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In June 2020, Warner Music Group Corp. (NASDAQ:WMG) made some noise when it announced its arrival as a publicly traded music player. Press the fast-forward button and two years later, the company’s stock dipped below IPO levels.
As the music industry conglomerate slid into the low-20’s, the market tuned out talk of a comeback tour and volume dried up big time. That changed dramatically last week.
The trading volume was on full blast after Apple announced a plan to raise its prices on Apple Music and Apple TV+ (as well as the Apple One bundle which includes both services).
Warner Music Group shares jumped more than 8% on the news and continued to see elevated activity throughout the week. Spotify also moved higher.
Let’s listen in to why this is a potential catalyst for the group.
Like everything else, consumers are paying more to listen to their favorite artists and binge-watch their favorite shows these days. Last week, Apple became the latest to hike the cost of its streaming services following Netflix, Disney+ and others.
Monthly subscriptions to Apple Music and Apple TV+ are going up by $1 and $2 respectively. This brings Apple Music to $10.99 per month and the Apple One bundle to $16.95 for individual plans.
Why? With licensing fees on the rise, content creation is getting more expensive. Meanwhile, ad spending is slowing. As a result, the consumer is asked to pay more and the streamers potentially make more.
Apple’s move impacts music services like WMG, Spotify, and Universal Music Group because these competitors are likely to raise their own prices. Spotify hasn’t budged from its $9.99 rate for over 10 years but management hinted at U.S. price hikes in its Q3 earnings call.
Warner Music Group is a special case. In addition to its digital music offerings, the company sells a full slate of old school vinyl, cassettes and CDs across music genres. All of these prices along with those of the clothing and accessories available at the Warner Music Store stand to trend higher. And absent a parallel increase in costs, WMG stands to rake in greater profits.
Near-term inflationary pressures aside, Apple’s decision signals that the streaming music industry has pricing power and a positive growth outlook. The company wouldn’t bump prices if it didn’t anticipate consumers will pay up, which suggests streaming demand will persevere over the long haul.
The ripple effect of the Apple increase is also a boon to content creators themselves. When prices go up, artists and songwriters bank more when their stuff gets streamed.
When you own four top record labels as WMG does, the growth can come from anywhere. Atlantic Records, Warner Records, Elektra and Parlophone make the company a greatest hits collection for all things music. Add in all the other music labels under the Warner umbrella and you get a catalog of more than 1.4 million copyrights, including classic and modern hits alike.
It is the diversified revenue streams that make WMG intriguing from an investment perspective. The below industry P/E and 2.4% dividend aren’t too shabby either.
Even though Warner Music covers all music mediums, digital is the clear growth driver. It’s no secret the world is shifting to streaming music platforms, leaving nostalgic physical music playing second fiddle.
In fiscal Q3, revenue increased 12% and profits more than doubled. The consolidated streaming business was a solid contributor and is expected to be leaned on going forward.
So too is international expansion. New music service launches like The Music Station creative hub in Spain and Warner Music Israel stand to augment growth. The company also recently partnered with Polish concert promoter BIG Idea.
And no media conglomerate would be complete without NFT exposure. A collaboration with Bose on the Stickmen Toys NFT collection peaked at the number two spot on Open Sea for 24-hour volume and topped the one thousand Ethereum milestone.
Price increases seem likely to happen at Warner Music Group. Given the popularity of its artist portfolio and streaming services, this could send growth to higher decibels in 2023.
Prior to the Apple news, Wall Street was mostly bullish on WMG’s long-term prospects. Price increases that are absorbed by loyal music fans should only support this.
In fact, the last six research firms’ opinions of the stock have been bullish. A few weeks back, Goldman Sachs started coverage with a buy rating. This set the stage for others to chime in with buy ratings and similar targets, which imply at least 10% upside from here.
This would bring the stock back to its IPO level and a potential new base to build on. Yes, it’s been a rocky Nasdaq debut for WMG, but the band of buyers may be getting back together.
Before you consider Warner Music Group, you’ll want to hear this.
MarketBeat keeps track of Wall Street’s top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on… and Warner Music Group wasn’t on the list.
While Warner Music Group currently has a “Moderate Buy” rating among analysts, top-rated analysts believe these five stocks are better buys.
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