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Over the past six months, Warner Music Group’s shares (currently trading at $27.85) have posted a disappointing 16.5% loss while the S&P 500 was flat. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy Warner Music Group, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Warner Music Group Not Exciting?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why we avoid WMG and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Warner Music Group grew its sales at a sluggish 7% compounded annual growth rate. This fell short of our benchmark for the consumer discretionary sector.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Warner Music Group’s revenue to rise by 3.7%, close to its 4.4% annualized growth for the past two years. This projection doesn't excite us and indicates its newer products and services will not catalyze better top-line performance yet.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Warner Music Group historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 10.6%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.
Final Judgment
Warner Music Group’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 9.5× forward EV-to-EBITDA (or $27.85 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are superior stocks to buy right now. Let us point you toward a top digital advertising platform riding the creator economy.
Stocks We Like More Than Warner Music Group
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