Warner Bros. Discovery's stock is at a 15-year low, and this former bull is jumping ship

By Emily Bary

'It sounds bad and it is,' a Bernstein analyst says as he downgrades the media and entertainment giant's stock

Shares of Warner Bros. Discovery Inc. are trading at 2009 levels, but a former bull doesn't see much upside from here.

Bernstein's Laurent Yoon mentioned "heightened uncertainties" as he cut his rating on the media stock to market-perform from neutral. He also reduced his price target to $8 from $10.

Warner Bros. Discovery shares (WBD) closed the last two sessions at $6.71, which is their lowest finish since February 2009, according to Dow Jones Market Data, taking into account trading action of Discovery from prior to the company's merger.

Yoon noted that the media and entertainment giant's latest earnings showed an elevated leverage ratio of around 4 times. The company has been able to reduce the absolute value of its debt, but the leverage ratio has remained stubborn, as earnings before interest, taxes, depreciation and amortization is down.

Read: Warner Bros. Discovery faces gloomy post-NBA future as company takes $9.1 billion charge

"It sounds bad and it is," he wrote in his downgrade. "While there are some nuances, such as comps, the market reaction is reflective of the very little patience investors have for [Warner Bros. Discovery] given the ongoing deterioration."

One high-profile uncertainty facing the company involves the high likelihood that its TNT business will lose National Basketball Association rights, although the company is fighting this. Warner is adding other programming, like French Open content, but that's "not quite the NBA," according to Yoon.

"There are several puts and takes here, but at the end of the day, less appealing programming means less revenue," he wrote. "It's a capital allocation issue ... but each cycle is (too) long to rebuild investor confidence in the near-term."

Read: Paramount slashes staff, follows WBD in taking big charge on TV network business

Elsewhere, Yoon wondered if Warner will be able to hit its goal for $1 billion in direct-to-consumer Ebitda next year, as the company is at "basically zero today." Warner Bros. Discovery operates the Max and Discovery+ streaming services.

"While we are encouraged by the traction they are seeing in advertising and in newly re/launched markets in [Latin America] and Europe, we remain cautious given the accelerated growth and/or margin expansion required to reach the $1 billion target," Yoon wrote.

Warner Bros. Discovery was formed in 2022 from the combination of WarnerMedia and Discovery, and Yoon flagged that the company's shares, along with those of Paramount Global (PARA), have been the worst performers in media since that merger.

"This is quite disappointing given the quality of [Warner Bros. Discovery's intellectual property] and studios," he wrote.

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-Emily Bary

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08-13-24 0937ET

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