The ripple effects of the novel coronavirus have made 2020 a year of extremes. Some stocks and sectors have thrived regardless of fundamentals. Others have struggled despite the overall narrative remaining quite good. Music stocks to buy fall in the latter category. The hope of a vaccine is giving society permission to turn the volume up on a festive 2021.
For the most part, music stocks have lagged behind the broader entertainment category and with good reason. This has been the year of streaming video stocks. If you’ve been invested in stocks such as Netflix (NASDAQ:NFLX) or Roku (NASDAQ:ROKU) you know exactly what I mean.
The global pandemic has interrupted the growth of digital music. And while this is a mature category compared to streaming video, in 2019 the Recording Industry Association of America (RIAA) documented that streaming digital music service revenues reached nearly $9 billion ($8.8).
An great thing about digital music is that it has easily adapted to the changes in technology. In the last 20 years, we’ve gone from creating mixed tapes to loading our MP3s to streaming music directly from our phones. And digital audio has brought more than music. Chances are if you have an interest, there’s a podcast for that.
If you’re looking for music stocks to buy, here are seven that deserve your consideration.
In 2020, Spotify has embraced its inner Netflix to the delight of investors. SPOT stock was up over 110% at the end of 2020. Original and exclusive content is a big reason why. The company realized that trying to win the battle over the largest music library was not a profitable venture. Instead, Spotify has gone all-in on podcasts and struck gold.
In addition to having exclusive contracts with Joe Rogan and Kim Kardashian West, the company is also developing its own original content. And for a company that has to pay labels to stream music, podcasts are something they can own.
Offering something that consumers can’t get anywhere else is expanding the company’s addressable market. For now, this content is helping increase subscribers to the company’s pay-per-month, ad-free Premium service. It will need to continue on that trajectory. As of this summer, less than 50% of the company’s listeners were paying customers.
While the company is not busy making cars (I jest), Apple is still true to its roots as a pioneer and innovator of digital music. However Apple’s recent announcement that it was looking into entering the electric vehicle space is a reminder that Apple has an ecosystem that spreads far and wide.
It would also be a mistake to believe that music will not continue to be a part of that future. The company that introduced its iconic iPod and iTunes was the initial disruptor of the music industry. Not only did the company change the way consumers listened to music, it changed the way artists thought about bringing their music to market.
And while Apple’s popularity has begat its competition, don’t believe for a minute that Apple is ready to cede its position in digital music. When it comes to music stocks to buy, Apple is not a pure play, but if you believe in the continued sales of the company’s iPhone, then you have to believe in a company that is also working on developing original content similar to its Apple TV offering.
For investors, the big three in digital music stocks to buy would be Spotify, Apple, and Amazon. The similarity between Amazon and Spotify are in the company’s tiered membership programs. However, the two programs have a significant difference.
In the case of Amazon, Prime Music members receive free access to a limited catalog of songs. However, like most things that involve Amazon, you get what you pay for. In this case, to get access to an artist’s full catalog, you have to upgrade to Amazon Music Unlimited. Not that they won’t be rewarded. In fact, the upgrade will provide access to the company’s full catalog which now includes nearly 6o million songs.
Like Apple, Amazon is not a pure play among music stocks. In the case of Amazon, it may be fair to ask how committed the company is to dominating the category. After all, Amazon doesn’t have an anchor like the iPhone to draw consumers in. But if you’re already invested in AMZN stock, the company’s presence in the digital music space shouldn’t be seen as a drawback.
Tencent Holdings (TCEHY)
If there is an equivalent to Spotify in China, it would be the music division of Tencent Holdings, known as Tencent Music (NYSE:TME). Tencent Holdings operates WeChat, which has over 1 billion monthly active users (MAUs). WeChat in turn promotes Tencent Music and facilitates the user’s ability to pre-load a user’s WeChat connections on its app.
Tencent has been on a buying spree. The company has purchased stakes in both Vivendi’s Universal Music Group as well as Warner Music (see below). The benefit for Tencent is that it’s getting access to a larger catalog of music, and in the case of Vivendi, Tencent will become part owner of the company’s Chinese division.
TCEHY stock is up 40% for 2020 as of Dec. 29, but it potentially faces a significant headwind. Investors should continue to monitor how much, if any, regulation will be imposed on Tencent as Beijing begins to step up its regulation of China’s internet and technology sectors.
Sirius XM (SIRI)
Sirius XM was looking down and out earlier this year. SIRI stock was facing two potentially devastating challenges. The first was collapsing demand as a result of the pandemic. Satellite audio is ideal for daily commutes and long road trips. It’s also heavily reliant on new car sales. Neither of those was happening in 2020, and Sirius was feeling the pain.
The other threat was more existential. Sirius has been the exclusive distributor of the Howard Stern program, but the company’s contract with Stern was ending in 2020. Luckily for Sirius, the contract was renewed and crisis averted.
The two key numbers for the company are 11 and 12. As of this writing, the stock was 11% below its opening share price in 2020. If the company can close that gap in the last few trading days of 2020, it will extend its impressive streak of delivering positive shareholder returns to 12 consecutive years.
Vivendi gives investors a different way to find music stocks to buy. Through its subsidiary, Universal Music Group (UMG), Vivendi owns (and therefore can sell) the rights to music.
This business has become much more profitable as revenue from streaming music services is increasing. UMG is home to contemporary starts Ariana Grande and Billie Eilish as well classic artists such as Queen, The Beatles, and more recently, Bob Dylan.
Vivendi made news recently when Tencent announced its intention to exercise its option to buy an additional 10% stake in UMG. VIVHY stock has lagged behind the broader market, but has turned positive for the year, largely due to the expected announcement from Tencent.
The deal will help boost UMG’s planned expansion into Asia. For its part, Tencent will take a minority holding in UMG’s Chinese subsidiary.
Vivendi has also said it will look to sell additional minority interests in Universal as it prepares to spin off UMG in an initial public offering (IPO) by 2022. Once that IPO takes place, Vivendi shareholders may be singing a different tune. Before that happens, now looks like a great time to ride the wave on Vivendi stock.
Warner Music (WMG)
One of the most anticipated IPOs of 2020 was that of Warner Music this summer. However, until December, the most apt way to describe WMG stock was as a “failure to launch.” Unlike other entertainment and streaming stocks, there wasn’t an appetite for shares of Warner Music.
Josh Enomoto theorized that changes in consumer behavior due to the pandemic may have had something to do with the tepid enthusiasm for WMG stock. But a recent upgrade from Morgan Stanley (NYSE:MS) suggests that the tide may be turning. Warner Music is up 23% as of Dec. 29 since its initial closing price of $30.12 on June 3, 2020.
According to Morgan Stanley, Warner is benefiting as customers spend more time on platforms like TikTok and Peloton Interactive (NASDAQ:PTON). The logic is simple enough. Consumers engage with those apps through music. And every time a song gets played, the register rings for Warner Music. The company is also benefiting from recent rate increases from streaming services such as Spotify.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.