Warner Bros. Discovery (WBD +1.37%) has attracted a lot of unflattering attention since it parted ways with AT&T back in April. Its first two quarterly reports as a stand-alone company were disappointing, and it scrapped several high-profile projects -- including CNN+ and the $90 million Batgirl film -- to cut costs and streamline its business.
Those strategies support CEO David Zaslav's plans to merge HBO Max and Discovery Plus into a single streaming platform, but critics believe that is recklessly tossing out a lot of babies with the bathwater. The lack of clear communication between Zaslav and WBD's investors regarding those cost-cutting measures also raises additional red flags for its future.
Image source: Getty Images.
To make matters worse, inflation and other macro factors are now generating headwinds for WBD's advertising business. All that pressure could force the company to make even more rash decisions as it attempts to offset its decelerating growth with more aggressive cost-cutting strategies.
That's why WBD's stock has lost nearly half its value since its first trading day. But could this actually represent a good buying opportunity for investors who can tune out the near-term noise?
NASDAQ: WBD
Key Data Points
What are WBD's long-term plans?
Prior to its spinoff, WBD planned to generate $52 billion in annual revenue in 2023. That included $15 billion coming from its direct-to-consumer (DTC) services, as its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose to $14 billion with a free cash flow (FCF) conversion rate of 60%.
But during WBD's second-quarter conference call in early August, CFO Gunnar Wiedenfels walked back most of those expectations. WBD now expects to generate "at least $12 billion" in adjusted EBITDA in 2023, to convert about a "third to half" of that total into FCF, and to merely "make progress" toward achieving its "long-term" FCF conversion rate of 60%.
Wiedenfels didn't mention WBD's revenue outlook, but those new estimates strongly indicate it won't generate $52 billion in revenue by 2023. In fact, analysts don't expect WBD to reach those levels until after 2024 -- which suggests its original growth plan is now at least a year behind schedule:
|
Period |
2022 |
2023 |
2024 |
|---|---|---|---|
|
Estimated revenue |
$45.3 billion |
$47.2 billion |
$50.2 billion |
|
Growth (YOY) |
N/A* |
4% |
6% |
|
Estimated adjusted EBITDA |
$9.3 billion |
$11.4 billion |
$13.2 billion |
|
Growth (YOY) |
N/A* |
23% |
16% |
Data source: S&P Global. YOY = year over year. *Not comparable to Discovery's stand-alone pre-merger numbers.
Can WBD overcome its main challenges?
Those growth rates don't look terrible, and WBD's enterprise value of $78.5 billion still looks cheap at just seven times next year's adjusted EBITDA. For reference, Netflix has a forward EV/EBITDA ratio of 16. However, WBD's future relies on its ability to keep pace with Netflix, Disney, Amazon, and other tough rivals in the margin-crushing streaming wars.
WBD still insists it can reach 130 million paid DTC subscribers -- including both cable and streaming viewers -- by 2025. Unfortunately, WBD's total number of DTC subscribers only rose by 1.7 million sequentially to 92.1 million in the second quarter of 2022.
So even if it gains 2 million subscribers each quarter through the end of 2025, WBD would only end the final year with about 120 million subscribers. By comparison, Netflix and Disney both ended their latest quarters with about 221 million paid streaming subscribers.
To accelerate its growth and catch up to those larger rivals, WBD needs to ramp up its spending on new content. But its DTC division is already drowning in red ink: On a pro forma basis, the DTC segment's adjusted EBITDA loss widened year over year from $235 million to $518 million in the second quarter. That's why WBD has been desperately trying to streamline the unprofitable business.
WBD's higher-margin advertising business, which generated 28% of its revenue last quarter, might offset those losses if the macro conditions improve. But during WBD's latest conference call, Wiedenfels warned investors that its global ad sales would likely decline by the "high single to low double digits" in the third quarter as it operated in a "less favorable macro environment."
WBD's stock will stay in the penalty box
WBD is stuck in the difficult position of trying to keep pace with its larger streaming rivals while reining in its spending. It's also trying to prioritize the growth of top-tier shows (like House of the Dragon) while unifying and streamlining its fragmented universe of DC Comics shows and movies.
WBD's stock might eventually bounce back, but its sluggish growth, high debt-to-equity ratio of 1.7, and confusing plans for the future will likely prevent the bulls from rushing back anytime soon.
