Two Wall Street firms downgraded Warner Music Group stock with Citigroup citing several scenarios that could send WMG's stock falling. Pali Research feels that speculation surrounding the EMI-WMG merger is already built into WMG's inflated share price.
Pali analyst Richard Greenfield stated, "We believe the road from 10 percent digital to 100 percent digital (let alone 50 percent digital) may not be nearly as smooth as the past several months has been".Few analysts also take into account the cannibalization of net profits that comes when consumers download a track or two off the CD for 99 cents each rather than paying $15-$18 for a full CD.
There may be many reasons that an EMI-WMG merger is smart, but in the long run can any old school music company married to an antiquated profit model be a smart long term investment? The value of WMG and EMI is mostly in their extensive catalogs and not in future profits. Investors sensed that when they bought WMG at bargain basement prices not that long ago.
Will they choose to get out now as many have suggested or have they been seduced by the industry?
