On Tuesday, Wolfe Research adjusted its stance on Warner Brothers Discovery shares (NASDAQ:WBD), downgrading the stock from Peer Perform to Underperform with a price target of $7.00. The firm pointed to several factors that contributed to the more bearish outlook on the company's financial performance.
In July 2023, the firm expressed concerns about an impending advertising downturn that could jeopardize Warner Brothers Discovery's guidance. Following that initial downgrade, Wolfe Research has now further lowered its 2024 EBITDA estimate for the company by 16%, citing weaker studio results, costly international investments in Max, and a continuing decline in linear advertising revenue.
The firm acknowledged that free cash flow and the asset value of Warner/HBO had previously justified a Peer Perform rating. However, looking forward to 2025 and 2026, the outlook appears more uncertain. Wolfe Research highlighted the absence of additional merger synergies, upcoming television distributor renewals, and financial pressures related to potential investments, such as the NBA rights renegotiations.
Warner Brothers Discovery is also facing a significant debt burden, with $44 billion in gross debt, which is approximately nine times the company's run-rate free cash flow atop an estimated $9.8 billion EBITDA for 2024. This projection is heavily dependent on $7.5 billion in high-margin linear TV advertising for 2024, a segment that is experiencing an accelerated decline.
Given these factors and the belief that EBITDA may have peaked in 2023, Wolfe Research has reduced its 2026 EBITDA estimate for Warner Brothers Discovery by 6%, which is 12% below consensus. The downgrade to Underperform comes with a price target based on 5.8 times the CY26E EV/EBITDA.
InvestingPro Insights
Warner Brothers Discovery (NASDAQ:WBD) is currently navigating a challenging financial landscape, as indicated by the recent downgrade from Wolfe Research. InvestingPro data provides additional context to the company's situation. WBD's market capitalization stands at $20.75 billion, reflecting the scale of its operations within the entertainment industry. Despite a notable revenue growth of 22.19% in the last twelve months as of Q4 2023, the company's P/E ratio remains negative at -6.62, with an adjusted P/E ratio for the same period at -9.32. This suggests investor concerns about profitability, which is supported by the company's operating income margin of -1.39%.
InvestingPro Tips highlight several key points that investors should consider. WBD is trading at a low Price/Book multiple of 0.46, which could indicate the stock is undervalued relative to its assets. Additionally, the valuation implies a strong free cash flow yield, which may appeal to investors looking for potential cash-generating investments. However, analysts do not expect the company to be profitable this year, and it has not paid dividends to shareholders, which could be a point of consideration for income-focused investors.
For those interested in a deeper analysis, there are additional InvestingPro Tips available, providing further insights into Warner Brothers Discovery's financial health and market position. By using the coupon code PRONEWS24, readers can get an extra 10% off a yearly or biyearly Pro and Pro+ subscription to access these valuable tips.
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