Music companies face Wall Street's high expectations

The glamor of the music industry, a darling of Wall Street in recent years, seems to have lost some of its luster.

Record and publishing stocks that boomed in 2023 are mostly retreating in 2024. Universal Music Group ( UMG ), hitting highs until two weeks ago, was down 14.0% through Thursday (Aug. 15 ). Warner Music Group (WMG) is off 21.0%. Reservoir Media is up 2%, although it is down 15.0% since July 26. K-pop companies have fallen off the cliff.

Not that business is bad – far from it. But as companies have released earnings results over the past two weeks, the good results have at times been overshadowed by a financial metric — namely, subscription growth — that has either missed expectations or is headed in the wrong direction. In some cases, the results were simply disappointing.

Since UMG posted weaker-than-expected subscription growth in the second quarter, analysts and investors have been re-examining their forecasts, wondering if they're setting their expectations too high and trying to figure out whether UMG's results reflect the broader market. The company's recorded music subscription revenue rose 6.5% in the quarter, about half of analysts' expectations.

Although UMG executives cautioned against reading too much into the results from any quarter, investors did just that. UMG's share price, which was among the best performers in its label-publisher peer group in 2024, fell 24% in a single day, despite UMG posting a 10% rise in revenue and better margins than what last year

Subscription growth isn't the only aspect of the modern music business, but it's probably the main reason most investors buy into music companies. As Bulletin board wrote in March, the music industry is increasingly—perhaps too—dependent on subscription revenue. In the US in 2023, subscription revenue accounted for 59.3% of recorded music revenue, up from 57.8% in 2022 and well above 47.3% in 2018, according to the RIAA. With ad-supported streaming stagnant, subscriptions become even more important.

Subscription revenue was on everyone's mind when WMG released earnings a week later. However, the company's streaming revenue showed no signs of UMG slipping, suggesting that the reaction to UMG's quarter may have been overblown. WMG's recorded music subscription revenue rose 7%, while ad-supported streaming revenue was flat. The streaming market, said the CEO Robert Kyncl during the Aug. 7 earnings call, is “differentiated,” “healthy” and has more room for subscriber growth. While analysts' opinions differed, investors seemed quite pleased, as WMG's share price gained 2% on the day.

Sony Music had similarly positive streaming results in its latest fiscal quarter. Total recorded music streaming revenue improved 6%, suggesting that subscription revenue rose more than 6% to offset a slight decline in ad-supported streaming.

Often overshadowed by UMG and WMG, Reservoir Media has seen steady growth since going public in 2021. The company's latest earnings results delivered more of the same: revenue rose 8% and operating income before depreciation and amortization increased by 27%. While there was a decline in recorded music revenue, it couldn't be attributed to a persistent streaming market. Conversely, Reservoir was high a year ahead of De La Soul's catalog reissue, which it picked up in its acquisition of Tommy Boy Music in 2021. Still, its share price is down 11.9% since the quarterly release of earnings, while the S&P 500 rose 2% over the same period.

K-pop is a completely different story. While these South Korean companies are riding the genre's success to aggressively expand globally through partnerships, joint ventures and acquisitions, they are showing signs of growing pains. In the year to August 15, the share prices of the four major K-pop companies had fallen an average of 35.5%.

Second-quarter results explain part of the decline. Three of these K-pop companies saw an average decline in net income of 84%, while the fourth saw its net profit turn into a net loss. At JYP Entertainment, home to Stray Kids and iTZY, revenue fell 37% and net profit plummeted 95%. SM Entertainment managed a 6% increase in consolidated revenue — the main SM Entertainment division did much better than its subsidiaries — but net profit is still down 70%. HYBE's revenue rose 6% to a quarterly record, but its net profit fell 86%.

South Korean companies' relatively small rosters and lack of diversity explain the shortfall from quarter to quarter. JYP Entertainment, for example, was missing its most popular artists from its second-quarter album release schedule — a problem for a K-pop label that depends on fans' propensity to buy CDs. (albums made up 49% of total revenue a year earlier). Down 82% in the last quarter, albums' share of revenue dropped to just 14%.

There are many opportunities for companies to regain their luster. UMG CFO Boyd Muir insisted the company will consistently deliver high single-digit revenue growth. WMG's Kyncl insisted that “streaming momentum remains healthy” and the company sees “plenty of room for subscriber growth” globally. K-pop labels won't go two consecutive quarters without priority releases in sales figures. Any quarter can have hiccups, but long-term trend lines still point in the right direction.