On Friday, Evercore ISI made adjustments to its outlook on Warner Music Group (NASDAQ:WMG), reducing the price target to $40.00 from the previous $42.00, while keeping an Outperform rating on the stock. The move follows Warner Music Group's second-quarter fiscal year 2024 results, which led to a 9% decline in the company's share price.
The firm acknowledges the disappointment stemming from the unexpected 560 basis points slowdown in Recorded Music ad-supported streaming revenue growth. Despite the initial negative reaction, the firm points out that the overall results concealed the underlying strength in core ad-supported trends, attributing the deceleration to the volatility in emerging platforms.
Evercore ISI remains optimistic about Warner Music Group's subscription streaming segment, which has shown the fastest growth rate since at least the fourth quarter of fiscal year 2022. The firm has taken a cautious stance for the second half of fiscal year 2024, adjusting its outlook for emerging platforms while awaiting more clarity on a recovery and future contract renewals, with a particular assumption regarding Meta Platforms Inc (NASDAQ:META).
The firm's forecasts for Warner Music Group's consolidated revenue, adjusted operating income before depreciation and amortization (OIBDA), and free cash flow (FCF) for fiscal years 2024 and 2025 remain largely unchanged.
Evercore ISI believes that the company's long-term prospects are still attractive due to expected price actions from digital service providers (DSPs), the adoption of artist-centric royalty models, solid core ad-supported trends, potential benefits from renewals of deals with emerging platforms, and consistent margin expansion from the company's recent restructuring and ongoing cost management.
The revised price target of $40 is based on a 16 times forward enterprise value to EBITDA (EV/EBITDA) multiple, in contrast to the current trading multiples of 14.1 times and 12.3 times for calendar years 2024 and 2025 estimates, respectively. Evercore ISI reiterates its Outperform rating, signaling confidence in the stock's performance potential.
InvestingPro Insights
In light of Evercore ISI's recent analysis of Warner Music Group (WMG), examining the real-time data from InvestingPro can offer additional context to investors. WMG has demonstrated commitment to shareholder returns, as evidenced by a consistent increase in its dividend over the past four years. Despite the recent dip in share price following Q2 results, InvestingPro Tips highlight that analysts predict WMG to be profitable this year, with profitability maintained over the last twelve months.
From a financial standpoint, WMG's market capitalization stands at $16.87 billion, with a forward-looking P/E ratio of 28.11 as of Q2 2024. This indicates a premium valuation, which aligns with Evercore ISI's price target rationale based on a forward EV/EBITDA multiple. The company's revenue growth remains robust at 9.9% for the last twelve months as of Q2 2024, showcasing its ability to expand its top-line figures. Additionally, the dividend yield is currently at 2.09%, which could be an attractive point for income-focused investors.
InvestingPro also provides a wealth of additional tips for investors interested in WMG, with 7 more tips available for those looking for deeper insights into the company's financial health and market position. For those considering an InvestingPro subscription, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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