially benefit by mid-22.”
Radio giant iHeartMedia continues to grow its digital business, and investors appeared to be rewarding it in 2021 despite some weakness later in the year. Reaching $19.33 in mid-December, the stock is still up 49% for the year.
Wells Fargo’s Cahall, in a Dec. 1 report, shared some takeaways from an executive presentation at a summit hosted by his company. “The audio is hot. We heard this sentiment shared by each of the audio companies we hosted at our conference,” he wrote. “A wide gap between radio consumption and monetization continues to exist, although iHeartMedia believes ad dollars will eventually follow the consumer. iHeartMedia is expected to be a key beneficiary due to its leadership position in digital and at unparalleled scale (90% reach on broadcast alone).”
His conclusion on the stock: “iHeartMedia remains our preferred name in audio, with the recent downturn providing an attractive entry point into what we believe will be a strong recovery in 2022 and an opportunity for sustained digital growth. “
Live Nation Entertainment, meanwhile, was seen for much of 2021 as a play on the reopening of economies and the return of concerts and other live events post-pandemic. After closing at $73.48 in 2020, it peaked at $127.75 on November 5 and rose 45% in mid-December to $106.42.
Guggenheim’s Curry Baker predicts more upside to come, noting in a recent report headline: “Outlook for record 2022 and strong multi-year growth cycle.” With a ‘buy’ rating and share price target of $122, he wrote, “The industry supply and demand tailwinds appear stronger than ever, setting a solid multi-year cycle of high growth for Live Nation.
Morgan Stanley’s Benjamin Swinburne, in a Dec. 15 report, also predicted the audio entertainment sector’s winners in 2022. His top pick is Warner Music, “after the stock has fallen 15% since fiscal fourth-quarter results in November”. He added, “We expect high single-digit to low double-digit revenue growth, driven by music monetization across an increasing number of platforms, geographies and use cases. Additionally, we see rising consensus earnings before interest, tax, depreciation, and amortization for fiscal year 2022 and rising emerging streaming revenue as catalysts for revaluation.
The analyst also argued that Spotify shares “could provide the absolute greatest benefit from our bullish hedge, which is accelerating premium subscriber growth and margin expansion through podcasting.”
Notably, these two audio names make up half of its four favorite media and entertainment stocks for 2022, Fox Corp. and Endeavor being the others. Said Swinburne: “Our best ideas for next year can address rising content costs and translate (revenue) growth into increased profits.”