Morgan Stanley Bullish on Spotify and Warner as Streaming Growth Remains Robust
2022.07.26 00:05
Morgan Stanley Bullish on Spotify and Warner as Streaming Growth Remains Robust
By Sam Boughedda
A Morgan Stanley analyst reiterated Overweight ratings on Warner Music Group (NASDAQ:WMG) and Spotify (NYSE:SPOT) in a note on Monday, based on the robust global growth in streaming music.
However, he cut the price target of WMG to $34 from $37 per share and Spotify to $140 from $170 per share.
The analyst said he sees accelerating growth in key financial metrics for both companies in 2023 as WMG exits some transitory pressures and Spotify begins to show gross margin expansion.
“We continue to forecast double-digit streaming music industry revenue growth for years to come, even in a slowing economy. This is fueled primarily by continued user growth given global smartphone penetration remains below 15%, although we see opportunities for modest ARPU growth as well,” the analyst explained.
On WMG, he explained that it has “lagged the market (1,800 bp) and its primary peer, UMG (AS:UMG) (2,300), YTD, primarily on de-rating, creating a more attractive risk/reward.”
Adding: “The multiple streaming revenue headwinds the company has absorbed in FY22 should fade and we expect the business to accelerate in FY23.”
On Spotify, the analyst argued that they find the company’s 3-5 year guidance from its recent investor day to be ambitious and not priced into estimates or valuation. “We attempt to capture this ambitious revenue and margin outlook to our $225 bull case. Spotify’s growth and margin success will be increasingly dependent on success outside of subscription streaming music, including podcasting, audiobooks, live entertainment, video, and more.”
“Our updated MS Global Music Forecast sees a modestly more conservative streaming forecast (~13% over the next decade), although our expectation for Spotify’s share has inched up and sustaining 30%+ over time, while we assume WMG holds its share of wholesale revenues,” concluded the analyst.
Spotify closed Monday’s session down over 1%, while WMG closed 2.6% higher.
