• K-pop's popularity has been rising on the global music scene, but this does not seem reflected in its share prices.
• Groups like BTS and Blackpink, have seen commercial success worldwide, breaking records on Spotify, YouTube and Billboard Charts.
• Despite the industry's surging influence, listed K-pop companies have lost between 29% to 56% of their market capitalization so far in 2024.

South Korean pop stars are smashing records, performing at premier music festivals in the West and topping charts — but that stratospheric success is not mirrored in the stock performance of their management agencies.

South Korea's "Big Four" K-pop agencies are all publicly listed. Hybe Corporation is the largest and listed on the blue-chip Kospi, while SM Entertainment, JYP Entertainment and YG Entertainment are on the small-cap Kosdaq. So far this year, Hybe shares have plunged 29%, SM lost 36%, while YG plummeted 37%. The largest loser is JYP Entertainment, which has more than halved since the start of the year, falling 56%.

The declines are puzzling as K-pop artists solidify the industry's position on the global music stage, breaking records on YouTube, Spotify and even Billboard Charts.

Statistics provided by Spotify to CNBC revealed that since 2018, K-pop streams on the platform have skyrocketed more than 180% in the United States, over 420% in Southeast Asia and over 360% worldwide, as of Sept. 3.

The music streaming service also said that in 2023 alone, South Korean artists were discovered by first-time listeners nearly 2.2 billion times on Spotify.

"Even if you didn't know my name, you may know BTS and Blackpink," South Korean President Yoon Suk Yeol said to a joint session of Congress in April 2023.

Boy group BTS is the best-selling act in South Korean history, and girl group Blackpink became the first K-pop act to perform at the Coachella in 2019. Blackpink is also the first South Korean band to headline a major U.K. music festival, performing at London's BST Hyde Park festival in 2023. Rookie group NewJeans and boy group Stray Kids have also performed at Lollapalooza this year.

'Complex' headwinds

There's no single reason that explains the gap between fan fervor and pessimistic investors. A complex mix of governance issues and declining earnings have plagued the Big Four, according to Kim Gyuyeon, financial analyst at Mirae Asset Securities.

While BTS and Blackpink smashed records, she said few recently debuted groups are currently able to replicate that success in the West. From an investor perspective, that dampens sentiment since it suggests the market has not expanded since 2020-2021.

Additionally, those groundbreaking groups have experienced their own turmoil. The members of BTS are currently fulfilling their mandatory military service and will not reunite as a group until 2025. While the members of Blackpink renewed their contracts with YG Entertainment for group activities in late 2023, they have decided to pursue solo projects outside of the label.

At the same time, earnings have declined among the Big Four, with each recording year-on-year operating losses in the second quarter. YG's operating profit plunged 94.5%, while that of JYP tumbled 79.6%. SM and Hybe recorded smaller declines of 30.7% and 37.4%, respectively.

Profits tumbled as South Korean media reported album export sales declined for the first time in nine years in the first half of 2024. Similarly, the Seoul Economic Daily reported in July that the Big Four's first-half album shipments fell to 44.74 million, down from 53.45 million in first half of 2023.

Physical sales have historically accounted for the lion's share of a label's revenue, Kim said, and has also been the most profitable segment. High physical sales, she explained, represent the number of fans, which, by extension, quantifies the addressable market for a company.

One unique element of the South Korean entertainment industry are "fansigns," where fans enter a lottery to meet the artist and get their album signed. The lottery allots higher odds to fans who buy more physical albums within a specific window, raising their chances of attending the fansign and meeting the artist.

Simply put, the more albums one buys, the more entries one gets for a fansign. As such, these events incentivize fans to buy more albums even in a streaming era.

Declining physical album sales not only hits earnings, but also raises questions about whether the investment thesis of "continual high growth" has collapsed.

Is streaming killing the CD star?

Investors have continued to use physical album sales as a key gauge, despite the dominance of streaming, where CD players are quickly going the way of the cassette tape.

"A physical album is useless and even a burden because it occupies space. [This means that] despite all these disadvantages, people who buy it are huge fans of the artist, who [also] spend a lot of money," Mirae's Kim explained.

Spotify revealed to CNBC that royalties generated by South Korean artists exceeded 180 billion won ($138 million) as of Sept. 3, marking a threefold increase from 2019 and a staggering 780% rise since 2017.

The high base in 2023 supported a thesis that there will be "continual high growth" for these companies, "but it [has since] collapsed," Kim noted.

While noting it is difficult to separate the margins for digital versus physical, Kim said streaming revenues till only makes up a small part of these agencies' revenue.

In 2023, she said Hybe's digital streaming revenue was only 13% of its revenue base, while SM and JYP's proportion was smaller, at 10% each. Physical sales revenue is 2.5 times more than streaming revenue at Hybe and up to four times more at JYP, Kim pointed out.

Nonetheless, analysts are still largely positive on all four stocks.

Recent analysis reports from Samsung Securities, NH Securities and Mirae Asset Securities all maintain "buy" ratings on the Big Four, although some have lowered their target prices.

Most of them forecast that artist activity, including comebacks and concerts, will pick up in the second half of 2024 and into 2025, thereby supporting the companies' top and bottom lines.