Warner Bros (WBD) stock is undervalued: is it a value trap?

Warner Bros. Discovery (NASDAQ: WBD) stock price has been a big disappointment in Wall Street as concerns about its streaming and cable business continue. It has plunged from an all-time high of $78 to about $13, pushing its valuation from over $50 billion to $19 billion today.

WBD is one of the biggest companies in the media industry. It owns well-known brands like CNN, Discovery Channel, HBO, and Oprah Winfrey Network (OWN). It also owns the production house for well-known franchises like Superman, Harry Potter, and Game of Thrones.

The biggest challenge for WBD is that it owns many television brands that are now widely seen as toxic assets because of the ongoing trends in the cable industry. Recent data shows that many Americans are canceling their cable subscriptions. A study found that 30% of Americans with cable planned to cancel them.

Additionally, many families have opted to watch content from platforms like Netflix, MAX, and YouTube. Many young people are no longer interested in television as they focus on short-form videos by companies like TikTok and Instagram. These trends are having an impact on the revenues it makes from cable companies and advertisements.

The most recent financial results showed that its revenue in the fourth quarter dropped by 7% to $10.2 billion. It also made a $400 million loss because of last year’s strikes and $1.7 billion in armotisation costs. 

Looking by segment, its studio division’s revenue dropped by 18% to $3.1 billion while its television network’s revenue figure crashed by 8%. It attributed that to distribution, advertising, and content revenue retreat.

The only business that did well was its direct-to-consumer, which is made up of HBO, Max, and Discovery+. It ended the quarter with over 97.7 million subscribers. The company plans to expand its streaming services to several international markets.

Warner Bros. Discovery earnings

Warner Bros. Discovery faces many challenges, including its mountain of debt, which stood at $39.9 billion. Still, the company has made progress since its total debt stood at almost $50 billion when the merger was completed. 

The company faces $1.8 billion in maturities this year followed by $3.1 billion, $2.3 billion, and $4.7 billion in the next three years respectively. It had a free cash flow of over $6 billion in 2023, meaning that it will be able to cover its maturities well. 

Despite its challenges, there is a sense in which the company is severely undervalued. A good example of this is Paramount Global, a smaller company than WBD. PARA has a market cap of over $8 billion while Apollo submitted a buyout deal valuing it at over $26 billion. It is unclear the amount of money that Paramount will eventually be sold for. What is clear is that WBD is more valuable than Paramount, meaning that its valuation should be higher.

A sum of parts calculation shows that the company is trading at a discount. For example, Netflix has over 269 million subscribers and a valuation of over $241 billion. That values each subscriber at $896. 

If we applied a lower figure, say $300,  to WBD’s streaming business, it means that the division would be valued at $29.3 billion. And that is its streaming business alone. While its cable business is struggling, buyers are willing to own some of its popular brands. 

Last year, Byron Allen attempted to buy BET and VH1 in a $3.5 billion. He also attempted to buy Disney’s television networks like ABC and National Geographic for $10 billion.

WBD chart by TradingView

Turning to the daily chart, we see that the WBD stock price has been in a strong bearish trend since going public. It has constantly remained below all moving averages, meaning that sellers are solidly in control.

The stock has plunged below the key support at $8.80, its lowest swing in December last year. At the same time, the MACD indicator has formed a bullish divergence pattern, which is a positive sign.

Warner Bros stock has also formed a falling wedge pattern. Therefore, there is a possibility that the stock will bounce back in the coming months. If this happens, the next point to watch will be the upper side of the wedge pattern at around $11.

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