Warner Bros. Discovery Stock Downgraded by Wells Fargo on Risky Earnings Setup
Warner Bros. Discovery (WBD), the newly formed media giant that combines the assets of WarnerMedia and Discovery, has been downgraded by Wells Fargo from equal weight to underweight, citing a risky earnings setup and a lack of clarity on its streaming strategy.
In a note to investors, Wells Fargo analyst Steven Cahall said that WBD faces "a tough 2022" as it integrates the two businesses, deals with the impact of cord-cutting on its cable networks, and competes in the crowded streaming market with its newly rebranded Max service.
Cahall lowered his price target for WBD from $14 to $9, implying a 12% downside from its current level of around $10. He also reduced his 2022 earnings per share estimate from $0.40 to $0.25, below the consensus of $0.36.
"We think WBD has a lot of potential, but we see too much risk in the near term to recommend the stock," Cahall wrote. "We think WBD needs to prove out its streaming strategy, show some stability in its legacy businesses, and provide more visibility into its financials before we can get more constructive."
WBD, which was formed in April 2022 after AT&T spun off WarnerMedia and merged it with Discovery, owns a portfolio of leading media brands, including HBO, CNN, TNT, TBS, Discovery, HGTV, Food Network, Warner Bros., DC Comics, and more. The company also operates direct-to-consumer streaming services HBO Max and discovery+, which have been combined into one offering called Max.
However, Cahall said that WBD's streaming strategy is still unclear, as it has not disclosed how many subscribers it has for Max, how much it is spending on content, and how it plans to differentiate itself from rivals like Netflix, Disney+, and Amazon Prime Video.
"We think WBD has some of the best content assets in the industry, but we are not sure how it will translate into streaming success," Cahall wrote. "We think WBD needs to provide more transparency on its streaming metrics, content investments, and pricing strategy to convince investors that it can achieve its long-term goals."
Cahall also said that WBD's legacy businesses, which account for about 80% of its revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA), are facing significant headwinds from cord-cutting and advertising declines. He said that WBD's cable networks are losing subscribers faster than the industry average, and that its film and TV production revenue is under pressure from lower licensing fees and theatrical windows.
"We think WBD's legacy businesses are in secular decline, and we do not see much room for improvement in 2022," Cahall wrote. "We think WBD will have to invest heavily in its streaming service to offset the erosion in its traditional segments, which will weigh on its margins and cash flow."
Cahall added that WBD's valuation is not attractive enough to justify buying the stock at this point, as it trades at a premium to its peers on an enterprise value to EBITDA basis. He said that WBD's debt load of about $50 billion also limits its financial flexibility and shareholder returns.
"We think WBD is overvalued relative to its growth prospects and risk profile," Cahall wrote. "We think WBD will have to deliver strong streaming results and demonstrate synergies from the merger to justify a higher valuation."
WBD shares have fallen about 37% since their debut in June 2021, underperforming the broader market and the media sector. The stock closed at $10.28 on Friday, down 3.3% for the day.
Sources:
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