Warner Bros. Discovery (WBD) continued to plummet on Thursday, dropping 16% in midday trading after the company reported a $3.42 billion loss in the second quarter, partly due to obstacles related to its recent merger.
“We knew it was going to be messy, but this was pretty awful,” Geetha Ranganathan, Bloomberg Intelligence senior media analyst, told Yahoo Finance.
The company expects 2022 adjusted EBITDA to come in between $9 billion and $9.5 billion, a decline from previous forecasts of $10 billion. Management also cut its full-year 2023 EBITDA guidance from $14 billion to $12 billion.
“This raises the question of what is the growth path for this company, because there’s no imminent catalyst,” Ranganathan said, explaining that the streaming business largely relies on future execution while the majority of the company’s revenues remain tied in its legacy TV business — a risk as consumers cut the cord.
“The end of 2022 and into 2023 — it looks pretty bleak,” she continued.
Analysts remain divided on what the future might hold for the streaming giant.
CFRA maintained its Hold rating on the stock. The firm also lowered its price target by $7 to $16 a share.
“We think WBD lags in a tough competitive TV market facing larger streaming providers,” analyst Ken Leon wrote in a new note.
Cowen analyst Doug Creutz, meanwhile, reiterated his Outperform rating, setting a price target of $24 a share. The analyst credited the conglomerate’s cost-cutting goals, writing that “the company will be managed first and foremost for free cash flow, and we think that is a message that will resonate.”
Warner Bros. Discovery previously said it expects to slash $3 billion worth of costs over the next two years.
As a result, job cuts are largely expected with Ranganathan surmising that “layoffs will be inevitable” as the company maintains a “laser focus when it comes to extracting synergies.”
HBO Max, Discovery+ merger ‘makes sense’
Zaslav provided a bit more clarity on the future of HBO Max during the company’s earnings call. He confirmed that the streaming service will combine with Discovery+ to be one platform, set to launch next summer.
Ranganathan said the move “makes sense” given the portfolio of assets with Discovery leaning towards more global and nonfiction, while HBO Max is compromised of more expensive, higher quality scripted programming.
She added that the decision also makes sense from a financial perspective given the duplicate management costs.
Combining the two entities “makes the product all the more robust — a must-have kind of service, which is exactly what their approach is going to be,” the analyst predicted.
In the interim, the two services will share content. The company provided an update on its programming prior to the announcement, revealing that select content from Chip and Joanna Gaines’ Magnolia Network will arrive on HBO Max in September. It will remain available on Discovery+, as well.
Additionally, CNN will receive its own hub on Discovery+ that will include original series like “Stanley Tucci: Searching for Italy” and “Anthony Bourdain: Parts Unknown.”
Profitability has quickly materialized as a top concern for investors with streaming and production costs continuing to skyrocket.
Amid its cost-cutting agenda, Warner Bros. Discovery revealed that the company is weighing a free, ad-supported streaming plan to attract cost-conscious consumers and reduce churn.
HBO Max and Discovery+ already boast their own respective ad tiers, making the rollout a fairly seamless process; however, Ranganathan warned that the benefits of an ad-supported tier, similar to the company’s streaming endeavors as a whole, will all “come down to execution.”
The company expects to see 130 million global streaming subscribers by 2025. It ended the second quarter with 92.1 million total subscribers, up about 1.7 million from the first quarter. For context, Netflix boasts just over 220 million global subscribers to date.
It’s going to come down to execution…Geetha Ranganathan, Bloomberg Intelligence senior media analyst
Warner Bros. Discovery estimated that EBITDA for global streaming will hit $1 billion by 2025 with the streaming business breaking even by 2024. It expects peak EBITDA loss in streaming by this year.
“There will be volatility but, in the long run, their goals seem very reasonable,” the analyst maintained, explaining that the media conglomerate’s $1 billion EBITDA target feels conservative, in addition to its margin goal of 20% for streaming.
Overall, Ranganathan emphasized that the company won’t have the most successful streaming platform on the market — but, ultimately, that might not matter.
“I don’t think they’re going to be the number one streaming service,” she predicted.
“But that’s okay — as long as they’re able to make money.”
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