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There is just one pure-play music label buying and selling on the American inventory market, and that firm is Warner Music Group (NASDAQ:WMG). This iconic music writer, which has produced artists new and outdated starting from Joni Mitchell and Madonna to Ed Sheeran and Lizzo, has fallen in sympathy with the remainder of the inventory market this yr, even if 2022 was presupposed to be its massive comeback yr (fading COVID pressures would ease the return of live shows and festivals, that are big drivers of music gross sales).
12 months to this point, shares of Warner Music Group have corrected by greater than 30%. That is despite the truth that the corporate continues to end up robust outcomes, particularly in capturing its burgeoning market in music streaming. It is a good time, for my part, for buyers to re-assess the bullish thesis for this inventory.
Let’s take a step again for a second: this yr, the inventory market has actually punished streaming content material distributors. Netflix (NFLX) and Spotify (SPOT), two of the primary pure-play content material distributors out there, have every misplaced greater than half of their market worth. The primary concern right here is competitors hampering subscriber progress – Netflix, for instance, noticed uncommon churn in its U.S. person rely, presumably due to the flood of streaming choices now obtainable out there.
However even because the distributors of video and music content material proceed to compete for subscribers, one factor is evident: the important thing differentiator between platforms is content material. And so in the long run, buyers ought to financial institution on the businesses which have the entry to and talent to create content material. Warner Music Group is strictly that within the music world.
Music, evidently, is prime in our day by day lives. Most of us pay for streaming accounts now. We watch movies with music taking part in within the background, for which labels like Warner Music Group obtain a minimize. After we ignore the short-term noise and take a look at the long-term image, I am unable to see a future by which Warner Music Group would not thrive.
I proceed to stay bullish on Warner Music Group and encourage buyers to purchase the current dip. This is a rundown of the explanation why I am bullish on the corporate:
Lastly, it is value mentioning that Warner Music Group affords a wholesome dividend to maintain affected person buyers enticed. At $0.15/quarter or $0.60/yr, Warner Music Group’s ~2% dividend is not one thing to miss.
From a valuation perspective: at present share costs close to $30, Warner Music Group trades at a market cap of $15.32 billion. After we web off the $385 million of money and $3.83 billion of debt on the corporate’s most up-to-date stability sheet, Warner Music Group’s ensuing enterprise worth is $18.76 billion.
Warner Music Group adjusted EBITDA (Warner Music Group Q2 earnings launch)
Versus the corporate’s trailing twelve-month adjusted EBITDA of $1.21 billion, Warner Music Group trades at 15.5x EV/LTM adjusted EBITDA. If we assume adjusted EBITDA progress can sustain with Warner Music Group’s present income progress tempo of ~10% y/y, its ahead a number of could be roughly 14.1x EV/FTM adjusted EBITDA, assuming forward-twelve month EBITDA grows to ~$1.33 billion.
Whereas this does not precisely scream “worth” simply but, I do assume the sticky nature of Warner Music Group’s income streams and the distinctiveness of its music publishing enterprise affords the inventory a premium.
In different phrases, keep lengthy right here: I see a path for Warner Music Group to get better to the $40s.
Let’s now talk about Warner Music Group’s newest quarterly leads to better element. The fiscal Q2 (March quarter) earnings abstract is proven beneath:
Warner Music Group Q2 outcomes (Warner Music Group Q2 earnings launch)
The corporate achieved strong income progress, at the least for a “legacy” enterprise that has been round for many years. Income grew 10% y/y to $1.38 billion, beating Wall Road’s $1.37 billion (+9% y/y) expectations. Be aware that within the absence of foreign money fluctuations, Warner Music Group’s constant-currency income progress would have been even stronger at 13% y/y.
See an extra income breakdown within the chart beneath. Streaming, now Warner Music Group’s greatest income, grew 9% y/y to $898 million within the quarter, or roughly two-thirds of the corporate’s whole:
Warner Music Group income breakdown (Warner Music Group Q2 earnings launch)
Be aware as properly, nonetheless, that even classic music codecs are nonetheless seeing robust demand. Bodily music income is up 3% y/y to $122 million, reflecting continued demand for vinyl data.
This is some useful anecdotal commentary from CEO Steve Cooper on the corporate’s most up-to-date hits and music offers, made throughout his ready remarks on the Q2 earnings call:
We’re at all times growing the subsequent wave of tradition shaping music that can create the sound observe of tomorrow. For instance, Gayle kicked off the yr with primary worldwide Smash ABCDEFU and Jack Harlow’s new single First Class debuted at primary on the Billboard Sizzling 100 final month. Dua Lipa and Megan Thee Stallion racked up over 40 million streams in only one week with their hit collaboration Sweetest Pie.
Our publishing group additionally continues to excel with a powerful 90 songs charting on the Billboard Sizzling 100 over the course of Q2. A number of the greatest hits that our songwriters contributed to this quarter have been Silk Sonic’s Smoking Out the Window, Rauw Alejandro’s Desperados and Dave’s, Starlight. Warner Chappell had an outstanding displaying at this yr’s Grammys. Along with Bruno and Anderson, who’re additionally Warner Chappell’s songwriters, we noticed massive wins for Chris Stapleton for Finest Nation Tune and Ojivolta for Finest Rap Tune. Warner Chappell is successful extremely aggressive offers for expertise all over the world and throughout the music spectrum. From Nigeria’s, Tay Iwar to Italy’s, Sick Luke to the U.S.’s, Nicolle Galyon.
In March, we signed two necessary offers with Patrick Moxey, the Founding father of Dance Label Extremely. Warner Chappell now administers Extremely’s 6,000 copyrights all through Europe, together with songs from Drake, Rihanna and The Weeknd amongst many others. And Warner recorded music additionally entered right into a strategic alliance with Patrick’s legendary Payday Information in addition to his new label, Helix.”
Cooper moreover added that the music trade grew at 18.5% y/y in 2021, however Warner Music Group outperformed that benchmark by 250bps.
Adjusted EBITDA within the quarter additionally grew 5% y/y to $282 million. The slight decay in EBITDA margins to twenty.5% (90bps weaker than 21.4% within the year-ago quarter) was pushed by income combine, because the restoration in artist providers income (which carries a decrease ~20% gross margin) weighed down the general income profile.
As one of many main music producers that has regularly confirmed itself able to shifting itself to the occasions (each discovering new widespread artists and adjusting its enterprise mannequin to the digital period), I proceed to view Warner Music Group as a “perpetually firm” buying and selling at an inexpensive valuation. Purchase this dip and maintain on for the long run.
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Disclosure: I/we have now a useful lengthy place within the shares of WMG both by means of inventory possession, choices, or different derivatives. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from In search of Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.