To most people, when you say that you think that Warner Music Group (nyse: wmg) is a great investment, they’d laugh at you. But I wouldn’t. I love the idea. Warner was spun off from Time Warner (makes sense…) in may 2005. The physical side of the business, which accounts for about 88% of revenue, is declining, but the real “magic” in this company comes from the digital side (12% of revenue). Last year, digital, which comprises both ringtones and music on websites like iTunes, sales doubled. This is the real growth driver for the company, and the management knows this- on the last conference call they talked about their “laser focus” on the digital side and on signing new artists. Warner increased their digital market share by 300 basis points to 20.5%. The reason why digital is so important is because it has much higher margins than physical sale. The management team at Warner knows that the music business is changing rapidly, and they are insistent that they remain on the vanguard of the “music revolution.” They just signed a new deal to have their music videos published on YouTube. They also signed deals to have music video’s published on Google and Brightcove. Warner is also persuing strategies in international markets, with sales in Japan, for example, up 50% YoY.
I want to emphasize that there are many risks with Warner. Because physical sales are so important, price and unit declines will hurt the bottom and top lines. But, I would buy this stock on any weakness, because I think that the management really understands that technology is changing and they are moving this company towards faster-growing, higher margin businesses. Besides, they pay a 2.5% dividend yield while you wait.
$21.55 (01/30/07)
