When AT&T (T) announced it would merge its WarnerMedia channels with Discovery (DISCA), the stock broke down from the $32-33 level.
Why?
WarnerMedia’s HBO Max is a crown jewel. The studio burnt through cash flow during the pandemic. And as the pandemic winds down, thanks to the vaccination program worldwide, the unit’s value is on the rebound. Income investors are upset that the $2.08 dividend will get slashed after the merger.
Investors fail to recognize that a post-AT&T stock plus the spinoff is worth more than T stock with the dividend. Still, the market is pricing in uncertainties ahead for the spin-off. The unit needs to compete in a low-margin business. Netflix (NFLX) saw an exodus of subscribers as Disney (DIS) stepped up its Disney+ expansion. Roku (ROKU) is also a dominant player.
Netflix ended account sharing, driving subscription growth lower but increasing margins in the long run. T investors do not want to own a streaming content pure-play a year from now. The sector’s valuations may plunge as demand slows. In a post-pandemic world, that assumption is reasonable.
Watch for T stock to battle the $28 – $32 range in the next few months. The stock is balanced between risk and reward, offering minimal growth upside from here.