Is the Warner Bros (WBD) stock too cheap to ignore?

By:
on May 26, 2024
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  • Warner Bros. Discovery is home to some toxic legacy television brands.
  • Its studios, network, and DTC business is slowing down dramatically.
  • The company sits on a $43 billion debt that could limit its growth.

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Warner Bros. Discovery (NASDAQ: WBD) stock price remained under intense pressure this month as concerns about the company’s future continued. It closed at $7.73 on Friday, down from its all-time high of $78.11. Its valuation has tumbled to less than $20 billion. 

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Undervalued but risky

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In my last article on Warner Bros. Discovery, I wrote that it was one of the most undervalued media companies in the US. I used a sum-of-parts approach to estimate that the firm was severely cheap. In my estimation, its studios and Max business have a bigger valuation than the whole company.

Warner Bros. Discovery also carries some toxic legacy media companies that are no longer relevant today. CNN, Food Network, OWN, and Animal Planet are some of its TV companies. While some of these networks were highly popular in the past, their audience has dropped sharply recently.

Still, in my sums of parts article, I estimated that some of these companies could fetch a huge sum of money if sold. A good example of this is that Paramount Global’s BET and VH1 attracted a $3.5 billion from Byron Allen. 

Warner Bros. Discovery’s recent financial results provided more evidence that its business was still under pressure. Its first-quarter revenue dropped to $9.95 billion from $10.7 billion a year earlier. Also, its adjusted EBITDA figure dropped from over $2.6 billion to $2.1 billion while its free cash flow rose to $390 million.

Most of Warner Bros’s segments reported a steady revenue decline. Its studio revenue dropped by 12% to $2.8 billion, which the company attributed to last year’s strikes. Also, its networks segment’s revenue fell by 8% to $5.1 billion as its advertisement business struggled.

WBD’s direct-to-consumer revenue was almost flat at $2.46 billion as the number of subscribers rose to 99.6 million. It had an adjusted EBITDA of $86 million.

Warner Bros. Discovery faces several risks ahead. First, it is still one of the most indebted companies in the media industry. While its debt has reduced over the years, it still owes $43.2 billion to lenders. 

Its huge mountain of debt may limit its content development spending at a time when Netflix and Disney are spending billions of dollars. Netflix has added millions of users and now has over 269 million subscribers. 

It is unclear whether Warner Bros. Discovery’s upcoming Max global expansion will attract millions of users. Also, as we saw with Netflix, the company will need to spend substantial sums of money in advertisements to reach these users.

The other uncertainty is whether Venu Sports, its joint venture with Disney and Fox Corporation will become a big success. 

Warner Bros. Discovery stock analysis

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WBD chart by TradingView

Therefore, with WBD, we have a company with some of the biggest brands in the media industry globally. Its growth is slowing, has substantial amounts of debt, and its business faces many uncertainties ahead. 

Worse, the company has some weak technicals. It has constantly remained below the 50-day and 100-day Exponential Moving Averages (EMA). It also dropped below the support at $8.83, its lowest swing in December 2022. This price was the lower side of the descending triangle chart pattern.

It has also formed a break and retest pattern by retesting the resistance at $8.83. Therefore, the stock’s outlook is bearish, with the next potential level to watch being at $5.0 This view will become valid if the stock crashes below the year-to-date low of $7.38.

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