What happened
Shares of music entertainment company Warner Music Group (WMG -1.31%) are up 9.1% as of 3:20 p.m. EST after the company earned an upgrade to overweight (i.e. buy) from investment bank Morgan Stanley.
So what
In Morgan Stanley's view, Warner Music stock that currently costs a hair over $36 is actually worth closer to $40.
The analyst explains that Warner is benefiting from "new digital growth drivers" -- customers who pay royalties for use of its library of licensable songs -- in the form of companies such as TikTok and Peloton Interactive, explains TheFly.com in a write-up today. The more time people spend streaming TikTok or riding Peloton bikes, the more songs they listen to, and the more money these companies have to pay Warner.
At the same time, Spotify's (SPOT 2.77%) recent move to raise the prices of its subscription service helps to reassure Morgan Stanley that Warner's customers will have the money they need to pay it more, and keep Warner's business growing.
Image source: Getty Images.
Now what
How much more can Warner grow? In the analyst's opinion, 15% to 16% compounded annual revenue growth between 2020 and 2024 is not out of the question -- and that could mean even faster growth in profits.
On average, analysts who follow Warner Music stock predict profits at the company could grow nearly 27% annually over the next five years. Granted, there's still the question whether even this fast of a growth rate can justify the stock's rich valuation -- about 44.5 free cash flow even before counting net debt.
For today, however, investors don't seem to be paying much attention to the overvaluation, and are simply buying Warner Music stock on Morgan Stanley's say-so.
