By Stephen Duval, Co-Founder 23 Capital
The music industry is again at an inflection point, one that is in stark contrast to the situation we faced twenty years ago when the hugely profitable business was nearly decimated overnight by digital disruption.
In 1999, global revenue speaked at more than$39 billion. Within a year, Napster, the brainchild of college student Shawn Fanning and Sean Parker, would have over 80 million illegal subscribers, making it arguably the fastest growing company of all time. Its offering, free and instant music, was simply too alluring to prevent nearly an entire market from breaking the law.
While Napster would not survive another year, eventually collapsing under the weight of legal action, its arrival had already begun to transform the face of the music industry forever. Swedish entrepreneur Daniel Ek was so inspired by the project that he hired Sean Parker to assist him with his own project, Spotify.
Launched in 2008, the advent of Spotify would again rewrite the rules of the industry. Despite being a freemium service, Spotify has now passed 100 million paying users, resurrecting the hope that consumers would once again be willing to part with their money in exchange for music. Now the long-term outlook for the music market looks strong with streaming growing at a double-digit pace and research from the IFPI predicting that music revenues could almost double by 2030 to over $100 billion.
The amazing success of the streaming giants Spotify, Tidal and Apple can be attributed to a number of factors, but none are as important as the improved user experience they offered. Subscribers to these apps now have a streamlined access to an on-demand content library of over 30 million songsat a low, inclusive price point of entry. This growth is being augmented further by global smartphone penetration. It can be easy to forget that the iPhone began life as the iPod, with music the central offering in the devices.
Encouraged by this growth, the tech giants Amazon, Google and Apple are now battling for home court advantage. Devices like the Echo are proving to be another pathway to streaming income, with 28% of in-home connected device owners saying the device drove them to a streaming subscription purchase, according to Wall Street Research. Given the same research suggests 55% of all households in developed markets will have a smart speaker by 2022, music should continue to become more engrained in consumers, with the total number of connected devices projected to grow to 125 billion by 2030.
Worldwide connectivity is also only adding fuel to the fire. 562 million streaming enabled cars are expected to hit to the roads by 2022, meaning in-car streaming could represent an $8 billion incremental revenue opportunity not previously registered. Meanwhile, the maturation of major streaming music markets such as the U.S. and the U.K. has Spotify and its rivals chasing emerging opportunities in China, Brazil, Mexico, India, and “late adopter” nations like Germany and Japan. Developed markets generated $3 billion in streaming revenue in 2016, while only $514 million was driven by emerging markets. With the subscriber base in these emerging markets estimated to grow by 850% by 2030, total streaming industry revenue could grow from $3.5billion to around $28 billion in just over a decade, fuelled by the rise in international smartphones and the growth in connected devices in these regions. Spotify’s monthly active users grew by 51% in emerging markets in 2017 for example, far outpacing other markets.
Investors are attracted to publishing because a credible catalogue has a highly predictable cash flow, based on royalties grossed from prior years. Streaming can therefore provide a passive, consistent and recurring revenue that requires limited administrative overhead. Ownership over intellectual property generates an annuity-like income stream with minimal oversight, with 80-90% of all modern music rights not requiring any active management besides a core team of specialists and financial consultants on hand to advise and inform acquisitions.
Nor is content holder disintermediation a threat. Strong copyright laws support the continuity and sustainability of music as an asset. Distribution channels and strategies can change, but rights holders always win. Music’s inclusion in film, TV, theatre and adverts only drives growth while strategic bundles that provide untethered access to multiple distributors tend to increase usage and reduce subscription churn.
What this gives investors is a protected and non-correlated asset class in a market with record high content creation and unstoppable growth. It’s taken the music industry almost 20 years to recover from technology’s entrance to the sector, but it looks to have finally found a model that works for consumers, artists and business alike. Now, the adoption of digital technology by consumers that once risked ruining the industry, is the very thing driving its success.
This document does not constitute and should not be considered as any form of financial opinion or recommendation by 23 Capital or any of its affiliates. It is for informational purposes only and you should not construe any such information as legal, tax, investment, financial, or other advice.
Wall Street Week Ahead: Investors weigh new stock leadership as broader market wobbles
By Lewis Krauskopf
NEW YORK (Reuters) – A shakeup in stocks accelerated by the past week’s surge in Treasury yields has investors weighing how far a recent leadership rotation in the U.S. equity market can run, and its implications for the broader S&P 500 index.
