Warner Bros Discovery Inc. (WBD)
Does $WBD Need “The Snyder Cut” of Its Balance Sheet?
In our Ledger Island Spotlights, we look at companies that could be a good fit in your portfolio or worth a closer look down the road. Some of them you have heard of. Some might be new finds. Either way, you’ll always get two retail investors’ perspectives from Clint & Phil. While they don’t always agree, they work to come to a middle-ground consensus on what to do moving forward and update guidance as we continue to track the stock on the Ledger Island Watchlists. Today, we’ll be looking at Warner Bros Discovery Inc. $WBD.
Warner Bros Discovery Inc. is a LARGE-CAP company founded in 2022 (following the AT&T spin-off) and began public trading as WBD on the Nasdaq in April 2022. In their own words from a Warner Bros Discovery press release:
“Warner Bros. Discovery is a leading global media and entertainment company that creates and distributes the world's most differentiated and complete portfolio of branded content across television, film, streaming and gaming. Available in more than 220 countries and territories and 50 languages, Warner Bros. Discovery inspires, informs and entertains audiences worldwide through its iconic brands and products…” https://ir.corporate.discovery.com/news-and-events/financial-news/financial-news-details/
Clint’s Take:
Cue the epic trailer voice; "In a world where the media landscape shifts with little rhyme nor reason, one company stands alone, unable to make substantial gains despite an impressive IP catalog, and pitted against consumer sentiment in theatrical release, cable TV and streaming."
That about sums up WBD 0.00%↑. With a foothold in each of the major media delivery systems (film, TV, and streaming), WBD seems incapable of turning victories into actual growth. Barbie garnered critical and box office success (1.45B worldwide), yet Q3 Network Segment revenue? Distribution declined by 2%. Ad revenue is down 13%. Content revenue declined 22%! All this transpired during the Screen Writers and Actors' strike, affecting both promotion and new content. Still, considering the savings they should have enjoyed from a "creative shutdown," this is pretty bad compared to peer media groups.
It is those gaps between outlets that concern me. Getting people into movie theaters is still rebounding post-COVID. Cord cutters continue to rise, with an average of 6M per year moving from traditional cable to streaming exclusively. Effectively, any investment in MAX (WBD's leading streaming service) exclusives drives more customers from their broadcast ad base pool. This is also true of most media companies (i.e., Disney DIS 0.00%↑ , Paramount PARAA 0.00%↑) in the same boat. It doesn't seem like a "hedging a bet" strategy to me. It's more like a self-inflicted hindrance while trying to gain ground on Netflix's NFLX 0.00%↑ ten-year head start.
In that same vein, recently, WBD 0.00%↑ announced a partnership with DIS and Fox FOXA 0.00%↑ to pool their sports assets (including Disney-owned ESPN, long rumored for a spin-off) in a new sports streaming platform. While details are hazy at best, there is tremendous growth potential there, but again, it will drastically affect all of the companies' cable networks. Sports has long been the final holdout for many customers making the switch to streaming alone. In the past, DIS 0.00%↑ has had standoffs with cable provider Comcast CMCSA 0.00%↑ spurring new incentives for CMCSA customers to receive discounts on DIS streaming services to compensate subscribers boxed out of content found exclusively on Disney+, Hulu, and ESPN+. I imagine similar scenarios when this new conglomerate sports streamer launches, but DIS, WBD, and FOXA will have the leverage with cable companies desperate to keep live sports and subscribers.
Note: It is also worth mentioning that CMCSA, owner of NBC Sports, and PARAA 0.00%↑ , owner of CBS Sports, were not included in this new venture despite having impressive sports broadcasting rights. Just today (02/16/24), The Wall Street Journal reported that Paramount and Comcast have had talks about a potential partnership of their streaming services (Paramount+ and Peacock, respectively). Read more here:
The overall media landscape is dizzying, especially regarding streaming. Between rebrands, consolidation, and new deals, it is hard to say who will make a “clear and clean profit” (meaning not taking away from their other offerings). This new sports venture could be a big boost for WBD 0.00%↑ , but I feel they are still over-extended across the board and playing from behind on most metrics. Investing based on the possibility of another Barbie at the box office seems too random, and in the past, proved to be somewhat fruitless when held up against all their other underperforming outlets.
Phil’s Take:
$45.3 billion of gross debt! WBD 0.00%↑ repaid $2.4 billion of debt during 2023'Q3, yet they still have $45.3 billion of gross debt! They had the highest-grossing film in Warner Brothers' history and still have 45.3 billion in gross debt! For comparison, Netflix NFLX 0.00%↑ ended its 2023'Q3 with $14.3 billion in debt. I'll be the first to admit that I need help understanding the future of streaming. The disruptions to media consumption are a continuing process, and what a winner looks like needs to be clarified. What I do know is that a 4.2x net leverage is concerning. Six straight quarters of negative earnings per share is concerning. Eight consecutive quarters of missing earnings expectations are concerning.
And yet, as a long-term hold, I don't hate it. And that's the biggest knock against WBD 0.00%↑ as a stock, and there's not a lot to love going forward. Their studio division will continue to put out films and may get a Barbie-esque film every few years, but the future profitability of cinema films is still being determined. Their network segment will continue to take hits in revenue as cord-cutters drive down the number of pay TV subscribers in the US. That will, in turn, drive down advertising revenue in what could be a self-reinforcing spiral. Long-term optimism comes from their direct-to-consumer segment, which claims 95.1 million global subscribers. Their average return per user was up 6% over the prior year, and they have shown the ability to cut production costs when not making shows that involve CGI dragons. HBO/Max is a strong brand with solid content pipelines. Adding the Bleacher Report add-on tier and the recently announced sports package deal with Disney DIS 0.00%↑ and FOX FOXA 0.00%↑ should allow them to capture more valuable sports viewers, but that remains to be seen.
If WBD 0.00%↑ paid a dividend, I would be more inclined to park some money here and take advantage of the lower-than-usual risk but right now I think you can get a much greater ROI (return of investment) elsewhere.
Moving Forward:
Because WBD 0.00%↑ is seemingly spread too thin, we are placing it on the “Prove It to Me” watchlist. Should more details about the joint sports venture come to light while answering some questions about how it will affect their ad base business, we will take another look and reevaluate. We expect some more details to flesh out nearing the Q4 earnings report on 02/23/24, as well as how big a hole WBD will need to dig out of before we see sustainable ROI.
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