December is always a musical time of year as Americans everywhere celebrate the holidays. Even though this year’s festivities will be a lot more subdued due to Covid-19, there will still be plenty of music playing in people’s homes, and that’s got me thinking of music stocks to buy.
It’s not often I get to write about music stocks to buy. That’s because it’s not really an area of focus for most investors. When it comes to festivities and celebrating, investors are more likely to dwell on food and beverage stocks.
Think about it. How often do you see headlines like the one above? You’re more likely to see headlines such as “7 Organic Food Stocks for Healthy Portfolios” from my InvestorPlace colleague, Josh Enomoto.
For whatever reason, music stocks don’t strike a chord (bad pun) with investors.
Well, for those of you that are musically inclined, it’s important to know that since 2014, the global music recording industry had grown from $14 billion to $20 billion in 2019, an indication that music stocks ought to be back in vogue.
- Apple (NASDAQ:AAPL)
- Dolby Laboratories (NYSE:DLB)
- Sirius XM (NASDAQ:SIRI)
- Sonos (NASDAQ:SONO)
- Sony (NYSE:SNE)
- Spotify (NYSE:SPOT)
- Warner Music (NASDAQ:WMG)
Here are my seven music stocks to take into 2021.
Music Stocks to Buy: Apple (AAPL)
Apple is such a massive business that investors tend to forget how much influence it has on the music industry. From the iPod to iTunes, to the tech company’s wonderful AirPods, chief executive officer Tim Cook and company continue to drive the music industry higher.
At the end of October, Apple reported its fourth-quarter results. For fiscal 2020, it generated $53.8 billion in services revenues, which accounted for 19.6% of its overall revenue, up from 17.8% a year earlier.
The services business includes digital content such as Apple Music. It is instrumental to the company’s enormous profits. In 2020, the services segment had a gross margin of 66%, more than double its products business.
To put that in context, for every dollar of sales Apple Music generates, its product segment has to generate $2 of sales to get the same dollar of gross profit.
It’s not hard to see why Cook has pushed Apple in the direction of services. The profit potential is enormous and Wall Street recognizes that it’s as much a software company as it is a producer of iPhones.
In early 2017 I recognized the move. In less than four years, the transition has made it the largest public company in the world.
Dolby Laboratories (DLB)
As a stock, Dolby Labs has had a bit of a checkered past. Year-to-date through Dec. 30, it has a total return of 38%, significantly higher than both its peers and the entire U.S. stock market.
That’s good news. The bad news for long-time investors of the surround sound company is that it has had a miserable performance over the past decade with an annualized total return of just 4.2%, about one-third of the markets’ returns as a whole.
In mid-November, Dolby reported Q4 and 2020 results. Its revenues dropped slightly from $1.24 billion last year to $1.16 billion in 2020. On the bottom line, its net income was $231.4 million in 2020, 9.3% lower than a year earlier.
Very few industries have been hurt by Covid-19 as badly as the cinema companies, so it’s amazing how well it has managed to perform given the challenges faced by its cinema customers. Despite the headwinds, it generated $270 million in free cash flow in 2020, 29% higher than 2019.
In 2021, Dolby will face some interesting comparisons. That’s because the first two quarters of 2020 were largely unaffected while the last two were fully affected. In the year ahead, the opposite should be true with the first two affected and the last two less so.
Long-term, Dolby’s products will remain very much in demand.
Sirius XM (SIRI)
2020 could have been a complete disaster if not for the strong returns over the past three months. Down 10.3% YTD, the satellite radio and streaming music platform hasn’t delivered for shareholders in recent years.
However, to change that, the company’s gone on an acquisition binge to buy businesses it feels will expand its total subscriber base. In July, it paid $300 million to buy Stitcher, a podcasting platform owned by E.W. Scripps (NASDAQ:SSP).
In 2019, podcasting ad revenues grew by 42% to $678 million. By the end of 2021, they’re expected to exceed $1 billion.
Stitcher operates both a free, ad-supported podcasting service and a premium, ad-free service for $4.99 per month. Previous acquisitions such as Simplecast, a podcast hosting business, provide Sirius XM with a vertically integrated podcasting business to compete against some bigger players such as Spotify and Apple.
Despite lower vehicle sales during Covid-19, a big distribution point for its satellite radio service, SIRI still has managed to grow in 2020. Through the first nine months of the fiscal year, its revenues rose 2.1% to $5.85 billion, while its operating profit grew 9.1% to $1.36 billion.
Under $6, it’s definitely one of the best music stocks to buy.
