Photo Credit: Bill Ackman / Senate Democrats
Pershing Square Holdings is unconcerned by Universal Music Group’s recent subscription slowdown, calling it ‘short term in nature.’
Universal Music Group’s revenues in Q2 saw 10% growth year-over-year, but analysts are disappointed in the major label’s slowdown in subscription streaming revenues, which only saw 6.9% growth in the same quarter. To wit, UMG shares are down about 17% since it revealed its Q2 earnings last month.
But Pershing Square Holdings, which owns around 10% of UMG’s equity, is unworried about the “short-term” slowdown. The investment company, founded and managed by CEO Bill Ackman, expressed confidence in the label’s long-term prospects in its interim financial report for the first half of 2024.
“We believe that UMG’s underperformance [during the quarter] will prove to be short term in nature and does not impact our view of UMG’s medium and long-term growth prospects,” the company wrote. “We believe the quarter’s disappointing subscription and streaming growth is due to certain idiosyncratic factors unique to UMG combined with some weakening in the overall economic environment, [although] music streaming is still growing at a healthy rate.”
“We continue to believe that music has a long runway of future growth, as it remains under-monetized relative to history and when compared to other forms of media,” they continue. “We expect the industry to improve monetization through new products and services, with better segmentation of customers including higher-priced tiers and increased subscription prices.”
“The company is now working with Spotify in launching a premium offering for superfans which UMG estimates could ultimately be adopted by as much as 20% of Spotify’s subscriber base. We believe there is amply room to increase pricing in the coming years as music subscriptions have been kept at flat prices for nearly a decade until some recent increase.”
Pershing Square Holdings explained its belief that, as the industry matures, users subscribed to ad-supported tiers at each of the major DSPs can be charged a monthly subscription fee, “as is typically the case in the video streaming industry.”
“Similar to how investors initially overreacted to concerns about the potential negative impact from AI, only to see UMG shares quickly recover as the market better understood the AI risk, we believe that as investors better understand UMG’s path to higher revenue growth and regain confidence in the long-term health of the industry, the company’s share price is likely to increase significantly from its current levels,” the company concludes.
“Given UMG’s strong market position and long runway for sustained earnings growth, we believe that the company’s current valuation represents a deep discount to its intrinsic value.”
