Tuesday, August 16, 2022

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Warner Bros. shares. Discovery drops as post-merger update fails to impress Wall Street –

A day after the release of quarterly results, Warner Bros. Discovery dropped sharply in Friday’s trading, with investors and analysts weighing the Hollywood giant’s prospects on its combined direct-to-consumer (DTC) streaming strategy and cost-saving plans.

Some financial watchers saw the need to lower their share price targets, with at least one analyst also downgrading their shares, while others kept their ratings and targets. Here are analyst actions and comments following the WBD earnings release on August 4th.

Analyst: Stephen Cahall of Wells Fargo
Call: Downgraded to “equal weight”, target reduced from $42 to $19.
Report title: “Matrix Failure”

The analyst downgraded his rating on Warner Bros. on Friday. Referring to movies in Discovery promotions. A “matrix disruption,” he called his report, downgraded it from “overweight” to “equal weight” and lowered its share price target from $42 to $19. The reduction in management’s financial guidance for 2023 and a more cautious streaming outlook “suggest the company is experiencing a lot of growing pains after the merger,” he argued. “Assets are great, but the risks and capital structure create a wider range of outcomes.”

others headquarters He then used the paragraph title “Blue Pill” to say, “While we like the WBD asset collection, we are getting more pessimistic about the medium-term outlook. We underestimated the complexity of WarnerMedia’s integration task and believe that Discovery similarly achieved a little more than it bargained for. Direct-to-consumer is challenging enough for peers like Walt Disney, Comcast, Netflix, and Paramount Global, and they are not simultaneously trying to improve poorly managed assets, consolidate complex organizations, and aggressively improve deleveraging.

Cahal argued that investors can wait to buy shares when things clear up. “The discovery was about $45 per share before the deal, these assets are the best in the content offering, so when things start to look up, we think investors will be able to hang on and still have a lot of potential.” .

Analyst: Kenneth Leon of CFRA Research
Call: Reiterated “Hold”, the target price was lowered from $23 to $16.

The CFRA Research analyst maintained his rating for the stock, but lowered his price target from $7 to $16 due to lower financial forecasts for 2022 and 2023. Management faces hurdles trying to integrate the complex merger integration.” , he emphasized. “WBD is changing video streaming plans to be more efficient and find ways to achieve greater profitability. … WBD is moving out of unprofitable units and spending capital to build integrated streaming platforms for HBO Max and Discovery+, which will take time.” Their conclusion: “We believe WBD is underperforming in the fiercely competitive television market that pits the biggest broadcast providers against each other.”

Analyst: Brett Feldman of Goldman Sachs
Call: Remained “Buy”, lowered the target price from $22 to $21.
Report title: “Continue shopping after DTC strategy update”

The Goldman Sachs analyst maintained a “buy” rating on Warner Bros. on Discovery, but also lowered its price target for the stock, including $1 to $21. “The integration of WarnerMedia and Discovery may be more difficult than expected, mainly because WarnerMedia’s fundamental trends are worse management expected and therefore require a course correction,” he wrote. “WBD has lowered its near-temporary pro forma guidance to reflect weaker trends at WarnerMedia, increased streaming competition and economic headwinds. We believe investors expected the WBD to lower its outlook, although the revised targets are likely to fall short of investors’ expectations. Overall, the analyst said he maintained his “positive investment thesis as we continue to believe that the Discovery and WarnerMedia merger positions WBD to achieve material scale as a global broadcaster, while strengthening its linear network business.” and increases significant cost synergies. “

analyst: Robert Fishman as Moffett Nathanson
Call: It reiterated “market performance” and target of $18.
Report title: “Reality first, dreams later?”

The MoffettNathanson analyst maintained his “market yield” and his $18 price target for the company. “We expect high debt burdens, macroeconomic headwinds and increasing age-old pressures from rapid cable cuts, plus some uncertainty around key strategic issues, to affect equities,” he explained.

