The Stock of Warner Bros Discovery is at an All-time Low, and This Former Bull is Leaving

Warner Bros. Discovery Inc. shares have recently hit levels not seen since 2009, and despite their long-standing reputation in the media industry, one former bullish analyst no longer sees much room for growth. Laurent Yoon of Bernstein downgraded his rating on the stock from neutral to market-perform, citing “heightened uncertainties” surrounding the company's future. Yoon also slashed his price target from $10 to $8.

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Warner Bros. Discovery shares closed the last two trading sessions at $6.71, marking their lowest level since February 2009, according to Dow Jones Market Data. This comparison includes the trading history of Discovery prior to its merger with WarnerMedia. The stock's significant decline reflects broader concerns within the market about the company's financial stability and strategic direction.

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One of the most pressing issues for Warner Bros. Discovery, according to Yoon, is the company's elevated leverage ratio, which currently stands at around four times earnings before interest, taxes, depreciation, and amortization (EBITDA). While the company has made some progress in reducing its overall debt, the leverage ratio has remained stubbornly high due to a decline in EBITDA. Yoon didn't mince words in his assessment: "It sounds bad and it is," he wrote in his downgrade note. He explained that the market's reaction is indicative of the diminishing patience investors have for Warner Bros. Discovery, given the ongoing financial and operational challenges the company faces.

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One of the most significant uncertainties clouding Warner Bros. Discovery’s future is the potential loss of its National Basketball Association (NBA) broadcasting rights on its TNT network. Although the company is actively contesting this possible outcome, the loss of NBA rights would be a major blow to its revenue stream. While Warner Bros. Discovery is trying to offset this potential loss by acquiring other programming, such as broadcasting rights to the French Open, Yoon argues that these alternatives are "not quite the NBA." He emphasized that less appealing programming will inevitably lead to reduced revenue, which poses a serious challenge to the company’s financial health.

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Yoon also highlighted a critical issue with the company's capital allocation strategy. He noted that each cycle of investment and programming acquisition is too long to quickly rebuild investor confidence. This slow recovery process further dampens the stock's near-term prospects and adds to the overall uncertainty surrounding Warner Bros. Discovery's future.

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Additionally, Yoon expressed skepticism about Warner Bros. Discovery's ability to meet its ambitious goal of generating $1 billion in direct-to-consumer EBITDA by next year. Currently, the company is at "basically zero" in terms of direct-to-consumer EBITDA, which raises significant doubts about its ability to achieve this target. Warner Bros. Discovery operates the Max and Discovery+ streaming services, which are critical components of its direct-to-consumer strategy.

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Although Yoon acknowledged some positive developments, such as increased traction in advertising and growth in newly relaunched markets in Latin America and Europe, he remains cautious. He pointed out that the accelerated growth and margin expansion required to hit the $1 billion EBITDA target are substantial, and the company’s current trajectory may not be sufficient to reach this goal.

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Warner Bros. Discovery was formed in 2022 through the merger of WarnerMedia and Discovery. However, despite the initial optimism surrounding the merger, the company’s stock performance has been disappointing. Yoon noted that Warner Bros. Discovery, along with Paramount Global, has been one of the worst-performing media stocks since the merger was completed. This poor performance is particularly frustrating given the high quality of Warner Bros. Discovery’s intellectual property and its renowned studios.

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In summary, Warner Bros. Discovery faces significant challenges that have led to a dramatic decline in its stock price. The company's high leverage ratio, potential loss of NBA broadcasting rights, and uncertain prospects for its streaming services all contribute to the "heightened uncertainties" that have led Yoon to downgrade his rating on the stock. Despite the company’s efforts to diversify its programming and expand its direct-to-consumer business, the road ahead remains fraught with obstacles, and the outlook for Warner Bros. Discovery is uncertain at best.

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