Shares of Warner Bros. Discovery (NASDAQ:WBD) can’t seem to catch a bottom lately, with the recent downswing taking it briefly below the $10 mark for the first time. Indeed, investors have soured streaming significantly over the past year. Steep content-spending budgets and limited clarity on profitability prospects have made the streamers a victim of the market’s shifted appetite. Undoubtedly, Warner Bros. Discovery is not a play that will start paying dividends overnight. Despite the choppy road ahead, I remain bullish because of the rock-bottom valuation and efficiency mindset, which may be key to outperforming in an increasingly cost-intensive streaming market.
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Sure, streaming isn’t the place to be these days, with all the negative momentum. At 0.5x book value and 1.0x sales, it seems like most investors have given up on the newly-merged media juggernaut well before it’s had a chance to embark on its epic streaming journey.
Warner Bros. Discovery: Layoffs and Cost Cuts Continue
As rivals continue funneling billions of dollars into content production, Warner Bros. Discovery has been busy slashing costs, canceling shows (like Batgirl), and trimming its workforce (around 70 job cuts over at HBO). In a higher-rate environment, I’d argue that such a strategy is only prudent, especially with the amount of debt on its balance sheet.
Indeed, Warner Bros. Discovery seems to be taking a page out of the playbook of the big-tech companies. Such cost-conscious moves should help the firm “lean out” after its historic merger and before a potential global recession.
Further, a focus on efficiency could help Warner Bros. Discovery improve its quality of content. With HBO, Warner Bros. already has one of the highest-quality networks in America. Additional improvements could turn Warner Bros. Discovery’s coming HBO-Discovery streaming platform into one that could grow to challenge the dominance of Netflix (NASDAQ: NFLX) or Disney+ (NYSE: DIS).
Warner Bros. Discovery will be leaning out over the medium term, but longer-term, it seems like a firm that could be crowned streaming king at some point over the next 10 years. Its “crown jewel” in HBO will surely play a key role in the company’s ascent in streaming.
HBO: The “Crown Jewel” of WBD Could Deliver Long-Term Value
CEO David Zaslav views HBO as the company’s “crown jewel.” Undoubtedly, HBO programming is known for its seal of quality. With a cost-constrained budget, HBO will have fewer pitches thrown at it than some of its rivals. Still, with such a quality mindset, I view HBO as having a higher batting average than its peers.
In short, HBO may not need as many pitches to swing a home run.
In the meantime, Warner Bros. Discovery has felt the heat of some pretty gloomy headlines, with fans slamming show cancelations and questioning the value to be had from Warner Bros’ merger with Discovery — two media firms that seem to cater to completely different audiences.
In due time, I think upset fans will move past recent show cancelations. At the end of the day, HBO has the must-see franchises (think DC), and once it is ready to launch new programming, the fans will be there and will be quick to forget about past cancelations.
Further, I view the minimal overlap of Warner Bros. and Discovery as a huge plus. By catering to a broader audience base, an HBO-Discovery service stands to add more value for more households.
Is WBD Stock a Buy, Sell, or Hold, According to Analysts?
Turning to Wall Street, WBD stock comes in as a Moderate Buy. Out of 11 analyst ratings, there are four Buys, six Holds, and one Sell recommendation. The average Warner Bros. Discovery price target is $18.67, implying upside potential of 73.35%. Analyst price targets range from a low of $8.00 per share to a high of $36.00 per share.
Takeaway: WBD is in Great Hands
Warner Bros. Discovery doesn’t need to put its foot on the gas to take market share away from streaming competitors. It needs to spend its limited investment dollars wisely while offering consumers great value as we head into a recession. Fortunately, I think the firm is in great hands with Mr. Zaslav, even though many analysts, investors, and DC fans may question the company’s direction post-merger.
As HBO Max and Discovery+ combine, I’d look for the content library and pipeline to stack up well against Netflix and Disney. At today’s depressed valuations, I think there’s much upside to be had by giving Zaslav and the company the benefit of the doubt as they adopt an efficiency focus.
With a 1.39 beta, WBD stock is far more volatile than the S&P 500 (SPX), making a rough ride for investors willing to buy into the deep value proposition.
