Media giant Warner Bros Discovery (WBD) has been reeling for months. With businesses reopening and entertainment venues mostly back in full swing, streaming video is much less the powerhouse it once was during the pandemic. The company recently released its earnings report, and the disaster that followed sent the company down over 17% on Friday.
WBD posted adjusted EPS of -$0.08 per share, which paled against Street projections calling for $0.14 per share. Revenue also faltered against forecasts, as the company posted $9.84 billion in revenue. Street estimates called for $11.83 billion instead.
The last 12 months for Warner Bros Discovery shares have been fairly volatile. The company started the previous 12 months with a slow slide followed by a recovery.
However, the slide from the recovery was steeper still. After briefly bottoming out at around $13 per share, the company staged a modest comeback going into today. Warner stock is currently worth about half what it was this time last year.
While Warner’s first foray as a combined company turned out to be much less than expected, there’s still reason to back it. Warner already has several plans in the works to turn things around.
I was bullish on the company in April and remain so today. Streaming is still a major market, especially given all the changes in the entertainment landscape, and Warner has what it takes to survive.
Investor Sentiment is Deeply Mixed
Warner Bros Discovery has a fairly mixed picture when it comes to investor sentiment. To begin with, insider trading at Warner has been buy-weighted. Informative transactions in the last three months are universal buys, and plenty of non-informative purchases have taken place as well. Since March, Warner insiders have made 42 buy transactions to 17 sell transactions.
However, retail investors are starting to question their positions in Warner. The number of TipRanks portfolios that held Warner Bros Discovery dropped 0.7% in the last seven days. Meanwhile, portfolios holding Warner shares are up 0.5% over the last 30 days.
Warner Has a Big Plan for Recovery
Warner has some very substantial and very concrete plans for a turnaround. First, the company is looking to cut at least $3 billion out of its expenses. It’s already killed off “Batgirl,” a project that would have been released on streaming only.
It might have been better had the project been killed before $90 million was sunk into its creation, but the move is what it is. The move does serve one useful point; it becomes a loss that can be written off, and that improves the company’s debt picture accordingly.
The company plans to revise its strategy for the DC universe as well, looking at a 10-year plan for future releases. Disney’s (DIS) Marvel line recently did something similar, to wide appeal. However, the Marvel Cinematic Universe has had much better luck overall at the box office than the DC product has.
Finally, by the end of this summer—just a few weeks away now—HBO Max and Discovery+ will begin combining into one larger service. The company also revealed plans to spend more on content but to focus less on children and family programming. They may be conceding that ground to Disney, which isn’t a bad move overall.
Wall Street’s Take on WBD
Turning to Wall Street, Warner Bros Discovery has a Moderate Buy consensus rating. That’s based on seven Buys, five Holds, and one Sell assigned in the past three months. The average Warner Bros Discovery price target of $22.82 implies 52.2% upside potential.
Analyst price targets range from a low of $17 per share to a high of $29 per share.
Conclusion: Warner Has a Bold Strategy
The combination of cutting costs and pursuing better value for customers is a sound strategy. It takes no shortage of sheer chutzpah to shutter a project that’s $90 million in and use it for nothing more than a booked loss. In addition, combining HBO and Discovery under one window should make subscribers of either service happy; they’re about to get more bang for their buck.
Subscribers of both services will likely see a bit of discounting since they’ll no longer have to pay for two services at once.
Right now, things aren’t looking great at Warner. However, the company clearly has a plan to turn things around. Better yet, the movies have long been a bastion of solid performance in a recessionary—or depressionary—economy. One need look no farther than Shirley Temple’s entire existence for proof of that score.
Warner’s insiders are buying briskly while the company is still trading below its lowest price target. Add these points together along with Warner’s bold strategy for the future, and the end result should be worth watching.
That’s why I’m bullish overall. This was a bad quarter, yes. It was also the first since Warner and Discovery combined. Let’s give the plan a bit of time to work because, frankly, it’s a pretty good plan.