Investment Thesis

With cord-cutting and streaming options becoming more and more common, Warner Bros. Discovery confronts a lot of uncertainty in the media environment. Financial pressure has been placed on the business to compete in a market where customers favor streaming over traditional television. Warner has gained customers, developed a number of streaming services, and offered a wide selection of programming. But as its pay-TV subscriber base has shrunk, its networks business has collapsed. Warner has the proper approach to handle the convergence of conventional and new media, and its streaming business is now successful, established, and international. Max and Discovery+, which house the majority of Warner's on-demand entertainment content and provide a channel for live news and sports on its linear networks, are currently the only streaming services it offers.First-rate Warner content will continue to reach consumers through streaming, linear, or licensing. The firm's production studios remain top-tier in terms of highest-grossing films and popular episodic television content. Warner may need to fine-tune traditional balances and timing for factors like film exclusivity in theaters versus availability at home, or which television shows and films to license versus keeping in-house. However, a more subdued business is expected to be more successful in the future.

• Warning! GuruFocus has detected 4 Warning Signs with WBD.

Investment Upsides

The Warner Brothers studio has a large content library and has developed valuable movie and TV franchises. The company is home to iconic brands and franchises including Warner Bros. Pictures Group, Warner Bros. Television Group, DC, HBO, HBO Max, Discovery Channel, discovery+, CNN, HGTV, Food Network, TNT, TBS, TLC, OWN, Warner Bros. Games, Batman, Superman, Wonder Woman, Harry Potter, Looney Tunes, Hanna-Barbera, Game of Thrones and The Lord of the Rings, giving it compelling avenues to attract consumers. The company has trimmed down its content to focus almost entirely on its most profitable brands, taking a quality-over-quantity approach. Moreover, Warner Bros. Discovery's position in multiple facets of entertainment, including gaming, streaming, theme parks and the box office, allows it to exercise the full power of its brands. We expect the merged companies to be better positioned to compete in the streaming video market due to a combined base of about 110 million HBO/HBO Max and Discovery+ subscribers.

Warner Bros. Discovery has resolved its legal dispute with the NBA, securing an 11-year deal for international media rights in regions like the Nordics and Latin America. The agreement allows Warner Bros. Discovery to broadcast 100 regular-season games and playoffs, and produce new and existing NBA content across its platforms. TNT Sports will continue producing the popular show Inside the NBA, preserving WBD's 35-year partnership with the league. In the United Kingdom, Warner Bros. Discovery Sports continues to showcase extensive live cycling coverage across Eurosport, discovery+ and GCN+, offering fans 300 days of live racing per year and more than 630 hours of live coverage. This approach aligns with the broader strategy of engaging audiences globally with a comprehensive sports content offering.

HBO has become a key growth driver for Warner Bros. Discovery, offering a robust content portfolio and an upgraded streaming service. The commitment to release an average of more than 40 new titles and seasons each month indicates a strong focus on providing a diverse and engaging content library for viewers. Max houses renowned and highly praised HBO Documentaries, including the notable six-part series called Mind Over Murder and the captivating two-part series titled The Vow. Other intriguing documentaries are The Jinx: The Life and Deaths of Robert Durst, I'll Be Gone in the Dark and The Case Against Adnan Syed. The incorporation of HBO podcasts adds an extra layer of engagement for fans, allowing them to delve deeper into the worlds created by HBO shows.

Warner Bros. Discovery's strategic focus on sports streaming, particularly live sports, is aimed at driving long-term growth. The company's sports portfolio, including popular consumer brands like Eurosport, BT Sport, Global Cycling Network (GCN), Global Mountain Bike Network and Golf Digest, collectively reaches 130 million people every month across more than 200 markets and in over 20 languages. This broad reach spans various platforms where consumers spend their time, including discovery+, Warner Bros. Discovery's free-to-air TV networks, and other channels.

Valuation

Free Cash Flow

DCF

Investment Downsides

Warner Bros. Discovery incurred significant costs in connection with the signing and closing of the merger. It was initially expected to incur approximately between $1 billion and $1.5 billion of cash costs relating to organizational restructuring, facility consolidation activities and other contract termination costs. However, these expenses are likely to have escalated.

Warner Bros. Discovery's high debt level is a concern. As of Sept. 30, 2024, it had cash & cash equivalents of $3.33 billion, which compares unfavorably with the company's consolidated indebtedness of more than $40.7 billion.

The media and entertainment industry in which WBD competes for viewers, distribution and advertising is highly competitive. WBD competes with other companies to attract creative talent and produce high-quality content and to make content available to audiences on a variety of platforms. Its traditional linear programming networks face increasing competitive pressure from other television networks, subscription-based streaming services, including HBO Max and discovery+ products, and other forms of news, information and media entertainment, such as feature films, interactive games and entertainment, user-generated content, live sports and other events, social media and diverse online and mobile activities and other digital entertainment platforms and offerings all vying for consumer time, attention and discretionary spending. There has also been a shift in consumer behavior related to changes in content distribution and technological innovation, including a preference by consumers to watch content on demand and a decline in subscribers to the traditional cable bundle.

Warner Bros. Discovery faces challenges related to intense competition, rising programming costs and potential risks associated with its investment in sports content and the Olympic Games. The success of its programming efforts, particularly with the Olympic Games, depends on meeting viewer expectations to avoid negative impacts on distribution and advertising revenues.

Guru Activity

Gurus have been bearish on WBD's stock past few quarters. The plummeting stock price has coincided with the offloading shares by Gurus. Renowned money managers seem to demand more from the management possibly share buybacks and increased dividends.

Portfolio Management

WBD currently presents an upside of 142% to investors with a target share price of $25.77. With its varied content library and improved streaming service, HBO is a major growth engine for Warner Bros. Discovery. The company prioritizes audience engagement by releasing more than 40 new titles and seasons every month. In addition to The Jinx: The Life and Deaths of Robert Durst, I'll Be Gone in the Dark, and The Case Against Adnan Syed, Max is home to HBO documentaries such as Mind Over Murder and The Vow.

This article first appeared on GuruFocus.