Universal Music Group: It’s Going To Get Tougher (OTCMKTS:UMGNF)

Universal Music Group N.V. (OTCPK:UMGNF) reported solid numbers on its latest earnings call, with all company segments contributing to its success. In response, the company made a nice move of almost 50 percent in a relatively short period of time.

In early to mid-October, it hit a double bottom of $16.35 per share, and jumped to almost $25.00 per share in early December before pulling back to $24.00 per share as I write.

While all of that is positive, it does follow a prolonged period of downward pressure on the share price of UMGNF, when it traded at about $32.00 per share on November 8, 2021, before dropping to the aforementioned 52-week low of $16.35 per share.

After making its recent move, the question the company must answer going forward is if its various segments will be able to continue to contribute to the growth of the company, or if they’re going to start performing in a mixed way that will offset one another, bringing about a period of rangebound movement in its share price.

In this article we’ll look at some of the company’s latest numbers, whether or not it has enough tailwinds to maintain momentum, and how things look for the long term.

Some recent numbers

Revenue in the third quarter was a little under €2.7 billion, up 13 percent year-over-year. Revenue growth was driven by performance across all its segments.

Recorded music growth increased 10 percent in the reporting period; up 6 percent excluding a one-off legal settlement. Subscription revenue within recorded music increased 9 percent in the quarter. Streaming supported by advertising jumped 5 percent in the third quarter.

Physical revenue in the third quarter fell 10 percent from the third quarter of 2021, primarily as a result of scheduling. On prior earnings calls the company had stated physical revenue is subject to volatility from quarter to quarter based upon releases that can make the comps difficult to match.

License and Other revenue jumped 30 percent in the reporting period, with increased demand for live events the main catalyst there.

Music Publishing revenue increased 7 percent in the third quarter. Excluding the changes in how the company now recognizes revenue, music publishing revenue would have gained 12 percent.

Merchandising revenue was up more than double to €189 million in the third quarter.

Adjusted EBITDA was €553 million, a gain of 9 percent from the third quarter of 2021. Adjusted EBITDA margin in the reporting period was 20.8 percent, down 0.6 percent from the 21.4 percent in adjusted EBITDA margin in the same quarter of 2021. The company expects adjusted EBITDA margin to trade flat for full-year 2022.

Some potential headwinds

For the most part UMGNF had a good quarter, but with economic headwinds coming in the next quarters, I’m not sure its License and Merchandise revenue will contribute as much as they did over the last quarter and year, based upon consumers being forced to make choices on how to allocate their capital.

Last year live events in general were hot because of pent-up demand to get out and participate in experiences again after being locked up during the pandemic. Whether or not that momentum will continue into 2023 is questionable, as is whether or not consumers will be buying up merchandise at the same level they have done in 2022.

Another issue was there were several one-off events that had an impact on the numbers in the third quarter. For example, a legal settlement added €52 million to EBITDA. How will EBITDA look in the next couple of quarters without that one-time, positive contribution? At this time, I’m thinking it’s going to skew to the downside, which would of course change the current growth momentum the company is enjoying.

Considerations when trading the stock

The Netherlands-based stock trades on the OTC in the U.S., and consequently, it is very thinly traded from day-to-day. Other than a rare exception, usually after an earnings report, the volume of the stock on a daily basis is under 50,000, and usually much lower than that.

What that means is it can be hard to get in and out of the stock at the desired price, depending on the volume being traded at any one time. As I was writing this article, it traded under 400 shares for the first half of the day before increasing to a little above 16 shares a little more than an hour before close.

Also keep in mind that the volume is throughout the entire trading day; during any period of time volume could be under 100 shares, so even a modest position could be hard to get in and out of.

Another thing to consider is the share price recently jumped as a result of a decent earnings report from the company for the third quarter. After soaring almost 50 percent from that time, I don’t see a catalyst that would drive the share price higher on a sustainable basis.

On the contrary, I see it having a far better chance of correcting than continuing its upward move.

Conclusion

The last quarter was a good one for UMGNF, but I have my doubts it’ll be able to repeat the performance in the quarters ahead, based upon inflation, high interest rates, a weakening economy, and whether or not live events and merchandise will be revenue drivers throughout 2023.

It is my thesis that a lot of the pent-up demand for travel and experiences after the pandemic is winding down, and when combined with inflation and economic concerns, consumers are likely to start tightening up on spending, moving primarily to discretionary spending during most of 2023.

Longer term I think UMGNF has enough tailwinds at its back to deliver incremental growth, especially if its various segments continue to contribute to revenue growth in the quarters and years ahead.

Much of its latest numbers are priced in, and I think probably priced in more than warranted. For that reason, I’m looking at a potential correction in the stock sometime in the near future because I don’t see any catalyst that will generate the type of momentum that would trigger accelerated growth much beyond where it’s trading today.