Warner Music Group Faces a Crossroads: Morgan Stanley’s Downgrade and the Streaming Growth Dilemma

The music industry’s shift toward streaming has long been a tailwind for Warner Music Group (WMG), but a recent downgrade by Morgan Stanley highlights growing concerns about whether the market’s optimism is sustainable. The investment bank’s decision to cut its rating to Equalweight from Overweight—coupled with a reduced price target—underscores a critical question: Is Warner Music’s growth story overheating, or is the stock undervalued amid sector-wide volatility?

The Downgrade: A Reality Check on Streaming Growth

Morgan Stanley’s move centers on recalibrating expectations for Warner Music’s subscription streaming revenue, a key driver of its top line. Analyst Benjamin Swinburne lowered his 2025 forecast for the company’s Recorded Music segment to 6.5% growth, marking the low end of Warner’s “high single-digit” guidance. This adjustment reflects a broader slowdown in streaming revenue growth across the industry, with Morgan Stanley now projecting 3.5% growth in Warner’s Q2 results, followed by a further 100 basis point decline in the second half of the fiscal year.

Despite these headwinds, the firm anticipates a modest rise in Warner’s OIBDA margins, driven by cost discipline and licensing efficiencies. However, the downgrade hinges on valuation: Warner’s stock trades at a 30x P/E ratio, elevated relative to its peers, even as its market cap has shrunk to $15.15 billion amid a 10% year-to-date decline. Morgan Stanley’s $32 price target now sits 2%-4% below consensus estimates, signaling skepticism about whether the stock can rebound without stronger growth catalysts.

Analysts Split: Bullish on Strategy, Cautious on Valuation

While Morgan Stanley tempered its outlook, other analysts remain divided. UBS maintained a Buy rating but trimmed its Q2 revenue forecast to $1.52 billion, citing weaker ad revenue. Conversely, Citi upgraded WMG to Buy, citing favorable contract terms with Spotify and a price target of $42—34% above current levels—while FBN Securities adopted a neutral Sector Perform stance. Moody’s added credibility to the bull case by upgrading Warner’s credit rating to Ba1, citing its $500 million acquisition of Tempo Music Investments and its push into music publishing rights.

Warner’s strategic moves—including its board re-election and focus on streaming monetization—aim to offset risks. However, challenges persist: traditional media sales remain sluggish, and competition from TikTok-driven micro-licensing could pressure margins further.

The Bottom Line: A Stock at a Tipping Point

Warner Music’s valuation hinges on two critical variables: streaming growth and margin resilience. The company’s $6.34 billion in annual revenue and 50.1% stake in Tempo Music provide a solid foundation, but its stock has already priced in much of the good news. Morgan Stanley’s skepticism reflects a sector-wide reality: streaming’s growth rate is slowing, and investors demand clearer visibility on profitability.

Consider this:
- Warner’s shares are trading $2.88 below Morgan Stanley’s revised target, yet still $2.88 above its current price, suggesting the stock could rebound if it beats lowered expectations.
- The company’s $29.12 price represents a 36% discount from its 52-week high, offering a margin of safety for long-term investors.

Conclusion: A Hold for Now, But Watch for Catalysts

Warner Music’s path forward is a balancing act between its content library’s value and the music industry’s shifting landscape. While Morgan Stanley’s downgrade is a cautionary note, the company’s strategic investments in publishing rights and its Ba1 credit rating suggest operational strength. For investors, the stock’s current valuation offers a compelling entry point—if they’re willing to bet on streaming’s long-term dominance.

Final Take: Hold WMG for now. The stock’s 10% year-to-date decline and lower growth expectations warrant patience, but a rebound to Morgan Stanley’s $32 target—or Citi’s $42—could reward those who see Warner’s content empire as a key player in the $30 billion global recorded music market. Monitor Q2 results closely: if streaming revenue holds above 3.5%, bulls may regain the upper hand.

This analysis synthesizes valuation metrics, strategic moves, and sector dynamics to provide a balanced view of Warner Music’s investment prospects. The next few quarters will be pivotal in determining whether the stock’s “more balanced risk/reward” profile is a temporary setback or a sign of structural challenges ahead.