Warner Bros Discovery Rebounds on the Company’s Cost-Cutting Plans

Shares of Warner Bros Discovery (WBD) are up +63% so far this year, following last year’s -60% plunge.  The stock is the second-best performer in the Nasdaq 100 Stock Index ($IUXX) (QQQ) this year, leading gains among video-streaming companies and well ahead of its media peers.  The company’s plans to cut $3.5 billion in costs have led to a sharp rebound in the stock this year.

Analysts will look to earnings results from Warner Bros Discovery after today’s close for more clarity on its cost-cutting strategy and its profitability goals.  Last April, Discovery and AT&T announced a merger that combined the WarnerMedia business with Discovery.  While concern about high debt and widespread weakness in the streaming sector haven’t entirely dissipated, investors have been drawn to the stock's cheap valuation.

The average price target for Warner Bros Discovery among analysts points to the stock having an upside of +26% from current levels.  That’s a higher return than expected from peers Paramount Global (PARA) or Netflix (NFLX).  Moreover, even after this year’s rally, the stock trades at a forward enterprise value-to-Ebitda of 8.1 times, below the media peer group average of 11.

The progress in cost-cutting is a key factor that will decide if the rally in Warner Bros Discovery can continue.  In a sign of how expense management is a priority for management, Company CEO Zaslav said last quarter that profitability, and not purely subscription count, “is our benchmark for success.”  According to estimates compiled by Bloomberg, the Ebitda for Warner Bros Discovery is seen at $9.2 billion in the 2022 fiscal year before jumping to $11.3 billion next year.

Risks remain for Warner Bros Discovery due to concern about weak advertising revenues, as evidenced last week after Paramount Global reported disappointing Q4 results on slumping advertising sales.  However, Huntington Private Bank said, “for years, the name of the game in streaming was signing up lots of people, but now it’s about profitable growth.  Cost cutting is what investors want to see, and Warner Bros Discovery remains the gold standard in quality content.  That means the rally can easily be justified.” 

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