Warner Music Group, Universal Music Group get new coverage from Wells Fargo

Investment firm Wells Fargo started coverage on Warner Music Group (NASDAQ:WMG) and Universal Music Group (OTCPK:UMGNF) on Wednesday, opining the global music companies are on different paths.

For Warner Music Group (WMG), analysts Omar Mejias and Steve Cahall put a equal-weight rating and $35 price target on the stock, calling it a "company in transition" thanks to new leadership that is focusing on tech.

"While the cadence of new releases has improved, we remain on the sidelines until we see sustained share recovery and get more clarity on tech investments," the analysts wrote.

The analysts added that Warner's (WMG) shares of record music revenue has fallen to 18.8% year-to-date, down from 19.2% in 2022, due in part to an "extended cold streak" from Atlantic.

"If/when WMG can turn through tech investments and/or A&R, we think its multiple can re-rate," the analysts said.

They said the company's new management is likely to focus on tech investment to drive efficiencies and reverse recent share losses, though that could impact near-term margins, even if it boosts long-term growth.

They added Warner (WMG) has a "great portfolio" and is benefiting from "underlying secular tailwinds," citing Zach Bryan's recent success and moving to growth genres, such as dance and country.

"While our global music outlook over the near and long-term remains bullish, for us to get more constructive on WMG, we would like to see continued improvement in the cadence of new releases — especially at Atlantic Records," the analysts wrote.

Incremental disclosures on tech initiatives and more focus on its distribution arm to get growth from independent artists would make them more constructive on the company, they said.

Universal Music Group's (OTCPK:UMGNF) scale and its "best in class" A&R management team are differentiators, the analysts said. They put an overweight rating and €28 price target on Universal's shares.

Thanks to its scale, the analysts said Universal can facilitate industry change, including price hikes from digital service providers (such as Spotify), continuing to evolve payout models, monetizing "superfans," better customer segmentation and benefiting from emerging platforms.

"UMG is able to do this in conjunction with, not in opposition to, DSPs, and stands to benefit as more royalties accrue to its industry-leading artists," the analysts wrote. "We expect this to lead to rev/margin upside, underpinned by UMG's strong market share."

The analysts added they liked Universal's (OTCPK:UMGNF) "consistent" gains in market share, thanks to its Republic and Interscope labels. Republic went from 10% market share in 2022 to 12% as of the third-quarter, aiding Universal, which rose from 33% to 35% during the same time frame.

"Leading share will mean more benefits from the industry's strong structural growth dynamics," the analysts said.