When you consider which industries have changed the most over the last few years, the music industry has to be at the top of the list. The emergence of the internet left many companies in the music business scrambling to figure out how to recoup all of their lost revenue from physical album sales. Then came the pandemic, which essentially halted another major revenue stream for many of these companies, live music. It’s quite evident that the music industry is going through a transformation and beginning a new era that is driven by streaming services and the digital revolution.
The investment thesis for music industry stocks is simple - people will always enjoy listening to their favorite music regardless of what’s going on in the world, and companies that offer a convenient and accessible way to do so could see strong earnings growth over the years. Let’s take a look at 3 music industry stocks to watch for 2021.
Tencent Music Entertainment Group (NYSE:TME)
The first stock on our list is a company that is based in China and was formed back in 2016 when gaming and social media giant Tencent Holdings (OTCMKTS:TCEHY) acquired China Music. Tencent Music Entertainment Group operates the leading online music entertainment platform in China including popular apps like QQ Music, Kugou Music, Kuwo Music, and WeSing. These applications have a massive user base in China, making TME the largest music company in the entire country. Keep in mind that other streaming services like Spotify are not available in China, which means this company is a true market leader.
Tencent Music is currently experiencing strong paid user growth, as the company reported that online music paying users reached 51.7 million in Q3 which accounted for 46% year-over-year growth. Total revenues for the company also jumped 16.4% year-over-year in Q3 to $1.12 billion. While the pandemic likely boosted the numbers of all streaming platforms this year as people were stuck at home, this company is one to watch next year, especially if it can further monetize its user base. With a strong balance sheet, nice free cash flow generation, and the fact that it’s a dominant company in China’s online music space, Tencent Music could be a big winner in 2021 and beyond.
The undisputed king of online music streaming services at this time is Spotify, an innovative Swedish-based company that offers both premium and free ad-supported streaming music services to users around the world. The stock has performed extremely well this year and is up over 113% year-to-date. While the company is still unprofitable, there’s a lot to like here thanks to strong monthly active user growth and improving free cash flows. In Q3, the company saw Monthly Active Users grow by 31% year-over-year to 170 million along with premium subscriber growth of 27% year-over-year.
While Spotify is a company that will have to compete with companies like Apple and Amazon in a rapidly growing streaming market, some of the strategic moves that the company is making could pay off. For example, the fact that Spotify is investing in different content including exclusive deals for podcasts and video content could help the company continue its accelerated growth. It’s also interesting to think about how valuable all of the company’s data will become in the future. The millions of hours that listeners spend using Spotify’s platform is generating specific information related to user demographics and preferences. This data could be a very lucrative asset for the company going forward and help to attract more advertisers to its platform. The bottom line here is that Spotify is one of the best music industry stocks to consider adding, even after its incredible performance in 2020.
Warner Music Group (NASDAQ:WMG)
The last music industry stock on our list is a company that went public back in June and owns a very strong portfolio of record labels and music publishing rights. Warner Music Group is the perfect example of a company in the music business that adapted to the times. Since it owns the rights to all of the music on its iconic record labels, the company receives royalties each time someone streams its artists’ music on platforms like the aforementioned Spotify.
It’s fairly rare for IPO companies to issue a dividend, but that’s exactly the case with Warner Music Group. The company announced a quarterly cash dividend of $0.12 per share back in November, which means the stock currently offers a 1.45% dividend yield. This is a testament to the strength of the company’s business and its recurring cash flows. Warner Music Group is also staying profitable even during the pandemic, with an Adjusted EBITDA of $33 million in Q3, a 33% year-over-year increase. The stock is up roughly 9% since it went public and is worth watching in 2021 as streaming platforms will likely continue their positive momentum.
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