Is UMG Still a Buy Amid Mixed Valuation Signals and Legal Risks?

Universal Music Group (UMG), the world's largest music label, has long been a cornerstone of the global entertainment industry. Its recent financial performance, however, paints a nuanced picture: strong revenue growth and a stable valuation coexist with legal headwinds and muted profit forecasts. For investors weighing whether UMG remains a compelling buy, the answer hinges on balancing its long-term strategic strengths against near-term uncertainties.

Financial Strengths: Revenue Growth and Stable Valuation

UMG's Q1 2025 results underscore its dominance in the music ecosystem. Total revenue rose 9.5% year-over-year to €2.9 billion, driven by a 10.3% surge in recorded music revenue and a 15% jump in vinyl sales. Subscription revenue, a critical metric in the streaming era, grew 9.3%, reflecting its ability to capitalize on global subscriber expansion and higher average revenue per user (ARPU). These figures suggest UMG is not only adapting to the digital transformation but thriving in it.

Valuation-wise, UMG appears near fair value. Analysts at Simply Wall St estimate its intrinsic value at €28.49, just 5% above its current price of €26.99. Price targets from analysts average €30.45, implying potential upside if the stock corrects to its projected long-term value. While UMG's forward P/E ratio of 14.3x (as of Q1 2025) is in line with the S&P 500's 15.5x, its revenue growth outpaces the market, which could justify a premium over time.

Profitability Concerns: Negative Earnings Growth and Cost Pressures

Despite revenue gains, UMG's earnings trajectory is less encouraging. Analysts project an 8-10% compound annual growth rate in subscription revenue through 2028 but expect earnings per share (EPS) to stagnate or decline in the near term. For 2025, EPS is forecast at €1.02, down from €1.15 in 2024, while 2026 estimates hover at €1.15—a modest 12% increase. This suggests margin pressures, possibly from rising legal costs or a shift in revenue mix toward less profitable short-form streaming platforms.

The company's Adjusted EBITDA margin of 22.8% remains stable, but this masks underlying challenges. For instance, UMG's streaming revenue grew a modest 2.9% in Q1 2025, reflecting a broader industry trend toward less monetized platforms like TikTok. Meanwhile, physical sales—while a bright spot—account for a shrinking portion of overall revenue.

Legal and Regulatory Risks: A Thorny Landscape

UMG's legal exposures could amplify these challenges. The most high-profile case involves a defamation lawsuit from rapper Drake, who alleges UMG promoted Kendrick Lamar's diss track “Not Like Us,” which he claims defamed him. The suit, which includes claims of payola and streaming manipulation, could result in costly settlements or reputational damage. If UMG is found liable, its artist relationships—and the trust of its roster—could erode, harming long-term revenue.

Equally concerning is UMG's dispute with TikTok, which temporarily removed its music in 2024 over disagreements over licensing and AI-generated content. This clash highlights the risks of relying on third-party platforms for promotion and monetization. While UMG's leadership emphasizes its commitment to protecting artist value, the company's aggressive stance has drawn criticism from artists and fans, potentially alienating key stakeholders.

Regulatory scrutiny adds another layer of uncertainty. The European Union's antitrust review of UMG's $775 million bid for Downtown Music remains unresolved. A blocked deal could delay UMG's consolidation in the publishing sector, while a conditional approval might require asset divestitures or operational changes. These outcomes could disrupt strategic plans and dampen investor confidence.

Strategic Resilience and Long-Term Potential

UMG's ability to navigate these challenges will determine its investment viability. Its Q1 2025 results, including a 22.8% Adjusted EBITDA margin and strong performance from artists like Kendrick Lamar and Sabrina Carpenter, demonstrate operational resilience. The company's global reach—evidenced by its dominance in the U.S., U.K., and Japan—also positions it to benefit from the continued shift to streaming and the resurgence of vinyl.

Moreover, UMG's focus on artist development and innovation in fan engagement could offset near-term headwinds. For example, its partnerships with emerging artists and investments in AI-driven analytics may enhance discovery and retention. These initiatives align with broader industry trends, suggesting UMG is not merely reacting to change but shaping it.

Investment Implications: A Cautious Case for Long-Term Buy

UMG's valuation is reasonable, and its revenue growth trajectory is robust. However, the combination of near-term profit declines, legal risks, and regulatory uncertainty makes it a high-risk proposition. For long-term investors with a five-year horizon, UMG offers compelling upside if it can resolve its litigation and regulatory issues while maintaining its market leadership.

Key Considerations for Investors:
1. Monitor Legal Outcomes: The Drake lawsuit and TikTok dispute could reshape UMG's risk profile. A favorable resolution could unlock growth, while adverse outcomes might pressure margins.
2. Assess Regulatory Decisions: The EU's ruling on the Downtown acquisition will impact UMG's publishing ambitions. A conditional approval could mitigate risks, while a blockage may force alternative strategies.
3. Track Earnings Momentum: Watch for signs of margin stabilization or improvement in 2026. If UMG can align cost management with its revenue growth, the stock could outperform.

In conclusion, UMG is not a slam-dunk buy for risk-averse investors. However, for those who believe in its ability to innovate and adapt, the company's strong revenue growth and fair valuation make it a speculative but justifiable addition to a diversified portfolio—provided one is prepared to weather the legal and regulatory storm.

Final Verdict: UMG remains a buy for long-term investors who can stomach near-term volatility and are confident in the company's ability to navigate its legal and regulatory challenges while maintaining its dominance in the evolving music landscape.