Warner Music

Warner Music's fiscal third-quarter performance reaffirmed that Universal's terrible recent results are not indicative of a weak streaming environment for record companies. Sales rose 10%, and the adjusted EBITDA margin expanded by one percentage point.

Why it matters: We've expected this year to bring outsize sales growth for record companies because they've recently renewed licensing agreements with most major streaming platforms on more favorable terms. Warner's recorded music subscription streaming sales rose 11% after excluding a currency benefit. Nearly one-third of that growth was due to pricing benefits from the new agreements and platform price increases. Most of the rest was from streaming subscriber growth, and management said market share gains added about 1% growth. Based on Universal's comments, market share was its biggest weakness, and we don't expect Warner to continually maintain such an edge. Still, with more favorable royalty structures in place and deals that management confirmed contain protections against AI dilution, we expect durable high-single-digit growth.

The bottom line: We raise our fair value estimate to $40 from $39 following the results, with no changes to our forecast. We believe the stock is significantly undervalued and that the market is mistakenly fearing any threat to Warner's long-term growth. Our narrow moat rating for Warner, versus wide for Universal, is based on Warner's smaller relative size and resources. However, recent results don't support Warner's inferiority in an industry where we still believe the major incumbents have tremendous advantages.

Key stats: The margin expansion comes on the back of the firm's multiyear cost-efficiency program and a favorable revenue mix. We don't project significant expansion from here, because we expect artist costs and lower-margin distribution sales to dilute savings. However, the firm has exceeded our expectations the past several quarters.

Warner recently renewed its licensing deal with Apple Music, which had been the only remaining major streaming provider outside of China that had not signed a new agreement containing higher per-subscriber minimum (PSM) payments. With Apple's deal now complete, management said that 88% of its subscription streaming revenue is now covered by the higher-PSM deals.

Fiscal third-quarter sales outside of subscription streaming were solid in most areas. Digital publishing revenue was up 15% year over year, also getting a boost from the new licensing agreements. Ad-supported streaming revenue was up 10% after adjusting for currency and one-time items. This is another area that drastically outperformed Universal in an aspect of the music business that has been under tremendous pressure recently. However, the quarter benefited from a weak comparison and World Cup advertising, so management doesn't expect advertising growth to remain at such an elevated level. Similarly, the midteens growth in synchronization revenue and artists services revenue was boosted by the timing of album releases and concerts, so growth in these areas will likely be choppy.

Our fair value estimate for Warner Music is $40 per share, implying P/E and EV/EBITDA multiples of 20 and 14, respectively, based on our 2026 forecasts.

Over the course of our five-year explicit forecast, we project 6% annual average revenue growth and 350 basis points of EBITDA margin expansion. We don’t project major acquisitions or sizable purchases of individual music catalogs, but we do build in several hundred million dollars in normal-course-of-business spending each year to add to the catalog of recorded music and publishing copyrights.

Continuing growth in music streaming platforms drives our top-line assumptions. We project recorded music streaming revenue, including both subscription and ad-supported streaming revenue, to grow at about 6%-7% annually throughout our forecast, driven by a combination of price increases, subscriber gains, and agreements with streaming and social media platforms.

In total, we project recorded music revenue to grow in the midsingle digits annually, as we are not as optimistic about revenue trends for physical sales, licensing, or artist services. Vinyl has had a resurgence in recent years, but we’re not convinced this represents a long-term shift back to a preference for physical media, and we don’t project growth over our forecast. Licensing revenue should grow as more internet-based content is created, but we expect opportunities for licensing to film and television show creators will stagnate as studios tighten their production spending.

Our view on the drivers of recorded music plays out in a similar manner for Warner’s publishing segment, where we project mid- to high-single-digit revenue growth over our forecast, to be driven by streaming. We project digital publishing revenue to grow by about 8% per year, but we expect mechanical revenue—from physical sales—and synchronization revenue—from media like film and television—to grow only at a low- to mid-single-digit rate, with a boost from annual statutory royalty rate increases for mechanicals.

The broader shift toward digital and catalog music, which boasts higher margins, helps drive the margin expansion we expect, but we expect the mix shift to be largely offset by our general expectation that signing artists will become more costly. We believe the talent Warner signs in the future will have negotiating leverage in many cases and will be able to demand greater royalties. We also believe Warner will add sales from distributing music for independent artists, which brings lower margins. The bulk of the margin expansion we project stems from the firm’s cost-reduction program, which will be fully realized by 2027.

