Redburn cuts WMG, Spotify stock ratings to Sell; shares down

Redburn Atlantic has downgraded Warner Music Group (WMG) and Spotify (NYSE:) shares to Sell, citing structural challenges and valuation concerns.

For WMG, Redburn highlights the discrepancies between their streaming growth projections and consensus forecasts.

Despite factoring in announced cost savings, their adjusted OIBDA (Operating Income Before Depreciation and Amortization) forecasts for WMG remain below consensus for FY24-26. The firm’s price for the stock of $23, implying a 25% downside from the current share price.

Redburn says it sees both Universal Music Group (UMG) and WMG “as structurally challenged,” and maintains a relative preference for the latter due to its strategic realignment and valuation gap compared to UMG.

Analysts said UMG’s recent stock performance appears correlated with its streaming revenue growth, which Redburn expects to disappoint. They reiterated a Sell rating for the stock with a price target of €15, 46% below the current price.

Spotify, on the other hand, is facing significant valuation risks, per Redburn’s note.

Analysts attribute the rich valuation of SPOT to ambitious long-term revenue growth estimates and its correlation with other risky assets like Bitcoin. The recent launch of Spotify’s audiobook bundle has helped it break away from the price-competitive music-only market, but legal challenges from music publishing organizations pose a significant risk.

“The litigation not only risks higher legal costs but could also challenge the royalty savings embedded in our estimates, derailing the cadence of future pricing changes,” analysts said.

They also point out that Spotify’s subscriber growth and average revenue per user could be pressured by the saturated developed markets and higher prices.

WMG and SPOT shares fell 3.2% and 1.6% in premarket trading, respectively.