Redburn Downgrades WMG and Spotify Stocks to Sell; Shares Fall by

Redburn Downgrades WMG and Spotify Stocks to Sell; Shares Fall by

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

Redburn highlights discrepancies between streaming growth projections for WMG and consensus estimates.

Despite accounting for announced cost savings, adjusted OIBDA (Operating Income Before Depreciation and Amortization) estimates for WMG remain below consensus for FY24-26. The company’s $23 price for the stock represents a 25% drop from the current share price.

Redburn says he views both Universal Music Group (UMG) and WMG as “structurally challenged” companies, giving the latter relatively higher priority due to strategic restructuring and the valuation difference compared to UMG.

Analysts said UMG’s recent stock performance appeared to correlate with Redburn’s expected streaming revenue growth to disappoint. They reiterated a Sell rating on the stock with a price target of €15, 46% below current price.

Spotify, on the other hand, faces significant valuation risks, according to Redburn’s note.

Analysts attribute SPOT’s rich valuation to its ambitious long-term revenue growth projections and its correlation to other riskier assets like Bitcoin. Spotify’s recent launch of an audiobook bundle has helped it move away from the price-competitive music-only market, but legal challenges from music publishers pose a significant risk.

“The lawsuit not only carries the risk of higher legal costs, but could also jeopardize the royalty savings included in our estimates and disrupt the rhythm of future price changes,” the analysts said.

It also notes that Spotify’s subscriber growth and average revenue per user may be under pressure due to saturated developed markets and higher prices.

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