When the novel coronavirus first devastated the U.S. markets, few people were thinking about initial public offerings. With almost every sector of the economy taking a devastating blow, few had the appetite for rapidly eroding equities. But as the worst of the crisis appears to have faded, sentiment came back. This was on display for Warner Music Group (NASDAQ:WMG), which saw its IPO initially send Warner Music Group stock heading toward the clouds.
At time of writing, though, the early momentum has taken a backseat. On Thursday, we saw the latest read of initial weekly jobless claims, which came in at 1.5 million. While some of this tally comes from the massive backlog of unemployment benefits filings from weeks ago, that the total remains stubbornly high suggests that the economic carnage is spreading to multiple job categories.
Of course, as a consumer-levered entity, this report didn’t favor Warner Music Group stock, sending shares tumbling along with the major indices.
Nevertheless, a case exists for buying WMG. First, the initial enthusiasm for Warner’s IPO was a sign that Wall Street is ready to wheel and deal. More specific to Warner Music, CEO Steve Cooper stated that “The valuation reflects the growing awareness of the value of content. Oftentimes the spotlight is on tech, but tech in many forms utilizes music.”
Moreover, Goldman Sachs predicted that recorded-music revenue will reach $75 billion in 2030, Considering that WMG’s revenue for 2019 was $4.48 billion, this forecast implies a long upside pathway for Warner Music Group stock. Therefore, it’s natural that many investors want to get in early.
Still, should you take a bet on the music industry?
Warner Music Group Stock Has Coronavirus Headwinds, Not Catalysts
On the surface, what might initially attract contrarians to Warner Music Group stock is the pandemic. Indeed, the very concept of forced quarantining suggests that streaming entertainment specialists should enjoy substantial upside.
That’s not my theoretical musing. Rather, you only have to look at the dramatic rise of Netflix (NASDAQ:NFLX) to understand this seemingly counter-intuitive argument. During the peak of the crisis, non-essential workers had every incentive to stay home, especially if they were working remotely or were protected by unemployment insurance.
Logically, this leads to boredom. With Netflix offering cheap contactless entertainment, it quickly garnered new subscribers. As well, revenue shot up nearly 28% year-over-year in the quarter ending March 31, 2020.
However, Warner Music didn’t see such a lift. In fact, revenue declined 1.7% in the first quarter of 2020, or flat in constant currency. So, what happened?
As Quartz noted, the coronavirus may have actually hurt music streaming. I’m not sure what its reasoning is since this article is exclusive to Quartz members. However, I have my own theories as to why the pandemic isn’t as favorable to Warner Music Group stock as it might be for other entertainment-based investments.
Primarily, the outside factors that incentivize music streaming or downloads don’t currently operate to their pre-pandemic levels. For example, you may stream music to pump you up during your gym workout sessions. But with the risk of infection, you might be thinking of cancelling your gym membership.
Also, long-haul flights are probably out of the question for many people, given the sharp drop in airline passenger volume.
Second, at-home alternatives exist for music. You can easily watch music videos or concert clips of your favorite artists through YouTube. However, you can’t easily subvert visual content providers like Netflix.
Economic Backdrop Is Unfavorable to Music Streaming
The reduced platform for streaming music also applies to mundane endeavors. For instance, many folks love to plug their smart device into their cars and listen to their favorite tunes. Unfortunately, this is a double negative today: fewer people are driving, and the old-fashioned radio provides a less convenient but free alternative.
And this dynamic ties into the economic headwind weighing on Warner Music Group stock. With millions of households looking to cut their budget in any way possible, music streaming is an easy one to ax.
Now you might scoff at the notion. After all, music streaming is so cheap. But the problem again is that free alternatives exist. Most certainly, the free platform is inferior to streaming directly from the source. However, during a severe and unprecedented recession, you’ll take whatever discounts you can get.
Over the long run, I do find Warner Music Group stock intriguing. The underlying company and the broader music industry has been able to bounce back from crippling dilemmas such as pirating. Once the good times return, WMG should start rocking again.
But for now, we’re in a heavily mitigated environment. Therefore, I expect further volatility before WMG becomes legitimately attractive.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
