Warner Bros stock a dirt cheap bargain or a value trap?

Warner Bros. Discovery (NASDAQ: WBD) stock has been one of the worst performers in the media industry this year. It has dropped by over 28% this year, while the S&P 500 and Nasdaq 100 indices have soared by over 20%. 

WBD’s performance is a continuation of what has been happening since WarnerMedia and Discovery merged in April 2022. It has dropped by over 60% since then, meaning that a $10,000 investment in the company would now be worth less than $4,000. 

WBD’s market cap has dropped from over $50 billion to about $20 billion. Netflix, on the other hand, has continued firing on all cylinders, rising by over 85% in the last 12 months, bringing its valuation to $304 billion. 

Why Warner Bros. Discovery is struggling

Warner Bros. Discovery’s performance has mirrored that of other media companies. For example, Paramount Global, the parent company of CBS, Nickelodeon, Comedy Central, and MTV, has crashed by over 70% in the past few years, giving it a market cap of $7.5 billion. 

Walt Disney, which owns ABC and ESPN, has dropped by over 53% from its highest level in 2020. 

These stocks have dropped because the media industry has changed, possibly for good. As a result, brands that used to be hot a decade ago have become toxic. For example, in the past, people used to watch MTV and BET to get the latest music. 

Today, that has changed, thanks to a free service like YouTube and streaming solutions like Apple Music, TikTok, and Spotify. 

Similarly, Nickelodeon and Cartoon Network were the best channels for children. That has changed, with YouTube having the biggest market share. 

This trend has seen many Americans embrace cord cutting since most of them rarely watch TV. Data by Statista show that the share of TV households without a traditional TV has grown from 18.8% in 2014 to 60% in 2023. This trend will continue to grow to 75% by the end of 2026. 

Cord cutting has a major impact on Warner Bros. Discovery. In the first place, it reduces its advertisement revenue now that most companies are opting for other forms of marketing. 

Additionally, it reduces the amount of money the company receives from cable companies like Charter Communications, Comcast, and Dish Networks. 

WBD’s earnings have been disappointing

The Warner Bros. Discovery’s stock has dropped because of the company’s slow revenue growth. Its second-quarter revenue dropped by 5% in the second quarter to $9.7 billion.

This revenue decline was spread across the studios and networks segments. Studios, which created popular theatrical releases like Godzilla x Kong and Dune dropped by 4% to $2.45 billion. TV revenue also retreated by 27% because of low licensing fees. 

The studio segment’s weakness is notable because it is one of its crown jewels. It also has a big market share in an industry whose other large players are Disney and Paramount. 

Meanwhile, revenue in the network business continued to fall, reaching $5.2 billion in the last quarter. This decline was mostly because of weak advertising and distribution divisions. Most importantly, the company made a big write-down of its networks division, which explains why it reported a big loss of $10.1 billion during the quarter. 

Most importantly, Warner’s direct-to-consumer business is not growing as expected. Total direct-to-consumer subscribers were 103.3 million, a 3.6 million increase from last quarter. Despite the increase, the division’s revenue dropped by 5% to $2.56 billion because of weak licensing fees.

Warner Bros. Discovery’s business, therefore, needs a good turnaround strategy, especially that the company lost rights to NBA. This turnaround, in my view, should include selling some of its assets and using the funds to pay its high debt. 

The best time to sell some or all of its TV networks is now because they still have some value. In the next decade, however, their valuation will continue falling, as we have seen with Paramount. In fact, there is a risk that cable companies like Charter will drop some of its networks.

Its other challenge is that it faces substantial maturities in the coming years. It has over $3 billion worth of maturities through 2026, which will affect its content investments.

Warner Bros. Discovery stock analysis

The daily chart shows that the WBD share price has moved sideways in the past few months as investors wait for the next catalyst. It has formed a rectangle pattern whose lower and upper levels are at $6.92 and $8.90. 

The stock is also consolidating between the 50-day and 200-day Exponential Moving Averages (EMA). 

There are signs that it has formed a small bullish flag pattern. Therefore, the outlook for the stock is neutral, with the key points to watch being $8.90 and $6.92. A break below the support will point to more downside, while a move above $8.90 will lead to more gains.