Warner Bros. Discovery Upgraded by Wolfe Research

Investing.com – Wolfe Research has upgraded shares of Warner Bros. Discovery (NASDAQ:WBD) from Underperform to Peer Perform following its Q3 results last week. They assigned a fair value range of $5-$16 based on multiple scenarios influencing valuation outcomes.

The firm downgraded the entertainment company’s shares twice since July ’23, forecasting ad sales issues and the loss of the NBA, but notes that the election result and distributor willingness to DTC bundles provide positive optionality, making the risk/reward look balanced.

> “Though we expect linear's decline to weigh on Warner's cash flow for years to come w/ ~80% of EBITDA tied to linear, Max's leverage to the industry's re-bundling and partnership trends create a plausible path to stable total company EBITDA,” the analysts stated in a client note.

They added, “Trump's election and Comcast (NASDAQ:CMCSA)'s strategic initiatives signal improving chances for deals that would unlock value.”

WBD reported earnings per share of $0.05, surpassing the anticipated loss of $0.11, but revenue of $9.62 billion fell short of estimates of $9.8 billion. Shares surged post-results, with WBD stock trading at $9.40 on Monday, reflecting a 2.34% increase compared to Friday’s closing and about 15% higher than a week prior.

Wolfe Research explained the market response, attributing the strength to:
1. Low buy-side expectations heading into the print
2. Improved odds of a spin/corporate action
3. Improved outlook for DTC profitability.

The firm anticipates DTC profitability will “meaningfully exceed” $1B in 2025, bolstering its EBITDA expectations.

Despite the favorable outlook, the firm cautioned that without rebundling or strategic action, the company may struggle. Wolfe Research assigns roughly equal probabilities to four scenarios, determining their fair value range with a $10 weighted average:
1. Bull case – spin
2. Bull case – re-bundling
3. Standalone "business as usual"
4. Bear case – affiliate cuts due to NBA loss.