It’s hard to have music without speakers. Sonos is on this list of music stocks to buy because it specializes in-home sound systems. Up 47.5% YTD, it’s done well in 2020 despite laying off 12% of its workforce in June.
Sonos went public in August 2018, selling 13.9 million shares at $15, well below its pre-IPO pricing of $17 to $19. Despite its IPO pricing being lower than expected, SONO stock managed to gain 32.7% on its first day of trading. It’s been tough sledding ever since.
Engadget recently discussed the company’s fight to stay relevant to consumers.
“Ahead of the holiday season Amazon, Google and Apple all launched $100 speakers that delivered better music quality than we’re used to seeing from devices in this size and price range,” wrote Engadget’s Nathan Ingraham on Dec. 18.
Also, Sonos is in a legal battle with Google over five of its speaker patents.
While the competition is intensifying, Sonos ought to hold its own in the higher end of the speaker market. It also might come out with its own $100 speaker to push back at the big boys.
In fiscal 2020, Sonos revenue grew 5% to $1.33 billion, with 21% of its sales from its direct-to-consumer (DTC) Sonos.com website. Growing DTC sales by 84% in 2020 is a big part of its growth strategy.
Even better, it generates free cash flow — it was $129.0 million in 2020, 32.4% higher than in 2019 — and it’s growing at a double-digit pace.
2020 could be the beginning of a long leg up for SONO stock.
Sony’s music business generated 416.8 million yen (US$4 billion) in the first six months of 2020. That represented approximately 10% of the company’s overall revenues through the end of September. The company’s Game & Network Services segment, which includes the Sony PlayStation franchise, accounted for 22% of its overall sales in the first two quarters.
Those numbers are likely to improve in the second half of the year as the PlayStation 5 continues to generate tremendous consumer interest. The new console has been so well received that its stock is trading above 10,000 yen for the first time since 2001 when the launch of the PlayStation 2 pushed it to new heights.
According to recent sales figures, the PlayStation 5, based on units sold and dollar values, is the highest-selling console in U.S. history. As my InvestorPlace colleague, Josh Enomoto, pointed out in late November, Sony pre-sold more PS5’s in the first 12 hours than the company sold in 12 weeks for the PS4.
Thanks to its newest video game console being a stone-cold winner, its music business will be able to do whatever it wants in the next few years.
Over the past year, I’ve tried the 3-month free trials for all three major music streaming services: Spotify, Apple, and Amazon (NASDAQ:AMZN). I’ll be honest; I really can’t tell the difference between them. They all do what they’re supposed to do and that’s give you lots of music to listen to.
However, the streaming service, which went public via a direct listing in April 2018 at a reference price of $132 — it’s up 161% over 33 months — has gotten into podcasting in a major way, forcing companies like Sirius XM to get in the game or fear being left behind.
The key to Spotify’s success in this area will be its ability to generate revenues from its third-party podcasts.
“I think what’s going to be key is for Spotify to monetize other third party shows,” Stifel analyst John Egbert told CNBC in December. “It’s interesting if they monetize their own podcasts, but the real magic would be helping, by using their really unique scale, to bring more ad dollars to podcasting that have ever come to the medium before.”
Spotify has spent hundreds of millions on building an integrated podcasting ecosystem that can monetize podcasts of all kinds. In 2021, the company will demonstrate why it did what it did.
Podcasts are the future.
Warner Music (WMG)
The Warner Music I remember is Edgar Bronfman’s acquisition in 2004 after nearly bankrupting the family empire by selling Seagram in an all-stock deal to Vivendi (OTCMKTS:VIVHY), whose shares would subsequently collapse after severe mismanagement.
But I digress.
The Warner Music of today is doing just fine thanks to music streaming, making it one of the music stocks to buy on this list.
In fiscal 2020, Warner had revenue of $4.46 billion, basically flat to a year earlier. Not a bad result during Covid. On the bottom line, it had adjusted earnings before interest, taxes, depreciation and amortization of $837 million, 14% higher than in 2019.
As I said, if it weren’t for streaming, Warner would be sunk. In 2020, it had digital revenue of $2.9 billion, 11% higher than a year ago. Digital revenue now accounts for 65% of the top line, up from 58% a year ago.
Warner, which went public in June selling 77 million shares at $25 a share, is controlled by billionaire Len Blavatnik, who controls 97% of its voting shares. With the stock up 50% from its IPO price and the 180-day lock-up period over in early December, I wouldn’t be surprised if he sells some of his holdings.
That said, he’s got the business on a solid playing field, so he’ll likely stick around to see it continue to grow in 2021 and beyond.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.