Warner Bros. Discovery Eyes Turnaround with Upcoming Disney+ Bundle and NBA Deal, Analysts Say

Keybanc analyst Brandon Nispel upgraded Warner Bros. Discovery Inc WBD from Sector Weight to Overweight and a $11 price target.

WBD reported fiscal first-quarter revenue of $9.96 billion, a 6.9% year-on-year decrease, according to Nispel. This was against a consensus of $10.25 billion. The total adjusted EBITDA of $2.10 billion, a 19.5% year-on-year decrease, fell short of the consensus of $2.18 billion. 

Nispel added that a $200 million content impairment for the Studios segment negatively impacted the results. 

However, free cash flow (FCF) of $390 million exceeded the consensus of $8.0 million, thanks to a strike that improved working capital and reduced capital spending.

Nispel noted that the numbers have likely bottomed out. Regardless, a resolution to the NBA issue is expected to be positive. Direct-to-consumer (DTC) profitability, subscriber growth, and average revenue per user (ARPUs) are all expected to continue improving.

According to Nispel, the stock is washed out and likely ready for a short-term rally due to these factors. As the numbers stop decreasing, an NBA resolution becomes apparent, and DTC continues to drive toward more meaningful profitability with subscriber or ARPU growth, WBD's multiple should revert to the mean, Nispel said.

For the second quarter, Nispel projected revenue of $9.81 billion (down from a previous estimate of $9.9 billion) and earnings per share (EPS) of $0.00.

Needham analyst Laura Martin reiterated a Hold rating on Warner Bros. Discovery. Martin highlighted the most significant upside surprise as WBD's Max bundle with Walt Disney Co DIS Disney+ and Hulu, set to launch this summer. 

The analyst noted that this deal, along with the ESPN, WBD, or Fox Sports joint venture set to launch in September, suggests that large content creators will recreate larger bundles without the 50% payout to multichannel video programming distributors (MVPDs).

Martin's research indicates that churn decreases by 20% to 50% as the bundle expands, implying a rising lifetime value (LTV) for WBD and a stronger competitive position than unbundled streaming services.

For the second quarter, Martin projected revenue of $10.45 billion, up from a previous estimate of $10.27 billion, and earnings per share (EPS) of 15 cents.

BofA Securities analyst Jessica Reif Ehrlich reiterated a Buy rating on Warner Bros. Discovery with a price target of $14.

Reif Ehrlich noted that WBD has a compelling assortment of assets and views the current valuation of ~6x calendar year 2024 EV/EBITDA as undemanding. 

As per the analyst, upcoming catalysts include incremental merger-related synergies, Max rollout internationally ahead of the Olympics, and potential recovery in advertising. 

Notably, the outcome of the NBA media rights renewal is the most critical catalyst for the stock in the near term. It could significantly impact the company's earnings outlook and investor sentiment.

According to the analyst, WBD's first-quarter performance reflects the macro environment and secular challenges within the linear ecosystem. 

The advertising market remains choppy; network advertising was -11%, reflecting audience declines in domestic general entertainment and news networks and soft linear advertising markets in the U.S. and Latin America. 

Reif Ehrlich said the Studios segment was also challenged, mainly due to tough comps in gaming, the lingering strike impact on production, and a ~$200 million write-down associated with Suicide Squad. 

With the advertising market stabilizing, DTC profitability progressing, an improving Studio segment, and continued expense management, the analyst noted that WBD will reach an inflection point in the next quarter or two. 

Should this momentum continue into the second quarter and stop the downward trajectory of forward estimates, it could go a long way toward improving sentiment.

Reif Ehrlich projected second-quarter revenue of $10.43 billion.

Price Action: WBD shares traded higher by 1.75% at $8.18 at the last check Friday.