Moves this week further spurred a shift that has seen months-long outperformance for energy, financial and other shares expected to benefit from an economic recovery, while a climb in Treasury yields weighed on the technology stocks that have led markets higher for years.
The two-track market left the benchmark S&P 500 down for the week, and sparked questions about whether it could sustain gains going forward if the tech and growth stocks that account for the biggest weights in the index struggle.
So far this year, the S&P 500, which gives more influence to stocks with larger market values, is up 1.5%, while a version of the index that weights stocks equally is up 5%.
“That just tells us the gains are less narrow, more companies are participating, and I think that’s healthy,” said James Ragan, director of wealth management research at D.A. Davidson.
The focus on market leadership comes as investors are weighing whether the S&P 500 is due for a significant pullback after a 70% run since March, with the rise in long-dormant yields the latest sign of trouble for equities as it means bonds are more serious investment competition. The yield on the 10-year U.S. Treasury note this week jumped to a one-year peak of 1.6% before pulling back.
Economic improvement will be in focus in the coming weeks, including the monthly U.S. jobs report due next Friday, as will the country’s ability to ensure widespread coronavirus vaccinations, especially as new variants emerge.
Tech and momentum stocks helped drive returns in 2020 “when everyone was locked down and all they had was their computer,” said Jack Ablin, chief investment officer at Cresset Capital Management. “Now it seems with the vaccines, the stimulus and the prospect of reopening that we are looking out toward a recovery phase.”
The shift in the market this week is building on one that was fueled in early November, when Pfizer’s breakthrough COVID-19 vaccine news generated broad bets on an economic rebound in 2021.
Among the moves since that point: the S&P 500 financial and energy sectors are up 29% and 65%, respectively, against a nearly 9% rise for the benchmark index and 7% rise for the tech sector. The Russell 1000 value index has gained 16.5% against a 4.3% climb for its growth counterpart, while the smallcap Russell 2000 is up 34%.
“You definitely are seeing the reopening trade that has pretty much come alive here,” said Gary Bradshaw, portfolio manager of Hodges Capital Management.
Despite the gains, there remains “plenty of room for the reflation trade to run from a valuation perspective,” Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, said in a report this week. RBC is “overweight” the financials, materials and energy sectors.
Rising rates tend to be favorable for more cyclical sectors, David Lefkowitz, head of Americas equities at UBS Global Wealth Management, said in a note, with financials, energy, industrials and materials showing the strongest positive correlations among sectors with 10-year Treasury yields.
Still, how long the market’s reopening trade lasts remains to be seen. Investors may be reluctant to stray from tech and growth stocks, especially with many of the companies expected to put up strong profits for years.
Any setbacks with the economy or with efforts to quell the coronavirus could revive the stay-at-home stocks that thrived for most of 2020.
And with a GameStop-fueled retail-trading frenzy taking hold this year, banks and other stocks in the reopening trade may fail to draw the same attention from amateur investors as stocks such as Tesla, said Rick Meckler, partner at Cherry Lane Investments.
“There isn’t the pizzazz to those stocks,” Meckler said. “There rarely is a potential for stocks to make the kind of moves that big tech growth stocks have made.”
(Reporting by Lewis Krauskopf; editing by Richard Pullin)
Exclusive: European officials urge World Bank to exclude fossil-fuel investments
By Kate Abnett and Andrea Shalal
WASHINGTON (Reuters) – Senior officials from Europe have urged the World Bank’s management to expand its climate change strategy to exclude investments in oil- and coal-related projects around the world, and gradually phase out investment in natural gas projects, according to three sources familiar with the matter.
In the six-page letter dated Wednesday, World Bank executive directors representing major European shareholder countries and Canada, welcomed moves by the Bank to ensure its lending supports efforts to reduce carbon emissions.
But they urged the Bank – the biggest provider of climate finance to the developing world – to go even further.
“We … think the Bank should now go further and also exclude all coal- and oil-related investments, and further outline a policy on gradually phasing out gas power generation to only invest in gas in exceptional circumstances,” the European officials wrote in the letter, excerpts of which were seen by Reuters.
The officials took note of the World Bank’s $620 million investment in a multibillion-dollar liquified natural gas project in Mozambique approved by the Bank’s board in January, but did not call for its cancellation, one of the sources said.
