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Several Wall Street analysts on Friday stuck to neutral ratings on it, suggesting investors stay on the sidelines for now as the newly merged entertainment giant works through its integration amid economic challenges. But others recommend the stock to investors, touting its long-term upside and signs of progress.
The different views were on display as analysts overnight shared their takeaways from the conglomerate’s third-quarter earnings report and call after Thursday’s market close. The news included an advertising revenue drop and an increase from 92.1 million to 94.9 million subscribers for its streaming services, led by HBO Max and Discovery+.
On the earnings conference call, management increased its post-merger cost savings target. And Warner Bros. Discovery (WBD) CEO David Zaslav said that the company’s combined streaming service would now launch in spring 2023, ahead of the original summer timeline, and that the firm would be “aggressively tackling” the advertising-supported streaming market opportunity next year.
Warner Bros. Discovery shares dropped in early Friday trading. As of 9:35 a.m. ET, they were down 7.6 percent at $11.06 after early in the trading session hitting a 52-week low of $10.76. But Wall Street experts’ takes differed.
Among the cautious analysts were MoffettNathanson’s Robert Fishman and Michael Nathanson. Following the latest results, they entitled their report “A Tough Juggling Act,” in which they asked: “How many balls can one company successfully juggle at once? Even before the onset of a global macro advertising slowdown and headwinds from currency, Warner Bros. Discovery was looking to combine legacy WarnerMedia with Discovery, reduce leverage from over 5 times to under 3 times in the next two years, relaunch its direct-to-consumer (DTC) strategy with a combined HBO Max/Discovery+, balance licensing content to third parties (including competing SVOD services), while keeping enough exclusive to its own DTC services, renew a critical NBA deal with likely significant increases over the existing contract, while maintaining networks earnings before interest, taxes, depreciation and amortization (EBITDA) and cash flow in the face of accelerating cord-cutting pressure. That’s a lot to juggle!”
So, will WBD be able to pull it off, the analysts asked next. “The reality is that we don’t fully know yet and the company essentially admitted as much as well,” the MoffettNathanson team argued. “Just three months ago, WBD provided updated 2023 EBITDA guidance of $12 billion-plus versus $14 billion previously. Last night, management flagged the ‘lack of visibility on advertising globally’”’ as the biggest swing factor in hitting its target and noted that pay TV trends are out of their control. Said differently, WBD’s deep dependence on profits from linear cable networks could offset any DTC improvement after expected peak losses in 2022.”
As a result, the MoffettNathanson team maintained its “market perform” rating on the stock and its price target of $15. “We expect the elevated debt load, macro headwinds and growing secular pressures from
faster cord-cutting along with still some uncertainty around key strategic questions to remain an
overhang for shares,” they concluded.
Meanwhile, Wells Fargo’s Steven Cahall lowered his stock price target on Warner Bros. Discovery by $3 to $13, but maintained his “equal weight” rating. In the title of his report, he summed up the company’s situation this way: “Running Hard for EBITDA to Stay in Place.”
The analyst also highlighted how economic challenges are hitting the media and entertainment sector as the company focuses on integration and optimization after the merger of Discovery and WarnerMedia: “Macro challenges are hitting WBD amid a big restructuring, and that’s fueling uncertainty.”
The conglomerate “faces worsening organic trends like peers, and it’s looking to manage this by focusing on greater profitability in DTC and additional synergies from the merger,” Cahall explained before turning to cost opportunities and debt risks. “There’s probably more scope for earnings upside at WBD due to these synergies, but with gross leverage at 5.4 times, there’s also limited tolerance for the company to miss the ’23 guidance and the macro makes everything feel shakier.”
Cahall also warned that investors will need patience, writing: “It’s also likely not until the second half of 2023 that the DTC proof points come through. We think visibility needs to improve before a rerating (of the stock) can occur.”
Guggenheim analyst Michael Morris also stuck to his “neutral” rating on WBD in a report. “Macro advertising and secular cord-cutting pressures likely persist while incremental savings and a refreshed DTC product launch are pursued,” he highlighted. “Cash flow guide remains on track, critical to further de-levering. With around 25 percent of $50.4 billion in debt (about $12.6 billion) maturing within three years, we see margin for error narrowing with further top-line pressure.”
Meanwhile, Macquarie analyst Tim Nollen struck a positive note, reiterating his “outperform” rating with a $18 stock price target, citing “strategic upside potential and valuation.”
While quarterly revenue missed estimates, the expert said that “the main difference on revenue was content licensing due to timing of releases – not so important.” And he highlighted: “Better news was the focus on costs that drove the earnings beat,” adding: “WBD expects to achieve $750 million in synergy benefits this year and raised its synergy cost target in ’24 from $3 billion to $3.5 billion.”
Nollen cut his estimates “a bit on advertising and foreign exchange.” His 2022 earnings per share estimate moved from $1.41 to $1.39, while he lowered his 2023 forecast from $2.77 to $2.66.
But he touted the “long-term opportunity” in his report. “Overall, WBD sounded defensive on its content strategy and cost control efforts, and optimistic on its growth potential as it moves through this integration, which is really about re-thinking the efficiency, profit maximization and cash generation
potential of the company. Free cash flow upside after this year should help WBD de-lever.” And Nollen emphasized: “We like the depth and breadth of the content base that can drive DTC globally.”
Cowen analyst Doug Creutz maintained his “outperform” rating on WBD shares with a $24 price target and the bullish report title “Turnaround Is Progressing.”
While third-quarter revenue “came in below both our $10.3 billion estimate and consensus $10.8 billion,” adjusted operating income before depreciation (OIBDA) of $2.42 billion “beat our $1.99 billion estimate and consensus $1.76 billion, largely driven by upside at studios and networks due to lower content and marketing expenses,” he noted. His takeaway is that the “bottom line beat shows operational improvement well underway.”
The analyst also lauded the increased merger cost savings target from $3 billion to $3.5 billion. “The raised estimate for cost synergies is based on actions the company already has in process,” he wrote. “Management indicated they continue to work to quantify other potential savings that could raise the ultimate total.”
And Creutz touted that “House of Dragon helps drive (a) DTC sub beat,” adding that the company’s news that it would be accelerating the U.S. rollout of its rebranded and updated streaming service from the summer to the spring was “a positive surprise.”
Cahall also commented on WBD’s streaming, or direct-to-consumer (DTC), trends. “DTC subs ended the third quarter at 94.9 million for +2.8 million net adds and average revenue per user (ARPU) was down sequentially to $7.52 per month. We think House of the Dragon drove gross adds, which may lead to a higher churn quarter in the fourth quarter,” the analyst argued. “We’re at 2.5 million net adds for the fourth quarter and estimate DTC distribution revenues down modestly year-over-year to $2.09 billion as higher ARPU linear HBO subs are declining by 7-8 percent year-over-year. We don’t think all subs are recaptured in streaming, and streaming HBO Max ARPU (is below) linear HBO.”
Concluded Cahall: “The big question is calendar year 2023 estimated DTC earnings before interest, taxes, depreciation and amortization (EBITDA), which we estimate at -$1.25 billion with content expense growing 8 percent year-over-year and 16 percent year-over-year, excluding intercompany eliminations. It’s a lot of wood to chop on DTC revenue growth.” The FAST service will launch after HBO Max and discovery+ are integrated, which we think will be margin neutral at best.”
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