Warner Bros. Discovery's Long-Term Potential Undervalued: BofA Analyst

BofA analyst Jessica Reif Ehrlich reiterated a Buy rating on Warner Bros. Discovery, Inc WBD with a price target of $21.

The analyst anticipates WBD's 3Q results to largely reflect recent trends. The macro-environment remains choppy, albeit modestly improving Q/Q in advertising, and the various strikes are impacting studio results. Conversely, FCF generation will be robust (aided by the strikes), which will help accelerate the company's deleveraging plans. 

Ehrlich's 3QE revenue is now $9.8 billion (vs. $10.0 billion previously), and our 3QE adjusted EBITDA is now $2.96 billion (vs. $3.20 billion previously). 

Key revenue drivers include Studio revenue growth of 10% (vs. 15% previously), reflecting the strength of Barbie. 

At Networks, Ehrlich forecasts an 8% decline (-6% previously), reflecting the challenging, albeit modestly improving Q/Q advertising environment, and moderating forecasts in content, DTC revenue growth of +8% (unchanged) reflecting estimated global net adds of 1 million. 

The analyst expects the Actors' strike to resolve in the coming weeks. While the strikes provided a near-term benefit to FCF, Ehrlich is encouraged the industry to return to work, especially for WBD, which is among the most prominent content creators in the industry. 

For WBD, the analyst expects the company to maintain their recently revised guidance, as it may take several weeks/months to ramp content production fully. 

However, the few months leading up to year-end will enable the company to enter CY24 at more normalized output levels and insulate the financial impact on CY23 results. 

Ehrlich lowered her CY23 adjusted EBITDA forecast to $10.7 billion (from $11.1 billion) to reflect updated guidance of $10.5 billion - $11 billion. 

The analyst significantly increased her 3Q and CY23 FCF to $2.0 billion and $5.2 billion, respectively (vs. updated CY23 guidance of "at least $5 billion"). 

The analyst remains bullish on the long-term potential of WBD and views the current valuation as very compelling. 

The upcoming catalysts include robust FCF generation, which should accelerate deleveraging, incremental merger-related synergies, and Max rollout in Latam with the rest of the world in 2024.

Price Action: WBD shares traded lower by 3.82% at $10.45 on the last check Monday.