10. Warner Music Group Corp. (NASDAQ:WMG)
D1 Capital Partners’ Equity Stake: $164.78 Million
Number of Hedge Fund Holders as of Q3 2024: 25
Warner Music Group Corp. (NASDAQ:WMG) is a global music entertainment company involved in the discovery and development of recording artists. The stock has been under pressure, going down by about 9% for the year. The underperformance comes amid growing concerns about waning growth rates.
While total revenue in the third quarter was up 2.8% year-over-year to $1.63 billion, it slowed down from annualized revenue growth of 4.2%. Operating margins also shrunk from 13.4% a year ago to 8.8%. On the other hand, the recorded music subscription segment is emerging as a bright spot, going by the 11% revenue increase in the quarter. Recorded music revenue was also up by 6%.
Similarly, Warner Music Group Corp. (NASDAQ:WMG) has embarked on a restructuring drive as it seeks to reinvigorate its growth prospects. The company is targeting $260 million in pre-tax expense savings as it streamlines its operations as part of the restructuring plan. It plans to take advantage of the expected growth in subscription streaming next year. Other strategies include a new organizational structure, expanding globally, and making strategic acquisitions like Cloud9 Recordings and Apicore.
Artisan Mid Cap Value Fund stated the following regarding Warner Music Group Corp. (NASDAQ:WMG) in its Q3 2024 investor letter:
“We are always on the lookout for companies that are under pressure in some form or fashion as this can create the conditions for an attractive entry price. Though equity markets have made substantial gains over the past year, we have still found select opportunities to put capital to work. Q3 purchases included Warner Music Group Corp. (NASDAQ:WMG), MGM Resorts International and Polaris.
Warner Music Group (WMG) is one of the three largest record labels in the world. The music industry had a challenging run post-Napster and pre-Spotify, with a broken monetization model punishing artists and labels alike. We believe we are in early stages of industry revenue growth as key distributors shift from subscriber growth to subscriber monetization. Despite high-quality streaming being adopted by the mainstream, music remains under-monetized compared to the pre-Internet era. We also believe this shift should benefit artists and labels such as WMG. Seventy percent of WMG’s streaming revenue comes from three services: Spotify, YouTube and Apple. Streaming penetration isn’t as high as one would expect in the US and globally, providing a nice runway for growth. However, the market’s outlook for industry growth is more downbeat as shares were down ~14% YTD at the date of our initial purchase in early July and were trading at a trough multiple relative to its public company history. WMG is also much cheaper than its closest competitor Universal Music Group. In regard to WMG’s financial condition, it is solid and stable, with debt that is well termed out and low cost.”
