Universal Music Group (XAMS:UMG, Financial) (6.4% of Sequoia’s capital at year-end, -13% USD total stock return in 2022)
Universal Music Group’s shares declined this year, though by significantly less than the S&P 500 Index. We saw solid underlying business performance and a continued bright outlook. We added modestly to our position during the year. For full-year 2022, revenues and EPS are both expected to be up double digits exclusive of the significant benefit from US dollar strengthening. Given past corporate actions and associated accounting complexity, we don’t have perfectly like- for-like financial figures going back to 2019, but we can safely say that Universal Music Group has grown both revenues and earnings at healthy double-digit rates over the past three years.
Sequoia Fund has owned Universal Music Group since 2018, initially through shares of French conglomerate Vivendi and on a standalone basis since the spinout of the business in 2021. Universal Music Group is the largest of the three major labels that sit at the center of the global music industry, and we believe it is the best-positioned and best-run of the group, led ably by industry veteran Lucian Grainge and his team.
The labels play a vital and entrenched role in the music ecosystem. By virtue of their expertise, scale, and relationships with producers, marketers, and distributors, labels offer musical artists the best shot at breaking out and sustaining a long career in the business. In return, the labels receive an interest in the artists’ music rights, often lasting decades, and they help maximize the monetization of those rights. The three major labels collectively have ownership interests in and control rights over almost all the music that has ever been made and commercialized in the West, giving them significant and valuable leverage when negotiating with distribution platforms.
The distribution landscape has changed markedly over the past two decades or so. The rise of internet- enabled piracy in the late 1990s decimated the industry. But with the subsequent emergence of digital download followed by streaming, the labels reestablished the value they could charge for their content. Industry- wide revenues have now recovered, recently returning to the nominal peak reached over two decades ago. We believe they are poised to reach new heights in the years to come.
Streaming now accounts for over half of Universal Music Group’s revenues, and streaming growth continued apace in 2022. What’s more, the company and its peers have built promising new revenue streams providing their music to accompany the video assets of major internet platforms like YouTube, TikTok, and Instagram. All of this, plus the return of live concerts and associated revenues, powered Universal Music Group’s growth this past year.
At the current share price, Universal Music Group trades for a mid-twenties multiple of expected EPS for 2023. We consider this an attractive price for a business with a clear and compelling value proposition, an extremely strong competitive position, and the ability to grow earnings at a teens rate over the next handful of years.
From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund fourth-quarter 2022 letter.
