Warner Bros stock: Chart Pattern Points to a 97% Rebound

Warner Bros. Discovery (WBD) stock price has plummeted, as the parent company of some of top iconic media brands, has become a toxic asset among investors and analysts. For example, of the 30 analysts covering the company, 14 have a hold rating while one has a sell rating. Just recently, Bernstein downgraded it from outperform to market perform. 

WBD stock has crashed from over $16 in 2023 to $8. It has also moved from the 2022 high of $31.53. As a result, its market cap has plummeted from over $50 billion to less than $20 billion, making it one of the worst-performing media brands in the US. 

This performance has mirrored the performance of other media companies. Paramount Global is the most direct comparison since it owns CBS, Paramount+, Studios, and other television brands like BET and MTV. Its stock has dropped by over 24% in the last 12 months. 

Walt Disney is another similar company since its media empire includes Disney+, ABC, FX Networks, and A&E, among others. Disney has also not done well as its stock has plunged by over 55% from its highest level in 2021. 

Only a handful of media stocks are doing well. Netflix stock price has jumped for three consecutive weeks and moved to a record high of $710. It has risen by 317% from its lowest point in 2022. 

Warner Bros. Discovery woes are continuing

The most recent financial results showed that Warner Bros was still struggling across most of its segments. The Studios revenue fell by 5% to $2.45 billion while the adjusted EBITDA fell by 31% to $210 million.

This revenue decline was mostly because of a sharp crash in the gaming segment, which dropped by 41%. The gaming segment was partially offset by its theatrical business whose revenue rose by 19%

The theatrical business has had some strong performers this year like Dune and Godzilla x Kong. This segment has more room to grow since there are signs that demand for Box Office movies exists. For example, Marvel Studio’s Deadpool & Wolverine, which has brought in over $1 billion in sales.

The biggest concern for WBD, however, is its networks segment, which is made up of popular platforms like TBS, CNN, HGTV, Discovery, and Food Network. This segment makes money through advertising, distribution, and content. 

Its distribution revenue fell by 10% as the payments made by cable companies continued falling because of cord-cutting. Advertising revenue fell by 9% to $2.6 billion while its adjusted EBITDA declined to $1.996 billion. 

WBD’s DTC business is the crown jewel

Warner Bros. Discovery is now focusing on its direct-to-consumer business, which is made up of HBO, Max, and Discovery+. This segment has accumulated over 103 million customers, a 3.5 million from those it had in Q1. 

Still, its revenue fell by 5% because of its licensing business whose revenue came in at $123 million last quarter. 

As I have written before, the DTC segment may be more valuable than the entire company. It has over 103.3 million users and an average revenue per user (ARPU) of $12.08. In comparison, Netflix has over 277 million customers, an ARPU of $17, and a market cap of over $294 billion.

Using Netflix as a benchmark, then it means that the DTC business should be valued at $109 billion. But since Netflix’s customers are 41% more valuable, we can place WBD’s valuation at over $45 billion, higher than the company’s $19 billion.

However, I also realize that the DTC business has some more moving parts. For example, a good number of subscribers are there because of its sports deals, especially its NBA deal. Recently, however, WBD lost a deal to Amazon, meaning that it could shed subscribers.

Also, the company’s plan to bundle a sports streaming service with Disney and Fox hit a major barrier after it was temporarily stopped by a judge. 

Altogether, I believe that WBD would be a better company if the management bundled and sold off its linear business. The resulting company would be a streaming and studio juggernaut that would attract a higher valuation.

Warner Bros. Discovery stock analysis

WBD’s stock chart has been ugly, as you can see above. It has constantly remained below all moving averages, meaning that bears are in control. However, on the positive side, the stock has formed a falling wedge pattern shown in green.

This is an important pattern made up of two descending and converging trendlines that are nearing their convergence points. In most cases, this pattern results into a strong bullish breakout. 

Therefore, while the stock is still bearish, I believe that the stock will stage a strong comeback in the next few months. If this happens, the stock could jump to $16.34, its highest point in February 2023 and 97% above the current level.