With the massive merger of Discovery and AT&T’s WarnerMedia shutting down late Friday, creating new media and entertainment giant Warner Bros. Discovery, Wall Street is turning its attention to the company’s stock outlook, which began trading Monday with the ticker symbol “WBD.”
In early trading Monday, shares of the group, led by CEO David Zaslav, were down 1.8 percent, at $23.99.
But before the new trading week began, new Hollywood giant and former Discovery stock was already a favorite of some on Wall Street, receiving an upgrade from at least two analysts.
Atlantic Equities’ Hamilton Faber upgraded his rating on Discovery stock of Warner Bros. from “neutral” to “overweight” on Monday with a stock price target of $40. “With a portfolio that includes some of the strongest content brands in the world, we believe WBD is positioned to be as successful as Disney in the direct-to-consumer space, but the new company is doing business with discount rates are important,” Faber wrote in a report.
Since some AT&T shareholders who received WBD shares in the merger will want to sell off the entertainment company stock, “there will probably be some selling pressure in the short term, but that’s not the case.” This is likely to be short-lived.” he also noted. But overall, he’s optimistic about the new stock. “We believe investors will be intrigued by the opportunity to invest directly in Warner properties, the first time in four years that this will be possible,” Faber wrote. “This is one of the best companies in the industry and is close to, if not on par with Disney.”
The analyst compared Disney more deeply, arguing: “The direct-to-consumer (DTC) combined presence will be similar to that of Disney. When it ends, WBD will have 96 million Discovery+ and HBO Max DTC subscribers combined. We suspect management will merge the two services, and have assumed that 60% of Discovery+ subscribers will be lumped into HBO Max, giving the company a perfunctory total of about 83 million subscribers, before Disney+ excluding India is 74 million. HBO Max and Discovery+ both show strong traction, adding a total of 25 million subscribers by 2021. We see both WBD and Disney+ in India hitting 150 million subscribers by 2024 and both companies all spend a similar $10 to $11 billion on DTC content. five.”
Evercore ISI analyst Vijay Jayant also upgraded old Discovery stock Monday from “consistent” to “outperform” with a $40 share price target in a report titled “Dive into the Machines.” create free cash flow directly to the first consumer”. That’s in reference to Discovery management’s comments in recent years, welcoming the company’s free cash flow dynamics.
The merger created “the second-largest media company after Disney with 2021 revenues of $46 billion, an annual content budget of more than $20 billion supporting a library of over 200,000 hours of programming and Most importantly is the asset to successfully compete in the global live-streaming-to-consumer (DTC) video streaming opportunity,” Jayant explains. “We think the stock is undervalued,” concluded the analyst, acknowledging that “a rotating consolidation trading structure is likely to generate a large supply of stock,” which means “ We recommend long-term fundamental investors to take advantage of this technical aberration as our 2023 end price target of $40/share offers over 60% upside from current levels. . “
Jayant also emphasized that the merged company would be “the third-largest streaming player,” arguing that “the combination of HBO Max and Discovery+ into a single service would be highly synergistic.” He added: “HBO Max will deliver the flashy, expensive originals needed to attract customers, while Discovery+’s descriptor-free content provides the massive content library needed to retain those customers. that customer. We expect the company to grow streaming revenue at a 21% compound annual growth rate (CAGR) from year 21 to year 26, in line with our expectations for Disney. Revenue growth would be moderate in ’22 before accelerating again in ’23 with a consolidated DTC product launch in the first quarter of ’23, followed by an increase in product launches international eye. “
He also considers 2022 to be “the peak year for streaming losses.” Jayant’s conclusion: “According to management guidance for ’23, which we think is ambitious but achievable, WBD is the cheapest media company in terms of borrowed free cash flow yield. debt (14%) and second cheapest in business value/earnings before interest, taxes, depreciation and amortization (7.9 times). ”
However, MoffettNathanson analyst Michael Nathanson gave the post-merger stock buy-in with a “neutral” rating and a $27 price target, summarized in a report Monday. titled “Competitor or pretender?”: “We anticipate mounting debt volumes and uncertainty around the key strategic question to be an overhang to share. In addition, we are concerned about increased pressure on WBD from AT&T’s shareholder base which tends to sell 71% shares due to a different investment profile. ”
The Wall Street expert also emphasized that “the world has changed in the year since the surprising Discovery-WarnerMedia deal was first announced on May 17, 2021.” After all, “with the current rising interest rate environment, investors have moved from using a simple turnover-to-total market (TAM) multiplier to fixed fundamentals. such as sustainable profitability or cash flow for valuation purposes,” explains Nathanson. “Nowadays, people seem to focus more on the costs of achieving long-term revenue growth and more on steady-state profitability and the industry cost structure. The current valuation of Warner Bros. Discovery seems to be a loss of this emotional shift. “
Also impacting sentiment is the fact that direct-to-consumer (DTC) subscriber growth across the industry has slowed for most companies, the analyst added. due to the protracted nature of the pandemic or other SVOD-specific reasons. This makes it more difficult for media companies previously in their own DTC axis to gain the confidence needed to stream, especially if the market doesn’t reward them for doing so in the same way. like last year. “
Nathanson also noted in his report that “while WBD still has many unanswered questions, the future growth of DTC will likely determine the future and shape of this new company.” He added: “At the top of the list, is the combination of HBO Max and Discovery+ enough to keep WBD going?”
The analyst also addresses short-term financial challenges. “Despite the upside potential for DTC, given WBD’s reliance on linear cable profits in the pay-TV ecosystem is dwindling, higher levels of gross debt are hard to ignore,” said Nathanson. start about five times,” says Nathanson. “Additionally, rising inflation and geopolitical risks combined with a rapid decline in overall entertainment viewership have raised concerns about slowing high-margin ad revenue. That said, perhaps one unexpected development over the past year has been the steady decline in pay TV. While it is relatively optimistic that we are yet to see much of a pick-up in cord-cutting activity across the range of around 5%, the industry-wide pivot to DTC puts increasing pressure on affiliate fee revenue growth . ”
Meanwhile, shares of AT&T opened 22% lower on Monday at $18.89 following the spin-off of WarnerMedia and merger with Discovery. AT&T CEO John Stankey sent a farewell letter to WarnerMedia employees on Friday, writing, “I remain confident that we’re on the right track.”