June 13, 2024

Warner Bros. Discovery stock downgraded by Wells Fargo on ‘more negative’ trends

Warner Bros. Discovery (WBD) stock fell more than 2% in midday trading on Monday after Wells Fargo downgraded the stock from Overweight to Equal Weight, citing a “risky earnings setup” to kick off the year.

“We’ve taken a thorough scrub of our 2024 WBD earnings estimates and come out more negative,” Wells Fargo analyst Steve Cahall wrote in a note to clients on Monday. “Lower earnings have been the story since the merger, and the trend limits future multiple expansion.”

Cahall, who slashed his price target to $12 from $16, lowered his full-year adjusted earnings estimate from $10.5 billion to $9.98 million, a drop of 5%.

For 2025, the analyst cut his forecast to $10.4 billion from $11.2 billion, representing a 7% drop.

The analyst listed several reasons for the downgrade, including less favorable M&A probability, a tough year-over-year studios comparison, higher amortization, the migration of ads from linear to streaming, and content licensing as a “double edged sword.”

In terms of M&A, which seems to be the talk of Wall Street media watchers, Cahall said recent commentary from company executives has splashed cold water on the idea.

“While we’ve pushed the prospect of CMCSA for WBD, CMCSA has talked it down of late,” he said, referring to comments made by Comcast (CMCSA) CEO Brian Roberts last week.

Roberts said the bar continues to be high for any type of consolidation, telling investors on the company’s fourth quarter earnings call, “I love the company we have.”

“Even if it makes sense we don’t see any urgency in an election year,” Cahall said, adding it’s also unlikely Warner Bros. Discovery would merge with a competitor, like Paramount Global (PARA) — despite the two companies fueling those rumors after meeting late last year.

“PARA, or some of its assets like CBS, are or could be available, but equity investors have a very limited tolerance for more debt regardless of the strategic rationale,” he said. “This means WBD’s opportunities are primarily organic.”

HOLLYWOOD, CALIFORNIA - JUNE 12: Warner Bros. Discovery CEO David Zaslav attends the Los Angeles Premiere of Warner Bros.

HOLLYWOOD, CALIFORNIA – JUNE 12: Warner Bros. Discovery CEO David Zaslav attends the Los Angeles Premiere of Warner Bros. “The Flash” at Ovation Hollywood on June 12, 2023 in Hollywood, California. (Photo by Axelle/Bauer-Griffin/FilmMagic) (Axelle/Bauer-Griffin via Getty Images)

Content strategy could also pose an issue as WBD weighs licensing content versus maintaining streaming exclusives for its flagship direct-to-consumer service, Max.

“One way to accelerate EBITDA and free cash flow would be to let marquee titles like ‘The Sopranos,’ ‘Game of Thrones’ or ‘Friends’ go to deep-pocketed streamers instead of Max — likely billions of untapped revenue potential,” Cahall argued. “But, this would come at the expense of Max engagement.”

Despite a strong HBO slate set for this year, which will likely increase subscriber additions, “management is caught between scaling direct-to-consumer and deleveraging through licensing deals,” he said.

On top of licensing challenges, continued pressure on the networks side of the business should also weigh on earnings as the advertising market remains challenged, coupled with declining ratings and increased cord cutting.

Warner Bros. Discovery will report its fiscal fourth quarter earnings later next month.

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

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