Shares of Warner Bros. Discovery (WBD) have been a disaster since going live on the Nasdaq exchange back in April 2022. The big media merger could come with considerable advantages over the long run. However, investors seem unwilling to scoop up anything in the media or video-streaming space these days following the blow-up of Netflix (NFLX) stock and the catastrophic fall of media powerhouse Disney (DIS).
In just under two months, Warner Bros. Discovery stock has shed over a third of its value. That’s a substantial decline that shows a lack of confidence in the potential value of the merger.
As investors continue souring on media and streaming, WBD stock could fall into deep-value territory if it hasn’t already. At writing, Warner Bros. Discovery stock trades at 8.55 times trailing earnings, 0.7 times book value, and 3.3 times sales.
That’s incredibly cheap, with potentially ominous expectations baked in. Nobody wants to be caught holding the next Netflix (that used to be a compliment!), especially given the decay in subscriber growth numbers.
While subscriber growth could fluctuate wildly at HBO Max as the subscriber wars heat up going into a potential economic downturn, I do think the stock is already conservatively priced. Though many Wall Street analysts would rather take a raincheck on the name, I think the stock has become cheap enough for me to maintain a bullish stance.
A Powerful Content Lineup That’s Easy to Discount
With Warner Bros. and Discovery joining forces, the resultant company now has a very strong content lineup. Though not to the scale of the likes of a Disney, the firm could be yet another Netflix challenger.
Undoubtedly, Warner Bros. Discovery picked a pretty bad time to land on the public markets, with Netflix sending streaming stocks into the gutter, following its first subscriber losses in over a decade. Though investors may have been too euphoric on video-streaming during pandemic-era lockdowns, I do think there’s plenty of growth to be had in the now maturing market.
Moving ahead, Warner Bros. Discovery will have its hands full as it looks to integrate and create value out of the merger. Though it’s nice to have a breadth of content, it’s clear that Warner Bros. Discovery will need to spend money hand over fist if it’s to keep up with the likes of a Disney+, which has a gigantic $32 billion (down from $33 billion) content budget for 2022. That’s going to be hard to keep up with, and the potential return on investment isn’t guaranteed to be high.
With a considerable amount of debt weighing down Warner Bros. Discovery’s balance sheet, there’s some concern that the firm may not be able to keep up a magnitude of spending to keep pace with the competition. The prospect of higher interest rates also does not bode well for the firm over time.
Indeed, the company’s nearly $55 billion debt load may be more than enough reason to steer clear of the stock amid recent pressure experienced by the streamers. Though debt levels should not ring alarm bells, for now, it does look to limit the company’s financial flexibility. In such a competitive market, a lack of flexibility could prove detrimental.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, WBD stock comes in as a Moderate Buy. Out of 13 analyst ratings, there are seven Buy recommendations, five Hold recommendations, and one Sell recommendation.
The average Warner Bros. Discovery price target is $33.27, implying an upside of 77.35%. Analyst price targets range from a low of $18.00 per share to a high of $48.00 per share.
The Bottom Line on Warner Bros. Discovery Stock
Warner Bros. Discovery’s debut has been met with a lot of selling. Recent streaming headwinds and the firm’s pile of debt make it difficult to get euphoric about the firm as it looks to bring its platform to the next level.
That said, the stock has become so incredibly cheap, with a now sizable discount to book value. At such low expectations, it may not take much to move the needle higher. In the meantime, it will be hard to avoid the gravitational pull of companies like Netflix and Disney, which can’t seem to catch a break.
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