I've been looking at Universal Music Group (UMG.AS). The stock is already down \~40% over the last year but I think the market may still be underestimating the structural deterioration.
* **Power is shifting from labels to DSPs:** Labels used to own scarce IP and therefore had leverage over distributors. Today Spotify / Apple / YouTube own the consumer, discovery and distribution layer, while UMG increasingly looks like the supplier. AI could accelerate this. If music creation becomes dramatically cheaper / user adoption picks up, the scarcity value of individual IP should fall.
* **FCF is not as good as it looks:** UMG generated €2.8bn of adj. EBITDA in 2025 but only €702m of FCF after investments (on €12.5bn revenue). It has now changed its FCF definition to exclude strategic investments / catalogue acquisitions. My issue isn't necessarily the accounting definition it's whether these investments are actually discretionary. If UMG needs to continually buy catalogues, fund advances and make strategic investments to sustain growth, I don't think the resulting cash should be valued like true excess FCF. Definitely struggle to argue for L5Y trading avg. reversal.
* **Capital allocation:** Management says its advances have generated high-teens IRRs, catalogue acquisitions have a ≥10% IRR hurdle, and core M&A has generated mid-to-high-teens IRRs. UMG has to continually reinvest to maintain its growth algorithm, while ROIC has fallen from >20% to \~16% and ROE is only \~8%. That doesn't look particularly compelling for a supposedly high-quality IP compounder. Downtown acquisition is also interesting, \~17x EBITDA upfront for a largely distribution / services business.
* Pershing's (failed) takeover thesis also centred heavily on capital allocation, balance-sheet optimisation and unlocking value through a US listing.
Keen to hear your thoughts and would be particularly interested in the bull case!