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If Music Is Growing, Why Did Stocks Underperform in 2021?

Looking forward, investors will need new narratives to help make sense of music companies' post-COVID prospects.

Music companies of all stripes ended 2021 healthier and more hopeful than the previous year, when touring stopped, advertisers shunned radio and the global economy teetered on the brink of ruin — although as a whole their stock prices did not provide evidence of a turnaround.

Among the stocks of 20 companies for which music is a significant portion of their business, 11 ended the year in negative territory, averaging a 3.7% decline in market value.


Five of the 20 stocks fed investors’ appetite for music’s streaming-led rebound by debuting on public markets in 2021 (meaning their gain or loss in 2021 came from less than a year of trading): Universal Music Group, Believe Digital, Reservoir Media, Vivid Seats and Cloud Village (the latter two went public through SPACS, or special purpose acquisition companies, rather than initial public offerings). But only one of the five, UMG, finished the year in positive territory following a high-profile public listing that attracted worldwide attention. In 2019, UMG was valued at roughly $33 billion after an investment by Chinese tech company Tencent. At the end of 2021, with its stock 13.7% above its Sept. 21 IPO price, UMG had a $51.1 billion market value, making it the world’s largest music company.

Ironically, the companies most responsible for the major labels’ good fortunes had the worst year on Wall Street. Spotify and Tencent Music began the year with a combined market value of $91.7 billion and $13.4 billion in annual revenues. Although their 2021 revenues will likely grow by double digits in 2021, their combined market value fell 38.2% to $56.7 billion by Dec. 31. Including the two companies, the combined market capitalization of the 20 music stocks grew by 6% in 2021. Removing the two music streamers, their combined value rose 22.6%.

As the common refrain goes, the stock market is not the economy. Neither is an individual stock the same thing as an industry within an economy. Instead, a stock price reflects investors’ latest expectations about a company’s growth and profitability. In the early days of the 2020 lockdown, for example, a spike in sales of Peloton’s indoor cycle caused the stock to jump 440% in 2020. Such a large increase would be justified if COVID-19 made a lasting change in how—and where—people exercise. In the fourth quarter, however, analysts slashed their price targets, and slowing sales caused Peloton to cut the price of its original equipment (the company has other products and sells subscriptions for online workouts). The shine also wore off two other pandemic darlings, Spotify and Tencent Music, although for different reasons.

Spotify had a standout year on paper: in the nine-month period ended Sept. 30, the company’s revenue climbed 26.6% year-over-year to 2.5 billion euros ($2.9 billion), while subscribers grew 19.4% year over year. Like Peloton, Spotify was a winner during the 2020 lockdown after investors flocked to most any company with a streaming business benefitting from consumers’ need for entertainment. But investors were also attracted to Spotify’s aggressive podcast strategy that could fuel subscriber growth, improve on music’s weak margins and keep Apple Music and other competitors at bay. Wall Street’s enthusiasm pushed Spotify to an all-time high of $387.44 on Feb. 22, valuing the company at $74.2 billion. The glow didn’t last, however. Despite a diligent effort to expand its influence, Spotify shares fell 37.7% and ended 2021 at $241.25, down 23.3% on the year.

Tencent Music, China’s leading music streaming company, lost $21.4 billion of market value in 2021 amidst regulators’ sweeping moves to reign in powerful technology companies with outsized commercial and social influence. In July, China’s State Administration for Regulation ordered Tencent Music to cancel its exclusive licensing agreements with record labels that might lend an advantage over competitors. (The broad crackdown also ensnared parent company Tencent and ride-sharing service Didi, among other Chinese companies, for failing to report past merger activity for antitrust review. Separately, e-commerce giant Alibaba was fined $2.8 billion in April for preventing merchants from selling goods on its platform.)

Sensing an opportunity, NetEase raised $421 million by spinning off Cloud Village, which runs China’s second-largest music streaming company, NetEase Cloud Music, on the Hong Kong Stock Exchange on Dec. 2. The possibility of a level playing field didn’t help Cloud Village, however, and its share price fell 23.4% through the end of the month.

The six public companies that own intellectual property averaged a 12.3% share price increase in 2021. Sony, which received about 18% of its operating profit from its music division, grew 25% in 2021, no doubt helped by the halo effect of Universal’s Sept. 21 public listing on the Euronext Amsterdam exchange. Sony’s investors must have watched Vivendi’s spinoff of Universal with keen interest, knowing its own standalone music division could nearly match UMG’s $51.4 billion market value. Not that Sony intends to sell stakes in its labels and music publisher, but Universal’s IPO helped investors better understand music companies’ value and was a factor behind the 13.7% gain in Warner Music Group’s stock price in 2021. That same investor zeal for music assets allowed Believe and Reservoir Media to go public in 2021 and helped shares of Hipgnosis Songs Fund and Round Hill Royalty Fund Ltd. enjoy low single-digit growth.

The greatest gainer in 2021 was Live Nation, whose stock price was battered after concerts were canceled and postponed in 2020. The concert promoter’s market capitalization rose 62.9%, from $16.5 billion to $26.9 billion, in 2021, a signal that investors expect enough fans will turn out in 2022 and 2023 to rationalize a busy pipeline of touring artists eager to return to the live stage. That was a simple narrative until Nov. 5, when Live Nation shares reached $127.75 the afternoon before the Astroworld festival tragedy in Houston that left 10 people dead and more than 1,500 injured, according to legal claims filed in December. But it’s also a surprisingly durable narrative. With Live Nation facing unknown legal liability, its share price dipped below $100 on Nov. 28. Despite the possibility of additional concert cancellations because of the omicron variant, Live Nation shares finished the year at $119.69, just 6.3% below the pre-Astroworld high mark.

Moving into 2022, investors will need new narratives to help make sense of music companies’ post-COVID prospects. Take Warner Music’s recent 9.7% two-day slide following its earnings release on Nov. 15. BofA Securities analyst Jessica Reif Ehrlich lowered her price target from $53 to $42 due to expectations that a rebound in physical product sales—hurt by store closures in 2020 and touring disruptions extending to present day—will harm WMG’s margins. Never mind that the streaming boom benefits WMG, too, and that there’s no indication physical sales growth will crowd out higher-margin streaming revenues. Instead, WMG’s share price moved because “COVID is a boon for content owners” was no longer the narrative. Likewise, Live Nation may find that investors need a newer storyline than “COVID has created a pent-up demand for live music.”

Music companies across the board are likely to excel in 2022. Whether or not their stocks soar is far less certain.