Sale on the stock market: Warner Bros. Is Discovery Stock a buy?

Discovery of Warner Bros.it is (WBD 0.52%) the stock price has fallen more than 50% since it began operating as a standalone business on April 11. The new media giant, resulting from the merger of AT&TDiscovery’s WarnerMedia division failed to excite investors as macroeconomic headwinds strangled growth in the wider media industry.

However, this strong sale reduced WBD’s enterprise value to around $79 billion, or six times its estimated adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for 2023. Does this low valuation suggest that it will bounce back quickly when the bear market finally ends? Let’s review the bearish and bullish cases to decide.

Image source: Getty Images.

What bears will tell you about WBD

Bears will point out that AT&T divested WarnerMedia because it was too expensive to compete with netflix, Walt disneyand other media giants in the streaming market.

WarnerMedia’s merger with Discovery was intended to create a stronger competitor, but WBD only ended its last quarter with 92.1 million direct-to-consumer (DTC) subscribers, representing a sequential gain of just 1. 7 million subscribers from Q1 2022. This total includes both its streaming and cable subscribers.

By comparison, Netflix and Disney both reached around 221 million paid streaming subscribers in their last quarters. WBD thinks it can still reach 130 million DTC subscribers by 2025, but that’s a very ambitious goal: even if it adds 2 million subscribers per quarter until the end of 2025, it doesn’t would only reach about 120 million subscribers.

WBD’s DTC segment is still deeply unprofitable. On a pro forma basis, its revenue increased 4% year over year (in constant currencies) to $2.41 billion, or 22% of revenue, in the second trimester. But its operating expenses rose 16% to $2.74 billion by those same measures, and its adjusted EBITDA loss fell from $235 million to $518 million.

In a healthier economy, WBD could make up for its DTC losses with the growth of its higher-margin networks and studio divisions. But its networks segment struggled with sluggish ad sales, lower distribution revenue and cord-cutting headwinds in the quarter, while its studios segment struggled with tough comparisons with the post-rebound rebound. industry pandemic last year.

Segment Q2 2022 revenue Revenue Growth (YOY) Q2 2022 Adj. EBITDA EBITDA growth (YOY)
Networks $6.12 billion 1% $2.36 billion (11%)
studios $3.36 billion 4% $409 million 0%
CPD $2.41 billion 4% ($518 million) N / A
Total* $10.82 billion (1%) $1.76 billion (31%)

Data source: WBD. Pro forma, at constant exchange rates. *includes segment and inter-segment eliminations. YOY = year after year.

The current macroeconomic headwinds will likely dampen market appetite for new advertising as well as consumer spending on new movies. A global recession could exacerbate this pressure and make it even more difficult for WBD to sustain the growth of its DTC segment. That’s why analysts expect WBD’s revenue to grow just 4% to $47 billion in 2023.

It’s also why WBD cut its own adjusted EBITDA target for 2023 from $14 billion to “at least $12 billion” in its second quarter report in early August. It also still has plenty of leverage with a high leverage ratio of 1.7.

To counter this pressure, WBD canceled expensive projects and laid off staff to cut costs. But in doing so, it could also narrow its gap with Netflix, Disney and other streaming providers specializing in big-budget original content.

What Bulls Will Tell You About WBD

Bulls will admit that WBD faces plenty of short-term headwinds and its abrupt cancellations of CNN+, the bat girl movies and other big projects are chaotic and confusing. However, they will also point out that WBD desperately needs to cut the fat and keep only its best content to generate sustainable returns in the saturated streaming market.

WBD still has many lucrative franchises, including DC Comics, game of thronesand Harry Potterr — which can be extended with new content. Like Netflix and Disney, WBD has rolled out ad-supported tiers to reach more viewers. But unlike Netflix, WBD doesn’t need a lot of third-party content to be licensed because it already has plenty of shows and movies. Instead, it may license those properties to other streaming platforms to generate more distribution revenue.

Once inflation is brought under control and the macroeconomic situation improves, WBD’s networks and its studio business should come back to life. When that happens, WBD’s initial bullish thesis — that it can sustain the expansion of its low-margin DTC business with its more established media segments — could finally pay off.

Is this the right stock to buy right now?

WBD is not doomed yet, but the bears will continue to dominate the bulls for the foreseeable future. Its low valuation might limit its downside potential, but it also won’t recover until it proves it can keep pace with Netflix, Disney and others in the cutthroat streaming market. Simply put, investors should avoid WBD and stick to more promising stocks for now.

Leo Sun holds positions at AT&T, Walt Disney and Warner Bros. Discovery, Inc. The Motley Fool holds posts and recommends Netflix and Walt Disney. The Motley Fool recommends Warner Bros. Discovery, Inc. and recommends the following options: January 2024 Long Calls at $145 on Walt Disney and January 2024 Short Calls at $155 on Walt Disney. The Motley Fool has a disclosure policy.

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