While the stock market still trades in a bear market, slowly but surely, more and more stocks are pulling off breakouts above their 200-day moving averages (DMAs). The 200DMA is an important long-term trendline. So Warner Music Group (NASDAQ:WMG) caught my attention after the stock soared above its 200DMA with a 15.2% post-earnings gain. WMG last traded above its 200DMA ahead of its February 2022 earnings. A 6.9% post-earnings loss took the stock down, and it has yet to recover since. I dove into the latest earnings results to assess whether Warner Music Group has launched into a sustained turnaround. All else being equal, I am encouraged.
Warner Music Group [WMG] broke out above its 200DMA (the blue line) post-earnings. (TradingView.com)
The headline earnings numbers suggest WMG can indeed sustain this turnaround in its stock. Here are some key highlights from the Q4 2022 earnings results (year-over-year change in constant currency):
For the year, Warner Music Group grew revenue +16% and cash flow from operations +16% in constant currency terms. The chart below shows that WMG is returning to its pre-pandemic, nearly linear, growth rate.
The onset of the pandemic initially flattened out WMG’s revenue growth trend. The last year is bringing growth back to trend. (Seeking Alpha)
Digital revenue delivered 66.1% of total revenue versus 67.3% a year ago. According to Warner Music Group, the slight decline in share came from “double-digit growth of Recorded Music artist services and expanded-rights and licensing revenue, as well as Music Publishing performance revenue.”
WMG’s physical and digital recorded music is well-balanced. Ten years ago, WMG’s top 5 artists delivered a sizeable 15%+ of these revenues. As of Q4, this concentration dropped to 5%+. In other words, success is better distributed across the line-up, and WMG’s revenue base is more robust.
WMG’s record $1.06B EBIDTA means that the business is likely doing more than riding post-pandemic tailwinds. The trends in digital music in particular are sustained for WMG.
WMG’s EBIDTA sits at an all-time high. (Seeking Alpha)
Warner Music Group ended the year $584M in cash and total debt of $3.732B. The company grew cash faster than debt, 17.0% vs 10.8% respectively. WMG will not see its first debt maturity until 2028 when rates for refinancing will presumably be a lot lower than today’s inflationary levels.
WMG management discussed its strategies in detail during the Q4 earnings conference call.
Warner Music Group prides itself on finding and signing artists who are early in their careers and can be developed over time into global superstars. Of course, every entertainment group strives for such success. WMG impresses me with the range of stars who are popular in their home countries as well as across the planet. For example, “Japan’s Aimyon, and South Korea’s Twice, and international superstars like France’s David Guetta, Argentina’s Paulo Londra, and Nigeria’s Burna Boy.” Warner Music Group has expanded to more than 70 countries in the past 10 years; the latest office opened in Vietnam. The company is also an active holder of songwriters’ catalogs. Accordingly, WMG claims that “over and over again, artists and songwriters not only stay, but grow their relationships with us in this fiercely competitive market.”
WMG also demonstrated its interest in the well-being of its artists by taking a stand against the use of rap lyrics as a confession in criminal cases. The company published its “Protect Black Art Open Letter” in the New York Times and the Atlanta Journal Constitution and convinced others to sign on like Universal, Sony Music, Spotify, TikTok, the ACLU, Color of Change, the Recording Academy, the RIAA, and numerous musical artists. Together, they demanded an end to a legal tactic which is implemented in a racially discriminatory way.
Warner Music Group’s successful artists showed up in this year’s Grammy’s: “Recorded Music scored over 80 Grammy nominations, including nearly half of the Album of the Year nominees, while WCM boasts more than half of the nods across the Best Country Song, Best R&B Song and Best Rap Song categories.” (I did not find a comparable for 2021).
Warner Music Group is also pushing the boundaries with virtual engagement. The company has partnerships with Roblox, Fortnite, and Wave, for creating “innovative opportunities for virtual world-building, concerts, and other forums.” WMG also has a deal with Sandbox that gave them the distinction as the first major to develop on virtual real estate (WMG Land) with artists like Sueco.
WMG is the first major moving into spaces used by today’s generation of music consumers. In 2021, WMG was the first major to sign a deal with Twitch. This year, WMG was the first major to develop a partnership with Pinterest. WMG also renewed and expanded its partnership with Meta (META) to expand revenue share opportunities.
Management did not provide specific guidance for 2023, but they did drop some tidbits on the future of streaming economics. They pointed to Goldman Sachs’ “Music in the Air” for directional guidance. Granted the report is now about 5 years old, but WMG’s reference suggests the projections remain sufficiently accurate. Goldman projects streaming music subscribers will more than double in the next 7 to 8 years.
Streaming providers Apple and Deezer raised prices in 2022, and WMG sees additional pricing power ahead, particularly in developed markets. Emerging markets are experiencing faster subscriber growth but the price points are of course lower.
The ad-supported business declined in the “high single digits” in Q4. WMG expects this part of the business to remain under pressure until the macro-economic environment improves.
WMG has positive technicals; the 200DMA breakout was confirmed with two days of follow-through buying. However, WMG’s valuation makes me wary: this stock market is unfriendly toward rich premiums. WMG currently sells at a 31 trailing and forward P/E. For reference, WMG enjoyed +80.8% annual growth in earnings from continuing operations, but suffered a 17.3% decline in the year going into the pandemic.
Relatively reasonable 2.8 trailing price/sales and 2.7 forward price/sales ratios make me a little more comfortable. A 2.0% dividend yield provides a small salve as well. Still, with WMG trading at all-time lows just over a month ago, I prefer to buy slow: buy the dips and re-evaluate if the market takes WMG to new all-time lows.
Sometimes the market discounts a company’s stock when leadership changes. New leadership must earn its way back to the higher valuation. When Warner Music Group announced that Robert Kyncl, former Chief Business Officer of YouTube, would replace long-serving Steve Cooper as CEO, WMG was already following the market in a September sell-off on its way to an all-time low in mid-October. The day of the announcement garnered little reaction from the market, so I believe the market is already confident that WMG will have a sufficiently smooth transition in 2023.
My interest in the workings of the music industry date back to the early 1990s. At that time, I wrote an undergrad honors thesis titled “Technology, Culture, and Race In American Youth Music: Another Look at the Perpetual Fad.” I focused on the intersection of music technology and the democratization of access and creation. In Warner Music Group, I see a company well-positioned on all three themes of my thesis. WMG talks about how “distribution has been democratized, talent never will be.” While true, democratization facilitates talent discovery like never before.
Right before the pandemic, I finally gave in to Amazon Music on one of their free streaming trials. The lockdowns and increased indoor time gave me more time than ever to listen to music, and I finally adopted streaming whole-heartedly. My ears were opened wide with technology-driven discovery. Today, I listen to more varieties and types of music than ever before at less cost than ever before. This ecosystem is great for consumers, but I often wonder how creators beyond the top 5% or so can survive. Warner Music Group seems to be a part of the solution. As I continue to track these developments, I would love to hear the assessments and observations are others knowledgeable in the industry.
Be careful out there!
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in WMG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.