Fishman also identified potential future challenges. “Lower earnings before interest, taxes, depreciation and amortization (EBITDA) forecast for 2023 of $12 billion, down from $14 billion previously, underscores the WBD’s deep dependence on earnings from linear cable networks, which are under increasing pressure in a shrinking pay-TV market. ecosystem”. He explained. “The risk is that the acceleration of cable and the weakness of linear advertising could increase pressure on the profitability of networks, which could offset any improvement in DTC after the expected peak losses in 2022.”

analyst: Cowen’s Doug Kreutz
Call: Reiterated “superior performance” and target of $24.
Report title: “Reasonable and reasonable is the approach we can work with”

A Cowen analyst shared one of his key findings in his report. “The fact that the WBD management is so clearly focused on running the business for long-term free cash flow will only make the stock more attractive to value investors, especially when compared to other media names out there. They are still a little uncertain. Revenue growth or revenue performance is the most important metric,” he argues.

Krutz said investors expect management to “provide clear answers to two questions: first, what are the company’s plans to combine its HBO Max and Discovery+ services, and second, is there any change in the financial guidance of $14,000 of EBITDA.” “. fiscal year 2023.” which was first delivered in May 2021. Their review of management feedback: “While the responses may not have been everything we had hoped for, especially for the second question, management’s presentation was thoughtful and clearly explained.

Kreutz also noted that the company’s stock had risen “21% in the last six trading days” before Friday’s drop, concluding: “Ultimately, we believe that yesterday was an offsetting event and that we likely saw a bottom in equities. , which rules out another significant portion, because the market in general is in decline.”

analyst: Jim Goss from Barrington Research
Call: Repeated “superior performance” and $25 stock price target.
Report title: “Introducing a new service was discussed, but no details”

Barrington’s Jim Goss summarized the company’s strategic updates this way: “Warner Bros. Discovery spent a lot of time and effort clarifying their plans to combine two different services and cultures (streaming and otherwise) into new programming opportunities. However, he was not bombastic in this regard, preferring to point to an investor a day before the end of the year, which will be covered in more detail. ”

He also cautioned, “We continue to feel there is a huge challenge in combining services as broad as Discovery that don’t subscribe to HBO Super Premium.”

Goss noted that the launch of the combined streaming service “will follow geographically, starting (in the US) first next summer and then moving to other areas. Maximum losses are expected in 2022, US returns in 2024 and global returns in 2025.

analyst: Barclays Kannan Venkateshwar
Call: The “equal weight” was maintained and the target price was lowered from $19 to $17.
Report title: “The kitchen sink room; But will it be the last?

Kannan Venkateshwar of Barclays highlighted Wall Street’s concerns ahead of the latest quarterly results. “On earnings, there were expectations among investors for a lower WBD guidance, but revisions were larger than expected,” he wrote. “The lack of short-term catalysts, limited visibility, and execution risk may cause the valuation discount to hold.”

An expert investigated whether the expectations of the new stream were realistic. “The company reaffirmed HBO’s numbers from about 100 million at the end of the first quarter to 90 million as AT&T apparently counted HBO subscribers who received the service as part of a distribution package but never activated their account.” , he explained. “Discovery has also removed the base of non-core streaming services (such as Motor Trends, Eurosport Player, etc.) from the count that was previously considered part of the Discovery+ sub-base. Based on this recalculation, the company expects to reach 130 million subscribers by 2025. For context, this compares to HBO’s long-term guidance of 120-150 million subscribers by 2025 and our Discovery+ subscriber expectation of 40 million. 0.5 million by 2025, and so on. Somehow it dropped from around 175 million subscribers to 130 million.

Venkateshwar then mentioned possible obstacles to reaching the goal. “While this seems feasible given that the company will need to do about 11 million subscriptions annually for the next 3.5 years, compared to the roughly 5 million we expect Discovery+ to do annually, this goal could still be a significant stretch. ”. in the context of a broader competitive landscape.

And the Barclays analyst looked at the average estimated revenue per user (ARPU). “Most of this growth will be outside the US, given that it is already high in the US (53 million of the 92 million subscribers at the end of Q2 2022 were domestic), but some products may not launch in some countries. ” Larger and less sensitive markets such as the UK, Germany and Italy due to HBO’s existing agreements with Sky. This, in turn, means that the ARPU gap between domestic and international could remain large.”

Source: Hollywood Reporter

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