Warner Bros. Discovery (NASDAQ:WBD) is slightly higher in a mixed Communication Services market after being termed the “best value in media” by BofA Global Research.
The company has implemented a “tremendous amount” of operational and strategic changes since April’s merger combined AT&T’s WarnerMedia with Discovery, analyst Jessica Reif Ehrlich said – and she anticipates WBD can deliver on a 2023 goal of $2B-plus in incremental synergy, with a longer-term target of more than $3.5B.
“In our view, there is a lot of low hanging fruit in almost every division where they can be more efficient (structure and costs) and monetize better (advertising and subscriber fees) by offering consumers a better product,” Reif Ehrlich says.
Near-term priorities include locking the company’s creative team in place, executing on the launch of a new streaming platform combining HBO Max with Discovery+ in the spring, and “shortly after” launch a free ad-supported TV service to tap a “uniquely large and under-monetized library,” she said.
Meanwhile, the area of greatest potential surprise is in Warner Bros. films – if the company can “maximize” its DC Universe, a goal that’s eluded earlier teams, she notes.
The new WBD is “finally” starting to maximize the value of sports content by putting sports and news along with entertainment under one unified ad sales force, she says. (She adds that the NBA media rights bidding coming after 2024-2025 will be “critical” to profitability, and it’s likely that incumbents Turner and ESPN (DIS) are unlikely to pay the expected boosts, suggesting the package will be split among several).
A primary reason for stock underperformance – WBD stock has halved since April – is high leverage, and the number of assets that could be shed to deleverage is underappreciated, Reif Ehrlich says, pointing to under-utilized and nonstrategic assets including “multiple cable networks, libraries, real estate, games.”
The risk/reward looks attractive for the long term, she concludes, and reiterates a Buy rating with a price target of $21 (currently implying 96% upside).
The company made a move to boost subscribers by returning its HBO Max to Amazon’s Prime Video Channels offering after more than a year away.