We assign a narrow moat to Warner Music based primarily on intangible assets. While technology has theoretically made it easier for artists to circumvent record labels, the fact that virtually none of the most successful artists choose that course demonstrates the value that record labels and music publishers continue to bring. The scale, reputations, relationships, and global reach of the three major music companies—Universal Music, Sony, and Warner Music—would be very difficult for smaller music companies to replicate, but more important, artists and other music creators typically assume financial disadvantages and/or added risk by choosing smaller or less established record labels and publishers. Although we think the music industry lends itself to wide moats for major record labels, we believe Warner’s smaller size compared with its two bigger competitors puts it at a slight disadvantage.

Reputations the major record labels have built based on their track record of developing and serving music’s most successful artists cannot be matched by independent record labels, giving the major record labels a big leg up in signing each successive generation of stars. The labels’ artist and repertoire (A&R) personnel recruit, sign, and develop talent. Marketing and promotional staff bring visibility and additional revenue-generating opportunities to the recordings, and record companies then distribute the recordings to all the various global outlets where the recordings can be used. Many independent record labels use one of the majors for broad distribution, which the independents aren’t suited to handle.

Record labels provide artists with advances, which consist of an upfront payment, and the artists agree to a royalty rate, which determines the percentage they will receive of all the revenue their music generates for the record company. Record companies recoup the advances with artist royalties—the artists conventionally don’t receive royalty payments from the label until their advances are recouped. However, the advances are generally guaranteed. Obviously, established, successful artists receive much bigger advances and can demand much higher royalty rates than unknown artists. Since the biggest and best capitalized music companies can provide the biggest advances, established artists can secure bigger advances from the majors. Size also allows the majors to take more “shots on goal” by signing a greater number of artists in trying to develop the next superstar.

Record labels are not as critical as they once were for producing high-quality recordings, and artists’ music can reach fans without the manufacturing and physical distribution that vinyl records or compact discs require. However, record labels remain central to maximizing an artist’s success, as judged by the monetization and reach of an artist’s music. Revenue from sound recordings now comes primarily from streaming platforms (officially called digital service providers, or DSPs). While individuals may be able to upload music to many DSPs without being affiliated with a record label, they are unlikely to organically generate as many streams as they would if they had the marketing team of a label behind them, as the record labels work to add visibility and inclusion in featured offerings and playlists.

Even if an artist who was not affiliated with a label "went viral" with a song and organically received an enormous number of streams after uploading to a few of the biggest DSPs, the artist would most likely need to sign with a label to truly maximize the earning power of their career. First, a single song is unlikely sufficient for an artist to achieve lasting success, and the creative resources and marketing power that record companies provide would likely be necessary at some point. More immediately, however, the record companies are critical in distributing and maximizing earnings from even the current hit.

As artists’ initial deals expire, they are incentivized to stay with the same record label, provided the company can provide a competitive advance and service offering. Record labels typically control the recordings that artists make under their labels for many years—as many as 35 years for new talent. Unlike with the legacy music industry business model where most revenue was generated by selling physical albums shortly after an album was released, those rights can retain significant value long after an album’s release. Warner says that roughly one-third of its revenue comes from its deep catalog (songs more than 10 years old), one-third comes from its shallow catalog (songs between three and 10 years old), and one-third comes from new releases within the past three years. If an artist goes to a new label, the prior label can reap almost pure profits on its remaining catalog rights while the new label takes on the costs of producing new music and marketing the artist without the benefit of back catalog monetization.

The advantages of staying with an incumbent major label are likely enough to benefit even the biggest superstars, especially considering the terms and advances they can negotiate. But even if a superstar with extensive resources and notoriety, decided to forgo affiliation with a record label, that artist would still need an expansive team to accomplish all the tasks that record companies are currently streamlined to do. The capital it would take to accomplish all of this, especially in the context of the leverage superstars have in negotiating new deals, likely makes it more financially advantageous to remain with a label. Of Spotify’s Top 500 new releases in 2025, 85% were associated with artists signed to one of the three major labels.

Talent will always be at the core of music industry sales, and major record labels like Warner are critical for artists to maximize success.

Warner’s sales growth directly follows the streaming platforms, which are still maturing. These platforms have just begun to take advantage of pricing power and have room to increase customer penetration globally.

The evolution of the streaming business to an artist-centric model that pays the most popular music at a higher rate per stream will benefit the major record labels, which represent the biggest stars.

Warner’s smaller size versus other major record labels could make it difficult to compete for the best talent at the most favorable terms.

AI-created music may diminish the share of music consumption that real talent provides. Favorable near-term AI agreements for record labels cannot negate the impact of fewer artists in the long term.

Successful artists’ ability to reach fans directly gives those artists more negotiating leverage to squeeze record companies for a bigger share of the artist’s earnings.