Global Expansion And DSP Upgrades Will Spur Streaming Amid Risks

Key Takeaways

• Strategic global expansion and strong subscription revenue growth across diverse geographies highlight significant revenue opportunities for UMG in emerging markets.
  
• Innovations like Streaming 2.0 and DSP collaborations are poised to enhance ARPU, improving UMG's revenue and operating margins through strategic reorganization.
  
• Shifts in consumption and economic factors could challenge revenue growth, profitability, and resilience in monetization and pricing strategies.

Catalysts

Operates as a music company worldwide.

• The broad-based growth in UMG's subscription revenue, driven by a diverse range of geographies and DSP platforms, including double-digit growth from several major partners, indicates a strong foundation for continued revenue growth.
  
• UMG's strategic global expansion into high-potential markets such as Japan, Germany, China, and Mexico, with robust growth in these regions, suggests significant revenue expansion opportunities in emerging markets.
  
• The advancement of the Streaming 2.0 framework, including potential adoption of super-premium tiers in collaboration with DSPs like Spotify, highlights potential for increased ARPU and revenue growth.
  
• Ongoing product innovation by DSPs, such as AI-driven user experiences and enhanced subscriber acquisition strategies, can drive improved conversion rates and bolster subscription revenue.
  
• UMG's strategic reorganization, cost-savings initiatives, and focus on optimizing their global operations are expected to enhance operating margins and support earnings growth.

Universal Music Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Universal Music Group's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.6% today to 13.4% in 3 years time.
• Analysts expect earnings to reach €1.9 billion (and earnings per share of €1.05) by about May 2028, down from €2.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.3x on those 2028 earnings, up from 22.7x today. This future PE is greater than the current PE for the NL Entertainment industry at 22.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.92%, as per the Simply Wall St company report.

Universal Music Group Future Earnings Per Share Growth

Risks

• The shift to short form consumption and its inadequate monetization could challenge ad-supported streaming revenue growth, impacting overall revenue.
  
• Economic downturns, despite music's historical resilience, could still present financial unpredictability affecting consumer spending on subscriptions, potentially impacting revenue.
  
• Currency fluctuations could pose headwinds for revenue, with management indicating a projected 2% decrease in 2025 due to foreign exchange, potentially affecting earnings.
  
• The continued negative impact of revenue and repertoire mix could lead to flat margins, affecting profitability and net margins.
  
• Potential challenges and delays in implementing new pricing strategies with DSPs could result in slower-than-expected ARPU growth, affecting the revenue growth trajectory.

Valuation

• The analysts have a consensus price target of €29.361 for Universal Music Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €41.0, and the most bearish reporting a price target of just €15.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €14.3 billion, earnings will come to €1.9 billion, and it would be trading on a PE ratio of 34.3x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of €25.85, the analyst price target of €29.36 is 12.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.