On Tuesday, KeyBanc Capital Markets maintained an Overweight rating on Warner Brothers Discovery (NASDAQ:WBD) and increased the price target to $14.00 from the previous $11.00. The adjustment reflects the firm's growing confidence in the company's potential for higher profitability in its Studios and Direct-to-Consumer (DTC) segments, as well as anticipated gains from the renewal of its affiliate relationship with Comcast Corporation (NASDAQ:CMCSA).
Currently trading at $10.56, InvestingPro analysis suggests the stock is undervalued, with the company showing strong momentum through a 30% price return over the past six months.
KeyBanc's analysis suggests that Warner Brothers Discovery's Studios segment is poised to return to its historical profitability levels, which is expected to be a significant driver for the company's financial performance. The firm's projections indicate that the Studios' profitability, which is currently estimated at around $1.5 billion for 2024, could increase to between $2.5 billion and $3.0 billion in adjusted EBITDA over the next two to three years.
With current total EBITDA at $7.15 billion and revenue of $39.58 billion, InvestingPro data reveals the company maintains a solid 41.6% gross profit margin despite recent challenges.
The report outlines a high-level view of the historical profitability of the Studios by sub-segment, providing a rationale for the belief that the current profitability level is at or near a low point. KeyBanc anticipates that the Studios segment will experience a rebound, contributing to the overall growth trajectory of Warner Brothers Discovery.
The firm also highlighted the potential for multiple positive catalysts in the near future, which contributes to their positive outlook on the stock.
These catalysts are expected to drive Warner Brothers Discovery's performance, making it one of KeyBanc's top picks as the market enters 2025. For deeper insights into WBD's valuation and growth potential, InvestingPro subscribers can access the comprehensive Pro Research Report, which includes detailed analysis of the company's financial health, currently rated as GOOD by InvestingPro's proprietary scoring system.
The positive forecast for Warner Brothers Discovery comes at a time when the media and entertainment industry is navigating a rapidly changing landscape, with an emphasis on streaming services and content creation. The company's focus on improving profitability in key segments is likely to be closely watched by investors as it aims to capitalize on these industry shifts.
In other recent news, Warner Bros. Discovery reported a 3.6% decline in Q3 2024 revenue, yet achieved its first positive GAAP Operating Income and net income since its 2022 merger, as noted by Macquarie, which increased its stock target to $9.00.
The Direct-To-Consumer (DTC) segment showed robust growth, adding 7.2 million subscribers to reach over 110 million globally and increasing revenue to $2.6 billion, a 9% year-over-year rise. However, Bernstein downgraded the company's shares from Outperform to Market Perform due to underperformance, particularly after Q2 financial results.
Warner Bros. Discovery, in collaboration with KERV.ai, launched Shop with Max and Moments, two new advertising solutions aimed at integrating shoppable content into its streaming platform, Max. These solutions offer viewers a seamless way to purchase products related to the content they're watching.
Despite over $300 million in write-downs year-to-date, the company remains optimistic about the Studio's profit rebound in 2025, driven by improved film performance, TV production momentum, and a recovery in gaming. The company has also reduced its debt by over $16 billion and aims to surpass a target of $1 billion in EBITDA by 2025. These are among the recent developments at Warner Bros. Discovery.
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