A.I.'s Music Revolution: Goldman Sachs Picks 5 Stocks

Goldman Sachs identifies transformative trends shaping the music industry.

by Nouman Rasool
A.I.'s Music Revolution: Goldman Sachs Picks 5 Stocks

Generative AI is poised to bring about a transformative shift in the music industry, presenting significant opportunities, according to Goldman Sachs. The renowned financial institution has identified five stocks with a buy rating that investors can consider to capitalize on this trend.

These stocks, namely Live Nation, Warner Music Group, Believe (a French digital music company), NetEase from China, and Universal Music Group, have all made it to Goldman's conviction list of top stocks. Goldman's analysts, in a note released on June 28, express their belief that generative AI will revolutionize music creation capabilities and enhance productivity.

The analysts dismiss concerns about AI-generated music, such as the notorious track featuring a "fake Drake" that surfaced in April, deeming them exaggerated. The analysts highlight the efforts of companies like Deezer and Believe, which employ AI to detect music tracks created by AI, and collaboration between publishers and streaming platforms like Spotify to remove artificially generated tracks.

Music Industry's Transformation and Safeguards

Goldman emphasizes that the music industry possesses robust mechanisms to safeguard its intellectual property, given its consolidation under three major companies that control the majority of artists' catalogs.

The analysts further contend that the music industry is on the brink of another significant structural transformation, attributable to persistent under-monetization of music content, outdated streaming royalty payout structures, and the advent of generative AI.

While streaming has made music more accessible than ever, revenue has not kept pace with consumption. For instance, Goldman estimates a 20% decline in revenue per audio stream over the past five years, and revenue per hour streamed for Spotify is four times lower than that of Netflix.

Goldman Sachs expresses optimism about Live Nation, the events promoter, as it anticipates an increase in artist tours due to the globalization of music. The bank also expects the industry to benefit from the younger generation's heightened awareness of performers through social media.

Regarding Believe, the analysts predict continued market share gains through its digital-first approach, particularly in the fast-growing emerging markets across Asia. Warner Music Group is identified as one of the highest quality long-term growth compounders in Goldman's coverage group.

Meanwhile, Universal Music Group is included in their conviction list for Europe, citing several competitive advantages such as scale, a consistent track record in breaking artists, an extensive catalog, and a proactive management team.

Goldman Sachs additionally highlights NetEase, a Chinese internet company with a music streaming platform, for its utilization of AI in music composition tools. With generative AI poised to revolutionize the music industry, Goldman Sachs' selection of these stocks reflects its confidence in the potential of this transformative technology.