Bill Ackman unworried by Universal Music Group subscription revenue blip

Universal Music Group (UMG) reported a 10% year-over-year revenue increase in Q2 2024, but the market reacted unfavorably. Wall Street analysts expressed disappointment over UMG’s subscription streaming revenue growth, which reached only 6.9% YoY, missing some analysts’ expectations of 11%. As a result, UMG’s stock price fell by 23% on the Amsterdam Euronext following the earnings announcement.

Despite the stock's decline, Bill Ackman’s Pershing Square Holdings, which holds approximately 10% of UMG’s equity, remains confident in the company's long-term prospects. In its interim financial report for H1 2024, Pershing Square attributed UMG's underperformance to short-term market overreactions. The firm expects a recovery, highlighting music's potential for growth due to its current under-monetization compared to other media sectors.

Pershing Square likened this situation to previous concerns about AI's potential impact on UMG, where investors initially overreacted before the stock rebounded. The firm believes that as investors regain confidence in UMG's long-term revenue growth, the company’s stock price will rise significantly.

In the report, Pershing Square emphasized potential growth areas, such as better customer segmentation and higher subscription tiers. UMG's CFO, Boyd Muir, stated that research indicates up to 20% of Spotify’s subscribers might upgrade to a higher-priced “super-premium” tier, supporting future revenue growth.

UMG’s Q2 results showed strong overall performance, with $3.15 billion (EUR 2.932 billion) in revenue across all divisions and an adjusted EBITDA of $699 million (EUR 649 million), up 11.3% YoY. However, the lower-than-expected subscription streaming growth led to downgrades from analysts at Guggenheim, Citi, Barclays, and Wells Fargo.

UMG’s largest shareholders include a Tencent-led consortium with around 20% and former Vivendi President Vincent Bolloré with 18%. Despite stock volatility, Pershing Square reaffirmed its belief in UMG’s intrinsic value and potential for future growth.