Rather than an overreaction, this development looks more like a healthy correction. Indeed, despite the quality of a royalty-based business model that generates a return on equity of almost 50% without recourse to leverage leverage, investors may have gotten carried away when they took the stock to unreasonable levels...
Perhaps they had also lost sight of the fact that the very good growth of the last three years was largely underpinned by acquisitions, notably last year's acquisitions of stakes in Chord Music Partners and Mavin Global.
What's more, despite a slight slowdown in the streaming segment - which seems to have been the cause of investors' dismay - this growth dynamic remains positive: consolidated sales rose by 8.8% in the first half of 2024, compared with 9.1% at the same time last year.
For those keeping a close eye on the balance of power between Universal and Spotify, the former controls 3.3% of the latter's capital, and its investment has so far delivered almost fifty times its initial stake.
A significant risk, curiously overlooked by the financial press, lies in the extreme dependence of Universal's catalog on Taylor Swift: as it stands, five of the label's ten "top sellers" are titles by the American artist.
Universal, which continues to operate as an oligopoly with Warner and Sony, should still be able to generate a billion euros in free cash flow in 2024, as it did in 2023 and 2022. In this respect, the market capitalization of EUR40 billion is no aberration; the inconsistency was rather in the overheated valuation of recent quarters.
For the record, Universal's acquisition of a quarter of Chord's capital was achieved at an EBITDA multiple of x17. After its fall, the label's stock is now trading at x16 its expected EBITDA this year.
