We came across a bullish thesis on Warner Bros. Discovery, Inc. (WBD) on Johnson Equity Analysis’s Substack by Kyler Johnson. In this article we will summarize the bulls’ thesis on WBD. WBD Technologies, Inc. share was trading at $8.56 as of Sept 16th.
A line of cable boxes and modern televisions, representing the company’s video services.
Warner Bros. Discovery, Inc. (WBD) presents a compelling investment opportunity despite significant challenges in a rapidly evolving media landscape. The company, a major player in entertainment, owns renowned brands such as Warner Bros., DC, HBO, and CNN, with operations in three main segments: Studios (28% of revenue), Networks (49%), and Direct-to-Consumer (DTC) (23%). The streaming segment is particularly crucial, as Warner Brothers seeks to establish its position amid fierce competition from Netflix and Disney. While traditional television is in decline, the DTC segment shows promise with estimated annual growth of 12%. The Studios segment is also expected to see modest growth, benefiting from popular titles.
Financially, Warner Brothers has maintained strong free cash flow (FCF) margins of 20% over the past 15 years, outperforming competitors like Netflix and Disney in recent years. However, the company faces significant debt, with a leverage ratio of 6.1x FCF, raising concerns about its ability to cover liabilities. The company generated $6.75 billion in FCF over the last year, but refinancing challenges could arise if cash flow does not improve. Warner Brothers’ current CEO, David Zaslav, has focused on cost-cutting, leading to improved cash flow management, but there are concerns about the company’s long-term strategy, particularly regarding its streaming platform, Max, which has struggled with U.S. subscriber growth.
The company’s stock, currently trading at $7.05, has dropped significantly from its 2022 highs. However, this steep decline may represent an opportunity for investors, with WBD trading at just 2.7x its 2023 FCF. Given the company’s strong leadership and potential in the DTC segment, WBD could deliver substantial returns if it successfully navigates its debt and streaming challenges. The projected free cash flow for 2029 is estimated at $9.41 billion, with a potential 10x FCF multiple, implying a share price of $38.38—offering a remarkable 470% return over five years. While the risks are considerable, especially in terms of debt and competition, Warner Brothers’ current valuation suggests an attractive entry point for investors seeking significant upside in the media sector.
Warner Bros. Discovery, Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 48 hedge fund portfolios held WBD at the end of the second quarter which was 55 in the previous quarter. While we acknowledge the risk and potential of WBD as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than WBD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.