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Warner Bros. Discovery Stock Falls After Analyst Downgrade on Lower M&A Likelihood, Slower Max Growth, Ad Declines

Warner Bros. Discovery probably won’t see a transformative M&A deal this year — and given negative trends in its TV and streaming businesses, Wells Fargo analysts issued a downgrade on the media conglomerate’s stock.

Wells Fargo on Monday downgraded its rating on WBD stock from Equal Weight from Overweight and trimmed its price target from $16 to $12 per share. Shares of Warner Bros. Discovery dropped as much as 3.5% before closing Monday at $10.49/share, down 1.2% on the day.

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Among the factors for the downgrade: The Wells Fargo team is less favorable on the chance of a big merger or acquisition involving Warner Bros. Discovery transpiring in 2024, amid speculation of potential deals. The Wall Street firm has “pushed the prospect” of Comcast merging with WBD, but the analyst team led by Steven Cahall noted that Comcast CEO Brian Roberts last week downplayed the need to pursue a major deal. The analysts added, “even if [an M&A transaction] makes sense we don’t see any urgency in an election year.” Paramount Global, or some of its assets like CBS, are or could be available, they wrote, “but equity investors have a very limited tolerance for more debt regardless of the strategic rationale.”

In the absence of an M&A deal, Warner Bros. Discovery’s growth opportunities “are primarily organic,” the Wells Fargo analysts wrote.

“Looking back, the ad market hasn’t improved, [direct-to-consumer streaming] growth has slowed as HBO content was lighter in ’23 + Max is perhaps not marrying the legacy-Discovery content with the HBO fan base, and licensing of marquee titles seems to be off the table given their contribution to Max engagement,” the Wells Fargo analysts wrote. The firm forecasts Max net adds to be more than 2.5 million in 2024, driven by international expansion, that growth rate “is lagging that of Netflix, Disney+, Peacock and Paramount+.”

The analyst firm expects ad revenue for Warner Bros. Discovery to come in at $8.7 billion for 2023, which includes a 13% decline at its TV networks, and projects consolidated ad revenue dropping 5% in 2024 to $8.3 billion. “Our checks suggest there hasn’t been much of an improvement in linear ads during Q4 and AVOD is being pressured too by a plethora of inventory that will likely continue from Amazon Prime ads,” the Wells Fargo team wrote.

Meanwhile, content licensing “is a double-edged sword” for the company, the analysts said. WBD has licensed some HBO and Warner Bros. titles to services including Netflix. The company could boost adjusted earnings and free cash flow by licensing marquee titles like “The Sopranos,” “Game of Thrones” or “Friends” to third-party streamers instead of Max — which could be worth billions of “untapped” revenue potential. But that would depress Max engagement to the tune of about 27 minutes/day in lower usage (thereby driving up cancellations), per the Wells Fargo team’s estimates. “Management is caught between scaling DTC and deleveraging through licensing deals,” the analysts noted.

After a “thorough scrub” of 2024 earnings estimates for Warner Bros. Discovery, Wells Fargo reduced its projected adjusted EBITDA by 5%, to $9.98 billion.

HBO’s originals slate is “certainly stronger in ’24” and could support Max net adds beating Wall Street expectations while a “licensing-first strategy” could re-accelerate earnings, Wells Fargo wrote. On the other hand, the analysts added, 2024 growth initiatives for WBD are TBD and NBA rights could add to lower future EBITDA.

Pictured above: Warner Bros. Discovery CEO David Zaslav

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