Why This Warner Music Group Analyst Is Turning Bearish

Although Warner Music Group Corp WMG is poised to continue benefiting from secular tailwinds in the music industry and its longer-term growth story remains intact, the stock seems “fairly valued” and there is downside risk in the near-to-intermediate term, according to BofA Securities.

The Warner Music Group Analyst: Jessica Reif Ehrlich downgraded the rating for Warner Music Group from Buy to Underperform while reducing the price target from $53 to $42.

The Warner Music Group Thesis: The stock has appreciated by around 30% since Vivendi shareholders agreed to spin out Universal Music Group on June 22, Reif Ehrlich said in the downgrade note.

Following several catalysts this year, “there are limited near-term catalysts (through at least F1H22),” she added.

While the “ad-supported streaming business faces difficult comps,” Warner Music Group’s “mix shift toward businesses that were adversely impacted by COVID-19 will negatively impact margins,” the analyst wrote.

The company’s free cash flows in fiscal 2022 are likely to be “impacted by increased investment as capex will increase to $130mn+ (vs. $93mn in FY21),” she further mentioned.

WMG Price Action: Shares of Warner Music Group were down 4.34% at $43.38.