Wells Fargo has downgraded Warner Bros. Discovery and cut its price target on the company’s stock, warning of a lower earnings outlook for 2024 and 2025.
“Lower earnings have been the story since the merger, and the trend limits future multiple expansion,” analyst Steve Cahall wrote in a Monday note to clients lowering the firm’s rating from overweight to equal weight and cutting its price target from $16 to $12 per share.
The bank estimates that adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) will come in below $10 billion in 2024 and hit $10.4 billion in 2025, down 5% and 7%, respectively, from its previous forecasts of $10.5 billion and $11.2 billion.
“We now acknowledge that linear is a bigger headwind to WBD’s multiple than we expected, deleveraging has not been as strong with earnings expectations coming down,” he added. “While HBO content remains strong, Max’s scale is not driving an earnings inflection.”
Cahall also cited a “less favorable” environment for M&A.
While the firm has previously pushed the prospect of Comcast buying WBD, Cahall pointed out that the NBCUniversal parent’s CEO Brian Roberts recently talked the idea down. He also noted that even if the deal makes sense, there isn’t any urgency in an election year.
“PARA, or some of its assets like CBS, are or could be available, but equity investors have a very limited tolerance for more debt regardless of the strategic rationale,” Cahall added. “This means WBD’s opportunities are primarily organic. We do forecast a much stronger HBO slate in ’24, but also [continued] Networks pressures.”
Additionally, he warned that WBD’s recent experiment of licensing HBO and Warner Bros. content to services like Netflix is a “double-edged sword.”
“One way to [accelerate] EBITDA and [free cash flow] would be to let marquee titles like The Sopranos, Game of Thrones or Friends go to deep-pocketed streamers instead of Max – likely billions of untapped [revenue] potential,” Cahall said. “But, this would come at the expense of Max engagement (we est. ~27 min/day). Management is caught between scaling DTC and deleveraging through licensing deals.”
Looking ahead, Wells Fargo no longer sees “significant upside to consensus estimates” or a “positive catalyst including M&A that can drive multiple expansion in 2024.”
“Given this backdrop, we see more attractive earnings and/or rerating stories in Media,” Cahall concluded. “WBD still has some of the best assets in the sector and an undemanding valuation, but we think downward revisions would need to cease and/or the DTC strategy would need to inflect to create material upside.”
Shares of WBD fell 2.4% during Monday’s trading session and are down 11% year to date and 27.9% in the past year.
