Yahoo Finance Did ‘Lord of the Rings’ Give Warner Bros. Discovery a Stock Boost?
Warner Bros. Discovery, the entertainment giant led by CEO David Zaslav, has been a work-in-progress since the mega-merger of Discovery and AT&T’s WarnerMedia that created it in April 2022. Its latest earnings report and call didn’t seem to change that sentiment much, but its management team signaled a focus on a creative reinvigoration thanks to Middle-earth.
On Thursday, company shares were trading lower after it reported mixed first-quarter results, including lower-than-expected total revenue and earnings, but also higher direct-to-consumer (DTC) unit earnings and subscribers. However, by mid-day, the stock had made a comeback, eking out a gain of 1.7 percent to $7.93 by 12:30 p.m. ET, possibly thanks to Zaslav sharing on the earnings call that the company was “in the early stages of script development” with Peter Jackson and Andy Serkis for new Lord of the Rings movies that are expected to be ready for release in 2026 and will “explore storylines yet to be told.”
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While that news didn’t feature in analyst reports reviewed by The Hollywood Reporter, the day still played out differently for Warner Bros. Discovery (WBD) shares than when the conglomerate issued its late February earnings report when analysts gave cool reactions to its fourth-quarter and 2023 results and particularly management’s lack of outright 2024 guidance.
Here is a closer look at their latest thoughts on WBD’s operational and financial momentum and its stock outlook.
Bank of America analyst Jessica Reif Ehrlich‘s team maintained a “buy” rating with a $14 price target on Thursday, in a report entitled “Turnarounds are hard.” Wrote the expert: “Secular and cyclical headwinds persist. WBD’s first-quarter performance reflects the challenging macro environment along with the secular challenges within the linear ecosystem. The advertising market remains choppy.” Plus, she added, “the Studios segment was also challenged, largely due to tough comps in gaming and lingering strike impact on production.”
But Reif Ehrlich sees upside in WBD’s stock, noting: “WBD has a compelling assortment of assets and view the current valuation of around six times estimated 2024 enterprise value/earnings before interest, taxes, depreciation, and amortization (EBITDA) as undemanding.”
TD Cowen analyst Doug Creutz reiterated his “buy” rating and $15 stock price target. Explained the expert: “WBD reported first-quarter results that missed our revenue and EBITDA estimates, largely driven by a lower-than-expected top-line result at DTC and bottom-line result at studios.” But he also highlighted: “We believe that the most important and significantly positive development is the news of a bundled DTC offering with Disney.”
Creutz even shared that he was “excited” about this new streaming bundle: “Yesterday, Warner and Disney announced a Disney+, Hulu, and Max bundle coming this summer. We view this as an important step in getting media back to being an investable space,” he explained. “Both WBD and Disney should enjoy … marketing efficiencies and lower churn and have less pressure to maintain the expensive content mill aspect of DTC.”
And the TD Cowen analyst predicted: “We believe the economic advantages of the bundle will push the rest of the media group to announce similar deals.”
Wolfe Research analyst Peter Supino, who has an “underperform” rating and $9 stock price target on WBD, highlighted before the company’s earnings conference call that “revenue and EBITDA missed consensus by 3 percent and 2 percent, respectively, but FCF surprised positively.” He explained that the FCF performance was “primarily driven by lower capital expenditures.”
While noting “studio softness” and “networks weakness,” he also emphasized “cost discipline drives DTC beat.” Added Supino: “Streaming advertising was robust (+70 percent year-over-year), aided by B/R and ad-lite subscriber growth.”
UBS analyst John Hodulik stuck to his “neutral” rating with an $11 stock price target in a report entitled “EBITDA pressured but better FCF trends.” He explained that “EBITDA declined 19 percent year-over-year as profitability in DTC was offset by softer trends at the studio.”
He also highlighted the good of the streaming segment – “positive EBITDA; sub trends improve,” the mixed at networks – “lighter ad and distribution, EBITDA in line,” and the bad – “studio revenues declined 12 percent year-over-year (UBS estimate: -8.3 percent, Street: -6.6 percent) as lower video game sales and delays in TV deliveries post-strikes were partially offset by higher theatrical. EBITDA was $184 million (UBS estimate $374 million, Street $367 million) versus $607 million last year (includes impairment for Suicide Squad game).”
Meanwhile, CFRA Research analyst Kenneth Leon on Thursday maintained his “hold” rating on WBD, while cutting his stock price target by $0.50 to $8.50. “We think more work is needed to turn WBD around,” he concluded in lowering his 2024 loss per share estimate for the company. But he also noted the potential benefits of the Disney streaming bundle, writing: “WBD will partner with Disney on a shared DTC platform for Max, Disney+, and Hulu to drive revenue sharing, reduce customer churn, and remove middlemen like Roku or Apple TV.”
Beyond Wall Street, Third Bridge analyst Jamie Lumley also chimed in on WBD’s first-quarter update and call. “Despite several strong content releases in the first quarter, Warner Bros. Discovery remains in a slump with stagnating streaming revenue and ongoing declines in its networks segment,” he concluded.
“The 2 million subscriber adds to the direct-to-consumer segment is a positive following some choppy quarters last year. However, our experts warn that the short-term drive to make this segment profitable is coming at the expense of long-term growth,” Lumley warned.
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