Music Majors Up, Spotify Down: Audio Entertainment Stocks Dance to Their Own Beat – Hollywood Reporter

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Universal Music joined the orchestra of music stocks in September, SiriusXM is roughly unchanged, and Spotify overcame a funk with its third-quarter results, but will end 2021 lower.
By Georg Szalai
International Business Editor
This past year was a cacophony for audio entertainment stocks. Universal Music Group saw a strong market debut and Warner Music saw a run-up in shares — then analysts grew cautious on both stocks. Meanwhile, SiriusXM was mostly flat and Spotify dropped before finding its rhythm later in 2021.
While the growth in music streaming has turned investors’ heads and re-energized interest in music and audio stocks, company-specific issues and trends affected their ebb and flow in the latest year.

Universal Music, the label home of the likes of Lady Gaga, Justin Bieber and Taylor Swift, made its market debut on Amsterdam’s Euronext exchange in late September with a pop, gaining 37 percent on its first day. The music powerhouse’s market 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 roughly 10 percent stake for a minimum period of two years, to cash in on a bounceback of the sector thanks to the streaming boom.

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Since then, the stock has trended lower after hitting its high of 27.96 euros in mid-November. As of the close on Wednesday Dec. 15, it was 4 percent below its opening trade, but 30 percent above its pre-market debut reference price.
Another music major similarly hit a high note in the fall before running into a bit of a funk. Warner Music Group shares had closed 2020 at $37.99 and traded in the $30s until a late summer boom tuned up by the company’s band of investors led it to hit a 2021 high of $50.23 in late October. But that was followed by analysts suggesting it had hit a ceiling, pushing its stock lower. It closed at $42.00 on Dec. 15, still up 11 percent for the year.
Bernstein analyst Todd Juenger, who has a “market-perform” rating on the stock, cut his price target by $1 to $45 in mid-November following the music major’s latest results, calling the quarter “the one where the fastest-growing revenue stream becomes the slowest.” He explained that the firm beat revenue estimates, but “missed where it matters most – digital streaming.” He explained: “The key culprit seems to be emerging platforms (i.e. TikTok, Peloton, Twitch etc.), which investors have considered to be the most incremental, most growth accretive, most high potential portion of streaming revenue (and where WMG has shown particular leadership to be involved).”

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Juenger also highlighted: “We learned on the (earnings) call that these early deals were mostly fixed rate, short-term (i.e. one- to two-year) deals. So while most of those platforms are showing strong double-digit growth, Warner Music’s revenue from them was flat sequentially (straight-lined over the life of the deal). When these deals were first signed, going from zero to something was a meaningful addition to growth rate. Now they are a drag … until they expire and renew, at presumably significantly stepped up rates.”
Bank of America Merrill Lynch analyst Jessica Reif Ehrlich even downgraded Warner Music from “buy” to “underperform” and cut her price objective by $9 to $42. “While we remain bullish longer term, we believe shares are currently fully valued and there are limited catalysts near term,” she wrote in her report.
Music streaming giant Spotify’s stock had a different trajectory in 2021. After some noise earlier in the year due to slower-than-expected monthly average user trends, its third-quarter earnings report in late October showed that it got its groove back.
“Back on the Train,” summarized Morgan Stanley analyst Benjamin Swinburne in his earnings takeaway report, reiterating his “overweight” rating. “(We) list Spotify as our top pick in the media and entertainment coverage group,” he highlighted. “This is based on the view that the global streaming audio total addressable market is substantial, that Spotify can continue to be the global market leader and that ultimately that will translate into substantial earnings power.”
Wells Fargo analyst Steven Cahall also highlighted Spotify’s growing advertising business. “Spotify: Now an Ad Company,” he entitled his report, mentioning that this seems to be “a key new point of excitement for investors.” His take was more mixed though. “It’s a logical strategy given ads favor scale, which Spotify has,” explained the analyst who has an “underweight” rating on the shares of the company. “However, it’s tough to size the market opportunity as Spotify’s U.S. ad-supported music business seems pretty 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, boosted his stock price target by $45 to $310. “We expect premium stability and ad growth in excess of current consensus estimates to drive further share appreciation,” he told investors.
Despite more optimism, as of mid-December, the stock, at $225.40, remains 28 percent 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 range, closing at $6.38 on Dec. 15, one cent above where it had ended 2020.
The firm has “grown nicely despite perceived competition in audio from streaming,” Cahall noted in a recent report and also noted that investors were concerned for at least part of the year about free cash flow guidance from management, which “now appears to primarily be conservatism.”

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Given chip shortages amid the global supply chain crisis, car sales also stalled in 2021, meaning a more limited pool for potential satellite radio users, providing another headache for investors. But Pivotal Research Group’s Jeffrey Wlodarczak noted in November that “with signs of a turn higher in U.S. auto production, SiriusXM results should start to materially benefit by mid-’22.”
Radio giant iHeartMedia continues to grow its digital business, and investors seemed to reward it in 2021 despite some weakness later in the year. Hitting $19.33 in mid-December, the stock is still up 49 percent for the year.
Wells Fargo’s Cahall, in a Dec. 1 report, shared some takeaways from a management presentation at a summit organized by his firm. “Audio is hot. We’ve heard this sentiment echoed by each of the audio companies we hosted at our conference,” he wrote. “A wide gap between radio consumption and monetization continues to exist, though iHeartMedia believes the advertising dollars will eventually follow the consumer. iHeartMedia should be a key beneficiary due to its leadership position in digital and unmatched scale (90 percent reach on broadcast alone).”
His conclusion on the stock: “iHeartMedia remains our preferred name in audio, with the recent pull-back offering an attractive entry point in what we believe will be a strong 2022 recovery and sustained digital growth opportunity.”
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 after the pandemic. After closing at  $73.48 in 2020, it hit a high of $127.75 on Nov. 5 and was up 45 percent as of mid-December at $106.42.
Guggenheim’s Curry Baker predicts more upside ahead, noting in a recent report headline: “Outlook for a Record 2022 and Strong Multi-Year Growth Cycle.” With a “buy” rating and $122 stock price target, he wrote: “Industry supply and demand tailwinds appear stronger than ever, setting up a robust multi-year cycle of elevated growth for Live Nation.”
Morgan Stanley’s Benjamin Swinburne, in a Dec. 15 report, also predicted the audio entertainment sector’s winners of 2022. His top pick is Warner Music, “following the 15 percent decline in shares since fiscal fourth-quarter earnings in November.” He added: “We see high single-digit to low double-digit revenue growth ahead driven by music monetization across a growing number of platforms, geographies, and use cases. In addition, we see upside to consensus earnings before interest, taxes, depreciation and amortization in fiscal year 2022 and increases in emerging streaming revenues as catalysts for re-rating.”
The analyst also argued that Spotify shares “may offer the greatest absolute upside in our coverage in the bull case, which is accelerating premium subscriber growth and margin expansion driven by podcasting.”
Notably, those two audio names make up half of his four favorite media and entertainment stocks for 2022, with Fox Corp. and Endeavor being the others. Said Swinburne: “Our top ideas for next year can navigate rising content costs and translate top-(revenue) growth into earnings upside.”

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