- Warner Bros. Discovery (WBD) launched with high expectations and cheap stock.
- CEO David Zaslav needs big profits to pay off its big debts.
- If he can get profits back to last year’s level, WBD stock is dirt cheap.
Source: Koshiro K / Shutterstock.com
Since breaking away from AT&T (NYSE:T) last month, Warner Bros. Discovery (NASDAQ:WBD) has been desperately seeking a bottom. WBD stock is down 31% just since April 19, while the Nasdaq is down by 16%. It opened May 24 below $18, with a market cap of $44 billion and just 10 times last year’s earnings.
The company, pulled together by CEO David Zaslav, thought it had a good story to tell in streaming. But investors don’t want to hear it. Thus, he told a different story about WBD stock being a “fifth broadcast network.”
They didn’t want to hear that, either.
Warner Bros. Discovery
WBD Stock and Its Recent Upfront
Zaslav premiered his new executive style at the “upfronts,” an obsolete event from TV’s past where networks would sell their fall schedules.
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Streaming and the pandemic have made the upfronts look very 20th century. Zaslav pretended not to notice. Instead, he talked about budget cuts and executive layoffs. He wants viewers to see the company’s disparate sports, news, entertainment and reality shows as a “bundle” that’s winning fat distribution revenues from broadcast, cable and streaming.
What investors see is a slow-growth company with iffy products that’s not sharing those profits with them. In 2021, WBD had earnings of more than $1 billion, or $1.53 per share, on revenue of $12.2 billion. Investors are only paying 10 times earnings for it because the earnings were half what they were in 2020, and WBD stock pays no dividends.
Zaslav can’t pay dividends because WBD also had $13 billion in debt on March 31, against just $4.2 billion in cash. It will take cash flow to whittle down that debt, and the company only generated $323 million of it in the first quarter, less than half what it had been doing for most of 2021.
Warner Bros. Discovery’s Assets
Numbers like this were why I called WBD stock “a speculative buy at best” when I wrote about it last month. It no longer has guaranteed distribution since it’s separated from AT&T. It badly trails Netflix (NASDAQ:NFLX), Walt Disney (NYSE:DIS) and Amazon (NASDAQ:AMZN) in streaming. Its competitors are orders of magnitude larger in terms of market cap and cash on hand.
Zaslav does have some assets. Rights in live sports are essential to maintaining subscriptions, so he signed a joint venture with BT to combine European rights.
News is considered essential, so he also brought in showrunner Chris Licht to steady the ship. That came after the killing of CNN+, a bad idea he couldn’t stop AT&T from trying, and finding room for some of its talent, like former Fox (NASDAQ:FOX) host Chris Wallace.
Zaslav does have an ace in the hole: the Warner Brothers movie studio. The studio switched its schedule from theaters to streaming last year. But if it can find some movie hall hits in its 2022 releases, which include titles built on Harry Potter and DC Comics plus an Elvis Presley biopic, it could create an earnings surprise.
The Bottom Line on WBD Stock
Wall Street has gone from skepticism to cynicism regarding WBD’s prospects. They just don’t see a long-term future in it. And while that may be the case, there could also be a profit.
If cost-cutting and hard bargaining can bring profits back to 2021 levels, WBD stock may become too cheap to ignore. It may also become attractive to Apple (NASDAQ:AAPL). Until now, the company has been going it alone with its Apple TV offering, but could use WBD programming to grow its device business.
In the end, I’m one of the cynics. I don’t need multiple streaming services. The Cloud Czars have all the cards. WBD stock remains a speculation, while sure things are in the bargain bin.
On the date of publication, Dana Blankenhorn held long positions in AMZN and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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