After years out in the cold, Warner Music Group (NASDAQ: WMG) will likely price its shares this morning ahead of a Thursday IPO on the Nasdaq. The company had originally planned on pricing its shares yesterday but opted to postpone in-line with the music industry’s solidarity with the Black Lives Matter movement. It would not have made for good PR to raise billions of dollars the same day that the industry pledged to tackle inequality.
The IPO looks set to value the world’s third-largest music producer somewhere between $11.7 billion and $13.3 billion, with shares between $23 and $26 apiece.
Why is Warner Music going public (again)?
It was the question on everyone’s mind when announced back in February, and it highlights an impressive turnaround for the music business which was sold off for $3.3 billion to Access Industries in 2011. The industry had been in terminal decline by that point, but since then, streaming has ruled the roost and breathed life back into the music industry, which was estimated to be worth between $20-$21 billion at the start of 2020.
Basically, music is profitable again (at least for the labels, not so much the underpaid artists), and Warner wants a slice of the cake. Streaming now accounts for more than half of the industry’s revenue and is growing at a CAGR of 5.8% per year. In a world where direct-to-consumer subscription services are the new norm, Warner can put all of its industry knowledge, experience, and most importantly, resources into becoming the biggest, baddest streamer out there.
Does this impact Spotify?
The biggest name in the music streaming industry right now is Spotify (NYSE: SPOT) and its 130 million paid subscribers. While at-home stocks such as Zoom (NASDAQ: ZM), Peloton (NASDAQ: PTON), and Netflix (NASDAQ: NFLX) have stolen the spotlight as of late, Spotify amazed the world last month with blowout Q1 earnings of $2 billion in revenue.
Not just that, but it has also procured exclusive rights to the biggest podcast on the planet, ‘The Joe Rogan Experience’ — for a whopping $100 million.
However, Warner’s move could prove problematic to Spotify, which already competes with the likes of Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN), and Google (NASDAQ: GOOG). Typically, Spotify will pay millions in royalties to such labels for the rights to their music, and back in April, after months of negotiation, it renewed its global licensing deal with Warner. The two companies don’t exactly have a ‘friendly’ relationship, leading to months of negotiations preceding this deal. Any tip to the balance of power could see tensions strained in the future. With a successful IPO and a valuation bump, what’s to stop Warner turning around and charging more for its content, or simply delving into the streaming space itself?
It is already the parent company of several prominent labels including Atlantic Records, Warner Records, and Elektra Records, and even name-dropped some top talent names in its S-1 filing: Ed Sheeran, Bruno Mars, Cardi B, Twenty One Pilots, Lizzo and Katy Perry, to name a few.
Like a medieval knight whose honor has been slighted, Warner is laying down the gauntlet and saying: “we’re back, we’re big, and we’re ready to dominate the music scene.”
Is Warner Music a good investment?
Warner Music is not like most new public listings. Last year we saw the likes of Uber (NYSE: UBER), Slack (NYSE: WORK), and *almost IPOd* WeWork rack up massive losses, which saw IPOs actually perform worse overall than the S&P 500 (NYSEARCA: VOO) in 2019.
Investor appetite for unprofitable tech ventures has waned of late, but there is no such risk with Warner which reported an annual profit of $258 million on revenue of $4.48 billion last September. In the two previous fiscal years, Warner Music had net income of $312 million and $149 million, and revenue of $4.01 billion and $3.58 billion, according to the same filing, showing its impressive growth. However, it is worth mentioning that the company does hold up to $3 billion in outstanding debt.
It also boasts an impressive array of underwriters in Morgan Stanley (NYSE: MS), Goldman Sachs (NYSE: GS), as well as JPMorgan (NYSE: JPM) as bookrunner.
Obviously, we will want to wait and see how the company performs in the first few quarters of its public life, and whether it can keep up with the competition, but it’s definitely one for investors to keep an eye on.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.
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Jamie is the Content Editor here at MyWallSt. His favorite stock is Apple, which is also the first stock he ever bought. Jamie is not only a big fan of its products, but he believes that the tech giant has a whole lot more to give the world, and hasn't even scraped the surface of its potential.