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Warner Bros. Discovery Stock: Let the Downgrades Begin

Warner Bros. Discovery is facing "growing pains," but it has potential to be in the streaming top-three alongside Netflix and Disney.

HOLLYWOOD, CALIFORNIA - JUNE 07: David Zaslav, NRDC Co-Chair attends NRDC honors Julia Louis-Dreyfus at "Night Of Comedy" benefit at NeueHouse Los Angeles on June 07, 2022 in Hollywood, California. (Photo by Rodin Eckenroth/FilmMagic)

Warner Bros. Discovery CEO David Zaslav

Eckenroth/FilmMagic

Warner Bros. Discovery stock may not be the best home for your kid’s college fund. After the company reported Thursday that it lost $3.4 billion in its first-ever quarter, the analysts at Wells Fargo likened WBD shares to Netflix. That comparison works in more ways than one, and none are good.

The bank’s researchers quickly downgraded their rating for WBD stock from “buy” to “hold” on Friday — the same rating they gave to Netflix, which is reeling from two consecutive quarters of subscriber losses. Wells Fargo also downgraded its WBD stock-price target from $42 to $19. Shares closed under $15 on Friday, down 17 percent from the previous day’s close.

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

They continued in Dear John fashion — or in this case, Dear David: “We prefer more straightforward stories including [Disney] and [Paramount]. Downgrading WBD to Equal Weight [“hold”] puts our thinking more in line with our [Netflix] thesis: another strong set of assets but with a long way to go as it navigates a brand-new path.”

Media analysts at MoffettNathanson on Friday maintained their previous “hold” rating and $18 stock-price target for WBD, highlighting the pressures from the company’s $50 billion in debt, a tough economic environment, cord-cutting, and unanswered questions around 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 for WBD; price targets ranged from $16 to $25. Cowen (Price Target: $24) and Goldman Sachs (also $24) kept their “buy” ratings; Goldman likes the streaming-integration plan announced yesterday, while Cowen believes shares have hit their lowest point.

WONDER WOMAN, Gal Gadot, 2017. ph: Clay Enos. ©Warner Bros./courtesy Everett Collection

“Wonder Woman”

©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 a single company. Thursday marked the first earnings call of that marriage, and Steven Cahall at Wells Fargo, who got in a question in during the event, concluded that the “growing pains” were obvious.

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

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

Of course, media conglomerates’ investment in streaming is all 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 2025 goal of profitability and 130 million subscribers.

Wall Street also likes the idea of WBD launching a free, ad-supported streaming TV (FAST) service, which Zaslav introduced on Thursday’s call. It delivers ad revenue, captures subscribers who are averse to spending money on entertainment (the combined subscription service from WBD won’t be cheap), and could offer the company a way to monetize its large library and insulate itself from the pressures of cord-cutting. It’s basically cable, which again, is Discovery’s strength.

“We currently license our library to others, but we’ll assess how best to play this growing business as the model evolves from free-to-air linear to free-to-view streaming,” global streaming CEO JB Perrette said on Thursday’s call.

While some analyst outlooks for WBD might seem brutal, there is opportunity for recovery. The company will likely be “the #3 global player in content prowess and DTC,” behind Netflix and Disney, Wells Fargo wrote. And while those researchers currently prefer Paramount Global stock, they think WBD has better assets overall. Now it’s up to Zaslav to figure out how to use them.

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