Warner Bros. Discovery Stock: Let the Sales Begin

Warner Bros. Discovery stock may not be the best home for your child’s college fund. After the company reported Thursday that it lost $3.4 billion in its first quarter, Wells Fargo analysts compared WBD’s shares to those of Netflix. That comparison works in more ways than one, and neither is a good one.

Researchers at the bank quickly lowered their rating on WBD shares to “hold” from “buy” on Friday, the same rating they gave Netflix, which is reeling from two straight quarters of subscriber losses. Wells Fargo also lowered its WBD share price target from $42 to $19. The shares closed below $15 on Friday, down 17 percent from the previous day’s close.

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Warner Bros. Discovery’s competitors Disney, Comcast, Netflix and Paramount “are having a hard time growing their broadcast/DTC (direct-to-consumer) businesses and turning a profit, and that’s without the added baggage of a major network integration project.” fusion”. the researchers wrote.

They continued in the style of Dear John, or in this case, Dear David: “We prefer simpler stories that include [Disney] Y [Paramount]. WBD downgrade at equal weight [“hold”] puts our thinking more in line with our [Netflix] thesis: another solid set of assets but with a long way to go as it navigates a whole new path.”

Media analysts at MoffettNathanson on Friday maintained their previous “hold” rating and $18 share price target on WBD, highlighting the company’s $50 billion debt pressures, a tough economic environment, cordon and unanswered questions about its strategic direction. In other words, they didn’t need to make changes because they were already there.

Several other analysts also maintained their previous ratings on WBD; price targets ranged from $16 to $25. Cowen (Price Target: $24) and Goldman Sachs (also $24) maintained their “buy” ratings; Goldman likes the streaming integration plan announced yesterday, while Cowen thinks the stock has reached its lowest point.

“Wonder Woman” - Credit: ©Warner Bros/courtesy Everett Collection / Everett Collection

“Wonder Woman” – Credit: ©Warner Bros/courtesy Everett Collection / Everett Collection

©Warner Bros/courtesy Everett Collection / Everett Collection

Hollywood and Wall Street waited for months to see how exactly CEO David Zaslav would integrate WarnerMedia and Discovery into one company. Thursday marked the first earnings call from that marriage, and Wells Fargo’s Steven Cahall, who took a question during the event, concluded that the “growing pains” were obvious.

There are a few things Cahall and Michael Nathanson (MoffettNathanson’s “Nathanson”) would like Warner Bros. Discovery to address before recommending investors buy the company’s stock. Join us in the 21st century and shift your focus from linear networks to streaming.

WBD adjusted (down) its previous guidance for 2023 EBITDA (earnings before interest, taxes, depreciation and amortization) by about $2 billion. According to MoffettNathanson, that shortage “highlights WBD’s deep reliance on profits from linear cable networks that are under increasing pressure in a declining pay-TV ecosystem.” Networks account for more than 50 percent of Warner Bros. Discovery’s value, Wells Fargo wrote, meaning the company is more sensitive to the linear ecosystem than its peers.

Of course, media conglomerates’ investment in streaming is about making sure they don’t collapse when traditional TV finally does. Wells Fargo calls the summer 2023 strategy to integrate HBO Max and Discovery+ into a single streaming service “achievable and ambitious,” with a goal of profitability by 2025 and 130 million subscribers.

Wall Street also likes the idea of ​​WBD launching an ad-supported free streaming TV (FAST) service, which Zaslav introduced on Thursday’s call. It offers ad revenue, wins over subscribers who are reluctant to spend money on entertainment (WBD’s bundled subscription service won’t be cheap), and could offer the company a way to monetize its vast library and insulate itself from cable pressures. court. It’s basically cable, which again, is Discovery’s strength.

“We currently license our library to others, but we will assess how best to play this growing business as the model evolves from free linear streaming to free streaming,” global streaming CEO JB Perrette said in the statement. Thursday call. .

While some analysts’ outlook for WBD may seem brutal, there is an opportunity for recovery. The company is likely to be “the No. 3 global player in DTC and content prowess,” behind Netflix and Disney, Wells Fargo wrote. And while those researchers currently prefer Paramount Global stock, they believe WBD has better assets overall. Now it’s up to Zaslav to figure out how to use them.

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