Warner Music upgraded by BofA on streaming deals, cost cuts

Bank of America upgraded Warner Music Group (WMG) to "Neutral" from "Underperform," raising its price objective to $33 from $28, citing improved revenue visibility from new streaming deals and a recently announced $300 million cost-cutting program. Analysts project these initiatives, combined with a new $1.2 billion joint venture with Bain Capital for music catalog acquisitions, will drive healthier earnings growth and significantly boost OIBDA forecasts to $1.61 billion in fiscal 2026 and $1.85 billion in fiscal 2027. While near-term challenges persist, growth is expected to accelerate in fiscal 2026, leading to a 1.9% gain in WMG shares.

Analysis

Warner Music Group (NASDAQ:WMG) has received an upgrade to "Neutral" from "Underperform" by Bank of America, coupled with a price objective increase to $33 from $28. The revision is predicated on two key factors: enhanced revenue predictability stemming from new streaming agreements with platforms like Spotify, and a substantial $300 million cost-cutting program. This restructuring, which includes $200 million in headcount reductions, is expected to create a direct path to improved earnings growth starting in fiscal 2026. Consequently, Bank of America has materially increased its OIBDA forecasts for WMG to $1.61 billion for fiscal 2026 and $1.85 billion for fiscal 2027. Further bolstering the long-term outlook is a new joint venture with Bain Capital, committing up to $1.2 billion for music catalog acquisitions, which enhances WMG's M&A capacity. While near-term headwinds persist, including challenges in ad-supported streaming and difficult year-over-year comparisons for the upcoming third quarter, the strategic initiatives are projected to drive growth acceleration in fiscal 2026, with a potential TikTok deal renewal offering additional upside.

Key Decisions for Investors

• Given the upgrade to 'Neutral' and improved long-term earnings visibility, investors should re-evaluate their models to incorporate the higher OIBDA forecasts for fiscal 2026 and 2027.
• Be prepared for potential weakness in the upcoming fiscal Q3 results due to known headwinds, but recognize the investment thesis has shifted towards the growth acceleration expected in fiscal 2026, driven by cost savings and new streaming deals.
• Monitor key execution milestones, including the progress of the $300 million cost-cutting plan, the deployment of capital via the Bain Capital joint venture, and any developments regarding the renewal of the TikTok partnership.