Warner Bros. Discovery (NASDAQ:WBD), in its current form, has only been around for several months and only reported its quarterly earnings once. The results were less than ideal. Yet, WBD shares are currently trading at a rock-bottom valuation multiple. Plus, one popular program could spark a turnaround for this struggling streaming business. Consequently, I am bullish on Warner Bros. Discovery stock.
Warner Bros. Discovery is a global media services company that offers theatrical, television, and streaming content. However, it’s evident that the company will have to shift its focus to its streaming business as more people opt to cut the cable cord. It’s a necessary transition for Warner Bros. Discovery, but it means that the company will have to compete with the reigning king of streaming content, Netflix (NASDAQ:NFLX).
That’s much easier said than done, of course. Don’t count Warner Bros. Discovery out of the race yet, though. The company holds the rights to some famous names in contemporary programming: TNT, CNN, The Food Network, Discovery, TLC, and HGTV should sound familiar.
The ace in the proverbial hole for Warner Bros. Discovery, however, is HBO and its streaming counterpart, HBO Max. In particular, there’s one HBO Max program that’s so popular that it practically broke the Internet. This, along with the ultra-low share price of Warner Bros. Discovery, creates a compelling value proposition for audacious, risk-tolerant traders.
Investors Should be Aware of WBD Stock’s Growing Pains
Don’t get the wrong message here. Warner Bros. Discovery stock may be exceptionally cheap, but there are valid reasons for the sell-off. The company is experiencing difficult growing pains, and its first quarterly report didn’t inspire confidence in Warner Bros. Discovery.
Sure, it’s tempting to look at Warner Bros. Discovery’s trailing 12-month P/E ratio of 7.34 and then back up the truck to buy as many shares as possible. After all, that’s a heck of a bargain; for comparison, Netflix’s P/E ratio is 19.51.
On the other hand, it’s not wise to jump at a low-P/E stock without figuring out why the share price tumbled. What caused WBD stock to slide from $18 to $13 and change in a few months? The primary culprit, it seems, is Warner Bros. Discovery’s current lack of profitability.
The second quarter of 2022 provided Warner Bros. Discovery’s with an opportunity to impress Wall Street with its first quarterly reports as a combined company. The results weren’t ideal, however, as Warner Bros. Discovery reported $9.8 billion in quarterly revenue, missing the analyst consensus estimate of $11.8 billion.
Furthermore, the company ended Q2 2022 with 92.1 million global DTC (direct to consumer, i.e., streaming) subscribers. This represents a relatively minor increase of 1.7 million versus 90.4 million subscribers
at the end of the first quarter.
Plus, here’s the most disappointing part. Analysts expected Warner Bros. Discovery to report quarterly earnings of $0.11 per share, but the actual result was a loss of $1.50 per share. That’s a hard pill for the shareholders to swallow, no doubt.
Warner Bros. Discovery is Making HBO Max Leaner
In order to pivot back to profitability, Warner Bros. Discovery is going to have to take decisive action. As it turns out, the company is trimming some of the fat from its HBO Max content offerings while also slimming down its workforce.
Bear in mind that achieving profitability typically means increasing revenue, but can also involve cost cuts. This explains why Warner Bros. Discovery would choose to implement a 14% workforce reduction in its HBO division, including the company’s HBO Max unit.
This, presumably, is part of CEO David Zaslav’s efforts to overhaul Warner Bros. Discovery into a leaner business. All in all, it’s been reported that Zaslav has been “tasked with $3 billion in cuts” – painful, ambitious, and probably necessary for Warner Bros. Discovery’s long-term viability.
Also part of the overhaul, apparently, is the cutting of Batman: Caped Crusader and five other animated projects from HBO Max’s lineup. Previously (and somewhat notoriously), HBO Max also purged the in-progress Batgirl film from its lineup, so don’t hold your breath if you’ve been waiting to see that one.
Interestingly, after Warner Bros. Discovery disclosed its disappointing Q2 earnings results, Wells Fargo (NYSE:WFC) analyst Steven Cahall stated, “Succeeding in streaming is hard enough, so we prefer names without the added baggage for now.” Perhaps, we can now say that Zaslav is engineering a baggage-reduction effort in earnest. Only time will tell, though, whether Warner Bros. Discovery can get lean enough to satisfy Cahall and the analyst community as a whole.
Instead of relying on underperforming streaming content, Warner Bros. Discovery can lean on winners like Game of Thrones sequel House of the Dragon, which was so popular that it actually crashed HBO Max. Having drawn 10 million viewers upon its premiere, House of the Dragon has already been renewed for a second season – and might provide Warner Bros. Discovery with a second chance at streaming market success.
Is WBD Stock a Buy, Sell, or Hold?
Turning to Wall Street, WBD has a Moderate Buy consensus rating based on eight Buys, eight Holds, and one Sell assigned in the past three months. The average Warner Bros. Discovery price target is $24.13, implying 81.6% upside potential.
Conclusion: Should You Consider Warner Bros. Discovery Stock?
It’s difficult to recommend Warner Bros. Discovery wholeheartedly and without reservation. The company had a rough second quarter; there’s no denying the obvious. If the company can continue to cut costs responsibly and come up with more big winners like House of the Dragon, Warner Bros. Discovery might just pose a serious threat to the likes of Netflix while rewarding its battle-worn shareholders with hard-won, long-term returns.
