In June 2020, Warner Music Group Corp. (NASDAQ:WMG) made some noise when it announced its arrival as a publicly traded music player. Hit the fast-forward button and two years later, the company’s stock plunged below IPO levels.
as the music industry conglomerate slipped into the low 20’s, the market stopped talking about a comeback tour and the volume dried up massively. That changed drastically last week.
Trading volume was booming after Apple announced a plan to raise prices on Apple Music and Apple TV+ (as well as the Apple One bundle that includes both services).
Warner Music Group shares rose more than 8% on the news and continued to see increased activity throughout the week. Spotify also went higher.
Let’s take a look at why this is a potential catalyst for the group.
Why is Apple’s price hike good for Warner Music Group?
Like everything else, consumers today pay more to listen to their favorite artists and binge watch their favorite shows. Last week, Apple was the last to raise the cost of its streaming services NetflixDisney+ and others.
Monthly subscriptions to Apple Music and Apple TV+ are up $1 and $2, respectively. This brings Apple Music to $10.99 per month and the Apple One bundle to $16.95 for individual subscriptions.
Why? With licensing costs rising, content creation is getting more expensive. Meanwhile, ad spend is declining. As a result, consumers are asked to pay more and streamers may earn more.
Apple’s move will affect music services such as WMG, Spotify and Universal Music Group, as these competitors are likely to raise their own prices. Spotify hasn’t moved away from the $9.99 rate in over 10 years, but management hinted at US price increases in its third-quarter earnings call.
Warner Music Group is a special case. In addition to the digital music offering, the company sells a full range of old school vinyl, cassettes and CDs in a variety of music genres. All of these prices, along with those of the clothing and accessories available at the Warner Music Store, will rise. And if there is no parallel increase in costs, WMG can make more profit.
Short-term inflationary pressure Aside from that, Apple’s decision indicates that the streaming music industry has pricing power and positive growth prospects. The company wouldn’t raise prices if it didn’t expect consumers to pay, suggesting demand for streaming will persist in the long run.
The ripple effect of the Apple increase is also a boon to the content creators themselves. As prices go up, artists and songwriters pay more when their stuff is streamed.
What is Warner Music Group’s growth strategy?
If you own four top record labels like WMG, the growth can come from anywhere. Atlantic Records, Warner Records, Elektra and Parlophone make the company a greatest hits collection for all things music. Add to that all the other music labels under the Warner umbrella and you get a catalog of over 1.4 million copyrights, both classic and modern hits.
It is the diversified income streams that make WMG interesting from an investment perspective. The sector P/E below and the 2.4% dividend aren’t too bad either.
Even though Warner Music covers all music media, digital is clear growth engine. It’s no secret that the world is shifting to streaming music platforms, making nostalgic physical music second fiddle.
In fiscal Q3, sales grew 12% and profits more than doubled. The consolidated streaming business made a solid contribution and is expected to be supported going forward.
So is international expansion. The launch of new music services, such as the creative hub The Music Station in Spain and Warner Music Israel, will drive growth. The company also recently collaborated with Polish concert promoter BIG Idea.
And no media conglomerate would be complete without NFT exposure. A collaboration with Bose on the Stickmen Toys NFT collection peaked at the number two spot on Open Sea for 24-hour volume, reaching the Ethereum thousand mark.
Price increases seem likely to happen at Warner Music Group. Given the popularity of its artist portfolio and streaming services, this could drive a growth to higher decibels by 2023.
Prior to the Apple newsWall Street was mostly optimistic about WMG’s long-term outlook. Price increases taken in by loyal music lovers should only support this.
In fact, the views of the last six research firms on the stock have been bullish. A few weeks ago, Goldman Sachs started with a buy recommendation. This set the stage for others to join buy ratings and similar goals, which represent at least a 10% increase from here.
This would return the stock to IPO levels and a potential new base to build on. Yes, it was a rocky Nasdaq debut for WMG, but the group of buyers may be getting back together.