Warner Music Group (WMG)

Global music entertainment company Warner Music Group (NASDAQ:WMG) missed Wall Street’s revenue expectations in Q1 CY2025, with sales flat year on year at $1.48 billion. Its GAAP profit of $0.07 per share was 74% below analysts’ consensus estimates.

Company Overview

Launching the careers of legendary artists like Frank Sinatra, Warner Music Group (NASDAQ:WMG) is a music company managing a diverse portfolio of artists, recordings, and music publishing services worldwide.

The advent of the internet changed how shows, films, music, and overall information flow. As a result, many media companies now face secular headwinds as attention shifts online. Some have made concerted efforts to adapt by introducing digital subscriptions, podcasts, and streaming platforms. Time will tell if their strategies succeed and which companies will emerge as the long-term winners.

Competitors in the music industry include Universal Music Group (ENX:UMG), Sony Music Entertainment (owned by Sony, NYSE:SONY), and Spotify Technology (NYSE:SPOT).

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Warner Music Group grew its sales at a sluggish 7% compounded annual growth rate. This was below our standard for the consumer discretionary sector and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. Warner Music Group’s recent performance shows its demand has slowed as its annualized revenue growth of 4.4% over the last two years was below its five-year trend.

We can dig further into the company’s revenue dynamics by analyzing its most important segments, Recorded Music and Music Publishing, which are 79.2% and 20.9% of revenue. Over the last two years, Warner Music Group’s Recorded Music revenue (new music production) averaged 3.2% year-on-year growth while its Music Publishing revenue (royalties from catalog music) averaged 11% growth.

This quarter, Warner Music Group missed Wall Street’s estimates and reported a rather uninspiring 0.7% year-on-year revenue decline, generating $1.48 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 5.6% over the next 12 months, similar to its two-year rate. While this projection suggests its newer products and services will fuel better top-line performance, it is still below average for the sector.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Warner Music Group’s operating margin has been trending down over the last 12 months, but it still averaged 12.6% over the last two years, decent for a consumer discretionary business. This shows it generally does a decent job managing its expenses, and we wouldn’t weigh the short-term trend too heavily.

In Q1, Warner Music Group generated an operating profit margin of 11.3%, up 3.4 percentage points year on year. This increase was a welcome development and shows it was more efficient.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Warner Music Group’s EPS grew at a spectacular 23.7% compounded annual growth rate over the last five years, higher than its 7% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

In Q1, Warner Music Group reported EPS at $0.07, down from $0.18 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Warner Music Group’s full-year EPS of $0.87 to grow 48%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Warner Music Group has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 10.8% over the last two years, slightly better than the broader consumer discretionary sector.

Warner Music Group’s free cash flow clocked in at $33 million in Q1, equivalent to a 2.2% margin. Its cash flow turned positive after being negative in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.

Over the next year, analysts predict Warner Music Group’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 12% for the last 12 months will increase to 14.3%, it options for capital deployment (investments, share buybacks, etc.).

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? 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 11.4%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Warner Music Group’s ROIC has increased significantly over the last few years. This is a good sign, and if its returns keep rising, there’s a chance it could evolve into an investable business.

Warner Music Group reported $637 million of cash and $4.56 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $1.34 billion of EBITDA over the last 12 months, we view Warner Music Group’s 2.9× net-debt-to-EBITDA ratio as safe. We also see its $156 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results. Its EPS missed significantly and its Recorded Music revenue fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock remained flat at $29.85 immediately after reporting.

Updated: May 16, 2025 at 10:10 PM EDT

Before deciding whether to buy Warner Music Group or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Warner Music Group isn’t a terrible business, but it doesn’t pass our quality test. To kick things off, its revenue growth was weak over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its Forecasted free cash flow margin suggests the company will have more capital to invest or return to shareholders next year, the downside is its projected EPS for the next year is lacking. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Warner Music Group’s EV-to-EBITDA ratio based on the next 12 months is 9.6x. Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $33.34 on the company (compared to the current share price of $27.04).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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