Warner Bros. Discovery (WBD 1.08%) had a rough start after being spun off as a stand-alone company last April. The media company, created by the merger of AT&T's WarnerMedia unit and Discovery, initially traded at $24.08 per share.
But as of this writing, it's only worth about $11. Warner Bros.' stock plummeted as investors fretted over its slowing growth, persistent losses, and chaotic cancellations of several high-profile projects. It seemed like Warner Bros. was more interested in burning the furniture to stay warm than creating new content for its cable TV, streaming, and theatrical businesses.
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However, Warner Bros.' stock rallied after CFO Gunnar Wiedenfels laid out clearer plans for the company's future at Citi's 2023 Communications, Media, and Entertainment Conference on Jan. 5.
Let's see whether those plans can breathe some life back into Warner Bros.' battered stock this year.
What did Wiedenfels say?
Wiedenfels said Warner Bros.' new streaming service merges HBO Max with Discovery+ and will launch this spring. This consolidation should eliminate the fragmentation between the two ecosystems, which together served 94.9 million direct-to-consumer (DTC) customers in its latest quarter. Plus, this should widen its moat with a blend of scripted content and reality shows.
That new streaming platform reportedly could be named Max and will feature hubs for HBO, DC, Warner, Discovery, and its other brands. But this isn't really fresh news. CEO David Zaslav already revealed the spring launch date for the service during the company's latest conference call last November.
Wiedenfels also said Warner Bros. had concluded all its restructuring moves and write-offs for its weaker content. Wiedenfels admitted it "took a bit of time" to accomplish but that the company's portfolio had finally been streamlined by licensing some of its content to other platforms and canceling its weaker shows and movies. It also wasn't looking to sell any of its assets.
In other words, Warner Bros.' seemingly endless streak of cancellations -- which eliminated high-profile projects like CNN+, the Batgirl film, Ridley Scott's Raised by Wolves, and Wonder Woman 3 -- could finally be over. Looking ahead, Wiedenfels said Warner Bros. would release about twice as many theatrical movies in 2023 as it did in 2022. It's also put director James Gunn (Guardians of the Galaxy, The Suicide Squad) in charge of rebooting its messy cinematic universe of DC movies.
That's encouraging news for Warner Bros.' DTC and studios divisions, which together accounted for 60% of its pro forma revenues last quarter. But its networks division, which accounted for the rest, still relies heavily on ads across "linear" platforms like cable and satellite TV. Warner Bros.' network advertising revenues declined 11% year over year on a pro forma constant currency basis in the third quarter, mainly due to macro headwinds along with the broader slowdown of linear TV platforms. Wiedenfels warned that those broader advertising trends had not improved in the fourth quarter.
So where will Warner Bros.' stock be in a year?
On a pro forma basis, Warner Bros.' revenue declined 2.5% year over year to $32.1 billion in the first nine months of 2022. Its DTC segment expanded with a 19% year-over-year jump in subscribers in the third quarter. However, its average revenue per user dipped as it gained a higher mix of lower-revenue international subscribers.
Its studios segment suffered from a drought of new blockbuster movies and tough comparisons to the industry's post-pandemic recovery in 2021. Its networks division grappled with declining ad revenue and challenging comparisons to the Olympics and NBA playoffs in 2021.
However, Warner Bros.' adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 91% year over year to $5.1 billion in the first nine months of 2022 even as its DTC segment remained unprofitable. Analysts expect Warner Bros. to generate an adjusted EBITDA of $9.2 billion for the full year and for that figure to rise 24% to $11.4 billion in 2023.
Based on those expectations and its enterprise value of $73 billion, Warner Bros. trades at just eight times its 2023 adjusted EBITDA. Walt Disney and Netflix have comparable ratios of 13 and 23, respectively, suggesting Warner Bros. could be deeply undervalued relative to its peers.
Wiedenfels' latest comments suggest that Warner Bros.' DTC and studios divisions will overcome their near-term challenges this year as the company consolidates its streaming ecosystem, pumps out fresh content, and ramps up its theatrical releases again. That growth could offset the macro-induced weakness of its advertising business. But stiff competition from Disney, Netflix, and others in the streaming space could still derail those plans.
Warner Bros.' stock could remain volatile this year, but I believe it could head significantly higher as the company moves past all the merger-related noise and expands its core businesses again. It might not bounce back to $24 a share anytime soon, but reaching the mid-teens could be achievable if it's fairly valued again.
