UBS upgraded shares of Warner Music Group (NASDAQ: WMG ) to a Buy rating (from Neutral) and set their 12-month price target on the stock to $37.00 (from $34.00).
UBS analysts see WMG as a long-term “beneficiary of secular industry trends in music and see the recent pullback as a buying opportunity.”
They anticipate that the recent price hikes by digital service providers (such as Spotify (NYSE: SPOT ), YouTube, and Deezer), new avenues for monetization arising from emerging platforms (including the renewed TikTok deal), and an increasing share of the streaming market will contribute to positive outcomes for the company, potentially exceeding the market's expectations.
Furthermore, BMG disclosed its intention to manage its digital distribution independently, ending a 7-year deal. This move is expected to reduce WMG's revenue from recorded music, although its impact on OIBDA in fiscal year 2024 is projected to be minimal.
Meanwhile, WMG has made significant strides in expanding its global streaming market share, gaining approximately 120 basis points in the fourth quarter of fiscal year 4 and approximately 500 basis points in the United States. This upward trajectory in global market share has been achieved steadily, progressing from 14% in the first quarter to 16% in the fourth quarter, primarily driven by the success of its new releases.
UBS updated their model to reflect the recent DSP price increase, share gains and the impact of the BMG deal.
"With improved market share and the TikTok deal, we expect FXN revenue to grow by 6% in Q4, with streaming contributing to about 12% of this growth. Recorded music revenue should increase by 5% due to stronger streaming, while artist services may decline due to tough comparisons," they wrote
Ad-supported revenue, now including emerging platforms and the new TikTok deal, is estimated to have grown by 8% in Q3. Music publishing revenue is expected to grow by 11%, driven by digital.
Overall, adjusted OIBDA is set to grow by over 18% year-over-year, resulting in a 19.7% margin in Q4 and a 20.4% margin for the entire fiscal year 2023, up about 100 basis points from the previous year.
Shares of WMG are up 3.25% in pre-market trading on Tuesday.
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