On Friday, Goldman Sachs (NYSE:GS) adjusted its financial outlook on Warner Music Group (NASDAQ:WMG) stock, listed on NASDAQ:WMG, by reducing the price target from $40.00 to $37.00. Despite the decrease, the firm maintained its Buy rating. The revision follows Warner Music Group's fiscal fourth quarter results for 2024, which highlighted several key factors influencing the decision.
The report from Goldman Sachs identified a slowdown in Recorded Music Subscription Streaming and Ad-supported Revenue growth. Additionally, the multi-year outlook for Subscription Streaming Revenue growth was described as tepid. However, the company is expected to continue seeing margin expansion and robust Free Cash Flow conversion.
The financial institution has revised its revenue predictions for Warner Music Group, expecting a decrease of approximately 1-3%, with Adjusted OIBDA (Operating Income Before Depreciation and Amortization) potentially seeing a 3-5% reduction, and Free Cash Flow forecasts adjusted to a 2-4% decline for the year 2025 and beyond. The adjustments are primarily attributed to a lowered expectation for subscription streaming revenue.
Despite the near-term challenges and a cut in growth estimates for subscription streaming, Goldman Sachs still sees long-term positive trends for the music industry. They believe that Warner Music Group can benefit from these structural tailwinds if the company effectively capitalizes on its industry position.
The analyst cited Warner Music Group's scale, global reach, and its reputation for artist discovery and development as factors that contribute to the company's favorable growth-adjusted valuation multiples. Specifically, Warner Music Group is trading at 12.9 times its projected 2025 Adjusted EBITDA and 20.8 times its estimated 2025 Free Cash Flow, which are seen as attractive by the analyst.
In conclusion, the new 12-month price target of $37, down from $40, implies a potential total return of 21%. This reflects the updated estimates and the belief in the company's potential for upside, should it meet the base case performance outlined by Goldman Sachs.
In other recent news, Warner Music Group (WMG) has reported significant growth in its fourth quarter and fiscal year 2024 earnings. The company's total revenue saw a 6% increase, while the adjusted Operating Income Before Depreciation and Amortization (OIBDA) grew by 14% in the fourth quarter. For the full fiscal year, WMG experienced a 7% rise in revenue and an 11% increase in adjusted OIBDA.
Recorded music subscription streaming revenue also saw an 11% increase, and the company reported a 6% rise in recorded music revenue and a 5% growth in music publishing revenue. WMG's strategic developments included a restructured organizational framework, expanded global presence, and strategic acquisitions such as Cloud9 Recordings and Apicore.
In the context of these developments, Barclays (LON:BARC) has revised its assessment of WMG, reducing the stock's price target from $32.00 to $31.00 but maintaining an Equalweight rating. The revision follows a closer look at the company's recorded music streaming revenue growth, which appears to be trending towards mid-single digits.
WMG anticipates the music industry to continue growing, with subscriber penetration projected to increase from 35% to nearly 50% by 2030. A $100 million share repurchase program has been authorized, and WMG has an exciting release lineup for 2025.
InvestingPro Insights
To complement Goldman Sachs' analysis, recent data from InvestingPro offers additional context on Warner Music Group's financial position. The company's market capitalization stands at $16.15 billion, with a P/E ratio of 40.09, indicating that investors are willing to pay a premium for WMG's earnings. This aligns with Goldman Sachs' view of the company's attractive growth-adjusted valuation multiples.
InvestingPro Tips highlight that WMG has raised its dividend for 5 consecutive years, which may appeal to income-focused investors. The current dividend yield is 2.31%, with a 12.5% dividend growth over the last twelve months. This consistent dividend increase, coupled with the company's profitability over the past year, supports Goldman Sachs' positive long-term outlook on WMG.
However, it's worth noting that 4 analysts have revised their earnings downwards for the upcoming period, which could be related to the slowdown in Recorded Music Subscription Streaming and Ad-supported Revenue growth mentioned in the Goldman Sachs report. The company's revenue growth of 7.3% over the last twelve months, as reported by InvestingPro, provides context to the analyst's expectations of potential near-term challenges.
For investors seeking a more comprehensive analysis, InvestingPro offers 5 additional tips that could provide further insights into WMG's financial health and market position.
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