Shares of Warner Music Group (NASDAQ:WMG) were rocking on Tuesday, rising as much as 11.6% in the morning session thanks to a solid earnings report. By 12:30 p.m. EST, the entertainment company had cooled down to a 4% gain.
In the first quarter of fiscal year 2021, Warner Music's revenue rose 6% year over year to $1.34 billion. Adjusted earnings fell from $0.24 to $0.19 per diluted share. The bottom-line result was in line with analyst expectations, and your average Wall Street firm would have settled for revenue near $1.25 billion.
Warner Music's digital sales jumped 17% higher and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 19% to $297 million. These robust sales of digital media and digital publishing licenses more than made up for much lower revenues from live performances and so-called mechanical licenses (think sales of physical recordings such as CDs). The soft GAAP and non-GAAP earnings figures resulted from various accounting quirks such as intercompany loans and Euro-to-dollar adjustments of the company's European debt papers.
The stock has now gained 21% since going public last summer. The stock is far from cheap, trading at 540 times free cash flow and 35 times forward earnings estimates, but that's understandable given the highly unusual market conditions during the COVID-19 pandemic. It's no surprise to see Warner Music's investors embrace this muscular earnings report.