The World Bank confirmed receipt of the letter but did not disclose all its contents. It noted that the World Bank and its sister organizations had provided $83 billion for climate action over the past five years.
“Many of the initiatives called for in the letter from our shareholders are already planned or in discussion for our draft Climate Change Action Plan for 2021-2025, which management is working to finalize in the coming month,” the Bank told Reuters in an emailed statement.
The Bank’s first climate action plan began in fiscal year 2016.
The United States, the largest shareholder in the World Bank, this month rejoined the 2015 Paris climate accord, and has vowed to move multilateral institutions and U.S. public lending institutions toward “climate-aligned investments and away from high-carbon investments.”
World Bank President David Malpass told finance officials from the Group of 20 economies on Friday that the Bank would make record investments in climate change mitigation and adaptation for a second consecutive year in 2021.
“Inequality, poverty, and climate change will be the defining issues of our age,” Malpass told the officials. “It is time to think big and act big in finding solutions,”
He said it was also launching new reviews to integrate climate into all its country diagnostics and strategies, a step initiated before the letter from the European officials, said one of the sources.
(Reporting by Andrea Shalal in Washington and Kate Abnett in Brussels; Additional reporting by Valerie Volcovici in Washington; Editing by Matthew Lewis)
GameStop rally fizzles; shares still register 151% weekly gain
By Aaron Saldanha and David Randall
(Reuters) – GameStop Corp closed 6% lower on Friday as an early rally fizzled but the stock finished the week 151% higher in a renewed surge that left analysts puzzled.
The video game retailer’s shares closed at $101.74 after retreating from a session high of $142.90. The weekly rocket ride higher came despite a broader market selloff that sent the benchmark S&P 500 <.SPX> down 2.5% over the same time.
Analysts have struggled to find a clear explanation, and some were skeptical the rally would have legs.
“You might be able to make some quick trading money and it could be a lot of money, but in the end, it’s the greater fool theory,” said Eric Diton, president and managing director at The Wealth Alliance in New York. The theory refers to buying stocks that are over-valued, anticipating a “greater fool” will buy them later at a higher price.
Analysts mostly ruled out a short squeeze like the one that fueled GameStop’s rally in January, when individual investors using Robinhood and other apps punished hedge funds that had bet against the stock, forcing them to unwind short positions. Many GameStop buyers took their cues from online investment forums on Reddit and elsewhere.
Short interest accounted for 28.4% of the float on Thursday, compared with a peak of 142% in early January, according to S3 Partners.
Options market activity in GameStop, which has returned to the top of the list in a social media-driven retail trading frenzy, suggested investors were betting on higher prices, higher volatility, or both.
Refinitiv data showed retail investors have been buying deep out-of-the-money call options, which have contract prices to buy far higher than the current stock price.
Many of those option contracts were set to expire on Friday, meaning handsome gains for those who bet on a further rise in GameStop’s stock price.
Call options, profitable for holders if GameStop shares hit $200 and $800 this week, have been particularly heavily traded, the data showed. GameStop’s stock traded this week as high as $184.54 on Thursday, far below the $483 intraday high it hit in January.
“The actors are looking to take advantage of everything they can to maximize their impact and the timing is important,” said David Trainer, chief executive officer of investment research firm New Constructs. “The options expiration will contribute to their strategy on how to push the stock as much as they can and maximize their profits.”
Bots on major social media websites have been hyping GameStop and other “meme stocks,” although the extent to which they influenced prices was unclear, according to analysis by Massachusetts-based cyber security company PiiQ Media.
The U.S. Securities and Exchange Commission (SEC) on Friday suspended trading in 15 companies because of “questionable trading and social media activity.” GameStop was not among them.
The 15 companies were in addition to six stocks it recently suspended due to suspicious social media activity.
Robinhood said it has received inquiries from regulators about temporary trading curbs it imposed during a wild rally in shorted stocks earlier this year.
Other Reddit favorites were also lower on Friday, with cinema operator AMC Entertainment down 3.4%, headphone maker Koss off 22.4% and marijuana company Sundial Growers down 2.9%.
(Reporting by Aaron Saldanha in Bengaluru; additional reporting by Caroline Valetkevitch in New York, and Devik Jain and Sruthi Shankar; Writing by David Randall; Editing by Alden Bentley, Shinjini Ganguli, Anil D’Silva, Dan Grebler and David Gregorio)
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