I must admit, Warner Bros. Discovery (NASDAQ: WBD) constantly tempts me with its seemingly low valuation. However, even staunch contrarians should steer clear as this once-promising company has too many fiscal red flags. So, just to be cautious, I am staying neutral on Warner Bros. Discovery stock until conditions improve with the company.
Warner Bros. Discovery (often abbreviated as WBD) is an entertainment business and streaming content provider that was spun off of AT&T (NYSE: T) and got its own stock ticker in April after merging with Discovery. Hopes ran high among some investors at that time as WBD is a true media giant with assets such as HBO, CNN, HGTV, and the Food Network.
It didn’t take long, however, for high hopes to devolve into deep disappointment. Granted, the macroeconomic environment has been challenging for most U.S. businesses in 2022. Nonetheless, WBD’s problems are numerous, and, despite the company’s ability to generate sizable revenue, it’s not currently a worthy addition to a non-speculative portfolio.
WBD’s Surface-Level Valuation is Deceptive
Here’s what sometimes tempts me to throw caution to the wind, hold my nose and buy shares of WBD. WBD’s price-to-book (P/B) ratio is 0.5. That’s awfully hard for a contrarian investor like myself to resist – but don’t jump to any conclusions yet.
For one thing, it’s not a viable investment strategy to just buy a stock because a company’s P/B ratio is very low. After all, sometimes this number gets low because a company’s share price has fallen sharply. If you’re not squeamish, take a glance at WBD stock, and you’ll see that it has declined from $26 in April to just $10 and change recently.
Moreover, we can question whether WBD deserves to trade above its book value at all since the company is currently operating at a net earnings loss. Specifically, during 2022’s third quarter, WBD sustained a stomach-turning net loss of roughly $2.3 billion. That’s quite alarming as the company’s market cap is around $25 billion at the moment.
It’s also unsettling because WBD managed to bleed over $2 billion in three months despite generating $9.82 billion in revenue during that time. WBD also grew its base of direct-to-consumer (DTC) subscribers and apparently was the “#1 TV portfolio in total time spent by viewers in the U.S.” in Q3. Just imagine how much worse the company’s future bottom-line results could get if WBD’s subscriber base dries up – it’s not a pleasant thought, to be honest.
Layoffs and a Massive Debt Load are Weighing WBD Down
Sometimes, layoffs are applauded on Wall Street as it’s a signal that a company is taking its cost-reduction efforts seriously. As evidenced by the persistent downturn in WBD stock, however, it doesn’t look like the company’s layoffs are assuaging investors’ concerns. WBD’s huge debt load, furthermore, should be a deal-breaker to clear-minded financial traders.
Writ large in a recent Wall Street Journal headline was a concise summary of WBD’s woes: “Warner Bros. Discovery Marriage Hurt by High Debt, Low Morale.” I must admit, I already knew that WBD was mired in debt, but the “Low Morale” part prompted me to look deeper into the matter.
Certainly, it’s hard to maintain high morale when a company is laying off workers left and right. Over 1,000 workers have been relieved of their duties at WBD since April, believe it or not – and the Journal reported “more cuts coming,” citing “people familiar with the matter.”
The Journal‘s report also used the metaphor of a “dark cloud” to characterize WBD’s debt load, so I checked the company’s Form 10-Q to see just how dark the debt cloud actually is. Indeed, the forecast is stormy and downright dangerous, as WBD had $50.14 billion worth of total debt as of September 1. Once again – lest we forget – this is a business with a market cap of around $25 billion.
Is WBD Stock a Buy, Sell, or Hold?
Turning to Wall Street, WBD stock has a Moderate Buy consensus rating based on four Buys, six Holds, and one Sell assigned in the past three months. The average Warner Bros. Discovery price target is $18.67, implying 79.52% upside potential.
Conclusion: Should You Consider Warner Bros. Discovery Stock?
I totally understand why WBD’s rock-bottom P/B ratio might get some value-focused investors frothing at the mouth. Yet, the last thing anybody needs now is to get caught in a value trap like WBD stock. I encourage you to consider WBD’s layoffs and debt burden, along with the company’s current lack of profitability. With all of that in mind, it should be easier to stay on the sidelines and wait for WBD’s financial conditions to improve before taking a position in the stock.
