Spotify Shares Climb, UMG Shares Sink Following Q2 Earnings Reports

By raising prices and cutting costs, Spotify has transformed into the kind of profitable company investors always hoped it could become, and the streamer’s upbeat second-quarter earnings on Tuesday (July 23) led its share price to jump 9.1% to $321.87 this week.

After Spotify announced it grew revenues by 20%, improved its gross margin and beat guidance on new subscriber additions, a slew of analysts raised their price targets, including Goldman Sachs (from $320 to $425), JP Morgan (from $375 to $425), Rosenblatt (from $396 to $399), Pivotal Research (from $400 to $460), Barclays (from $350 to $360), Cowen (from $273 to $356) and B of A Securities (from $380 to $430).

Universal Music Group (UMG), the other music company that released earnings this week, had the opposite reaction from investors when its second-quarter subscription revenue fell far short of analysts’ expectations, leading its share price to drop 24.1% to 21.34 euros ($23.17). But it wasn’t all bad news: Overall revenue at the music giant grew 8.7% to 2.93 billion euros ($3.16 billion) and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 17.4% to 580 million euros ($624 million). 

But investors focused on UMG’s streaming numbers above all else. The recorded music division’s subscription revenue grew 6.9%, down from 12.5% in the prior-year quarter, while overall streaming revenue grew 4.1% compared to 11% a year earlier. A number of analysts lowered their UMG price targets following Wednesday’s earnings announcement, albeit by smaller margins than the decline in the share price.

UMG went public in Sept. 2021, giving investors an opportunity to capitalize on the largest music company during a time of streaming growth and industry expansion. Even optimistic investors will have to bear through short-term ups and downs, however. “If you think the longer term analysis holds then [UMG’s current price] represents a significant buying opportunity,” J.P. Morgan analyst Daniel Kerven wrote in an email to investors on Friday (July 26). “Ultimately we believe you will still get to the same destination…just the pace of getting there was never likely to be linear, particularly on a quarter by quarter basis.”

The Billboard Global Music Index (BGMI) fell 1.2% to 1,757.70 this week, marking the third consecutive weekly decline. The index has risen 14.6% year to date but fell 3.2% in July and is 4.9% off its all-time high of 1,847.64 set on May 17. Nine of the index’s 20 stocks were winners, 10 lost ground and one was unchanged.

UMG’s earnings appeared to have an impact on similar companies that have yet to release their own. Warner Music Group shares fell 6.6% the day UMG released earnings and ended the week down 6.8% to $29.83. Believe shares dropped 9.1% to 13.76 euros ($14.96). However, because UMG’s publishing business fared well — revenues grew 10.1% to 511 million euros ($550 million) — it’s not a coincidence that shares of Reservoir Media, which gets most of its revenue from music publishing, jumped 11.4% to $8.61. 

Many major indexes lost ground this week despite gains on Friday following encouraging U.S. inflation data. In the United States, the Nasdaq composite fell 2.1% to 17,357.88 and the S&P 500 declined 0.8% to 5,459.10. South Korea’s KOSPI composite index dipped 2.3% to 2,731.90. China’s Shanghai Composite Index was down 3.1% to 2,890.90. An outlier was the United Kingdom’s FTSE 100, which gained 1.6% to 8,285.71. 

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