On Wednesday, Guggenheim analysts adjusted their stance on Warner Music Group (NASDAQ:WMG), citing foreign exchange challenges. The firm's analyst, Michael Morris, reduced the 12-month price target on the company's shares to $40 from the previous $44 while maintaining a Buy rating.
With a current market capitalization of $16.1 billion and trading at a P/E ratio of 37.1x, InvestingPro data suggests the stock is currently trading near its Fair Value. Notably, three analysts have recently revised their earnings estimates downward for the upcoming period.
The revision reflects the impact of a stronger U.S. dollar, which has appreciated by 7.7% in the fourth quarter of the calendar year. The analysts now expect a 1.5% foreign exchange revenue drag in the first fiscal quarter and a 1.7% drag for the full fiscal year, in contrast to their earlier projection of no impact. Despite these challenges, Warner Music Group has maintained strong fundamentals, with revenue growing 6.4% over the last twelve months to reach $6.43 billion.
Due to the currency headwind and the fact that content costs are more domestically inclined compared to revenue, Guggenheim anticipates additional pressure on Warner Music Group's financials. The firm has adjusted its forecast for the company's first fiscal quarter Adjusted OIBDA margin to 21.7%, down from the previous estimate of 23.9%.
In addition to foreign exchange issues, Guggenheim has also slightly reduced its estimate for Recorded Music licensing revenue, attributing this to some expected quarterly variability, which is largely based on media end demand. Despite this, the analysts remain optimistic about the company's mid-to-long-term prospects, predicting sustained mid-single digit growth in this area.
For the core Recorded Music subscription streaming revenue, growth is expected to remain in the high-single-digit range for the year, though it is projected to be at the lower end of this range for the first fiscal quarter. This is partly due to the company cycling past incremental contributions from Spotify (NYSE:SPOT) pricing adjustments and the acquisition of 10K Projects in the previous year's quarter.
Looking ahead, Guggenheim anticipates that Warner Music Group will renew its distribution agreement with Spotify during the first half of the calendar year and expects to see industry-wide pricing actions in the latter half of 2025. The firm has provided additional details and revised estimates in their published tables, reiterating their Buy rating despite the lowered price target.
InvestingPro subscribers can access additional insights, including 8 more ProTips and a comprehensive Pro Research Report, which provides deep-dive analysis of Warner Music Group's financial health, valuation metrics, and growth prospects. The company's next earnings report is scheduled for February 5, 2025, where investors will be keen to see if these FX headwinds materialize as predicted.
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