Universal Music: Subscription Weakness Isn’t Representative of the Long Run of Opportunity

Universal Music’s stock was slammed after its second-quarter earnings report, with the firm reporting a deceleration in subscription streaming revenue growth to the midsingle digits. With recorded music subscription sales making up about 40% of total revenue, less robust long-term subscription prospects would warrant a sizable valuation cut. However, after digging deeper into the outlook for subscription streaming and listening to last week’s capital markets day, we have increased conviction in our initial take: subscription growth is likely to reaccelerate, and the market’s response was a drastic overreaction. We believe Universal has a wide moat and more power than any other company in a music industry poised to continue growing. In our view, the market selloff allowed us to buy a best-of-breed stock at a significant discount to fair value, which we continue to estimate at EUR 31.