Warner Bros. Discovery stock upgraded at Wolfe on re-bundling trends

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

The firm had downgraded the entertainment company’s shares twice since July ’23, anticipating ad sales problems and the NBA loss, but notes that the election outcome and distributor openness to DTC bundles create positive optionality, with the risk/reward now looking 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 said in a note to clients.

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

Last week, WBD reported earnings per share of $0.05, above the expected loss of $0.11, with revenue of $9.62 billion missing estimates of $9.8B. Shares rallied following the results, and on Monday WBD stock was trading at $9.40, 2.34% above Friday’s closing price and around 15% higher than a week ago.

Explaining the market response, Wolfe Research said, “We attribute much of the strength to: (1) low buy-side expectations heading into the print, (2) improved odds of a spin / corporate action, and (3) improved outlook for DTC profitability.”

The firm expects DTC profitability to “meaningfully exceed” $1B in ‘25E, supporting its EBITDA expectations.

Despite the improved outlook, the firm notes that without rebundling or strategic action, the company could fail to deliver. There are four scenarios that Wolfe Research assigns roughly equal probabilities to, and based on which their fair value range has been assigned, with a $10 weighted average.

These are: (1) bull case - spin, (2) bull case - re-bundling, (3) standalone "business as usual," (4) bear case - affiliate cuts due to NBA loss.

Source: Investing.com