Warner Bros Discovery Inc.

Warner Bros. Discovery Inc. (NASDAQ: WBD), formerly Discovery, Inc., is a media and entertainment conglomerate based in the United States. In roughly 220 countries and territories and 50 languages, the Company provides viewers with a diverse and comprehensive portfolio of content, brands, and franchises across television, cinema, streaming, and gaming.

Latest News

• Discovery+, the ultimate non-fiction, real-life subscription streaming service, has launched as a Premium Subscription on The Roku Channel, according to Roku, Inc. (NASDAQ: ROKU) and Warner Bros. Discovery. Users in the United States may now subscribe to discovery+ straight through The Roku Channel for both the ad-free (USD 6.99) and ad-supported (USD 4.99) editions.
• On April 8, 2022, Discovery, Inc., and AT&T Inc. (NYSE: T) announced that their merger of the WarnerMedia and Discovery businesses had been completed. The combination forms Warner Bros. Discovery, Inc., a top standalone worldwide media, and entertainment corporation that began trading on the Nasdaq on Monday, April 11 under the new ticker symbol "WBD."
• On a tax-free basis, AT&T stockholders got an estimated 0.24 share of Warner Bros. Discovery, Inc. (WBD) stock for each share of AT&T common stock.
• WBD named 13 new directors because of the transaction. Discovery's current CEO, David Zaslav, was named CEO of the newly established company.
• Warner Bros. Discovery, Inc. released financial data for the quarter ending March 31, 2022, on April 26, 2022.

Key Takeaways from Q1 FY22 financial results

• In Q1 2022, overall revenues of USD 3,159 million climbed 13%, or 15% ex-FX swings, over the same quarter the previous year. Furthermore, advertising revenues in the United States climbed 5%, while distribution revenues increased 11%, overseas advertising revenues increased 5%, or 11% ex-FX, and distribution revenues increased 4%, or 8% ex-FX.
• Warner Bros. Discovery, Inc. had USD 456 million in net income, while the total Adjusted OIBDA was USD 1,027 million. Furthermore, the company reported an EPS of 69 cents for the first quarter of 2022, with 21 cents in last year’s same period.

Balance sheet and cash position

• Operating cash flow climbed to USD 323 million in the first quarter of 2022, up from USD 269 million the previous quarter. Higher Adjusted OIBDA drove a 33 percent improvement in free cash flow to USD 238 million, somewhat offset by higher content expense.
• Ending the first quarter with USD 4.2 billion in cash and cash equivalents, USD 15.1 billion in gross debt, and a 2.7x net leverage ratio.

Other key financial highlights for the Q3 FY22

• The company exited its operations in Russia and removed all its channels and services from the market in the first quarter of 2022; additionally, the company is currently evaluating the impact of these actions but does not expect it to have a material impact on its consolidated financial statements.
• In Q1 FY22, the company generated almost USD 450 million in Next Generation Revenues, up 55 percent from the previous quarter.
• WBD's US Networks accounted for 61.2 percent of the company's first-quarter revenue, which increased 7% year over year to USD 1.93 billion.

Outlook

To enhance cash flow, WBD will most likely take further initiatives to decrease spending in the coming months. Discovery had said that the combination would result in USD 3 billion in synergies prior to the merger, while now the company believes that the USD 3 billion aim may be modest.

Key Risks

• FX risk: International Networks sales climbed 25%, or 30% ex-FX, to USD 1,229 million in the quarter, compared to the prior-year quarter, hence demonstrating that one of the company's key concerns is foreign exchange risk.

Valuation Methodology: Price/Earnings Per Share Multiple - based Relative Valuation

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation

Over the past six months, WBD's share price has corrected by 30.94%. The stock is currently leaning towards the lower end of its 52-week range of USD 16.51 to USD 31.98. We have valued the stock using the Price/ Earnings Per Share multiple-based relative valuation method and arrived at a target price of USD 21.49. Looking ahead, Warner Bros. Discovery is a long-term investment due to its rising subscriber base, huge content library, and increased focus on achieving a greater return on investment on projects. We believe that the company is trading at a discount from its peer's average but considering strong fundamentals, and better profitability metrics compared to the industrial average gives bullish estimates for the upcoming near future.

Considering the strong fundamentals, robust top-line results, associated risks, positive outlook, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 16.85, as of June 06, 2022.

One Year Technical Chart, as of June 06, 2022. Data Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

*Entry Price as of June 06, 2022.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.