Warner Bros. Discovery (NASDAQ: WBD) stock price will be in the spotlight this week as the company publishes its financial results on Thursday. These numbers will give investors more information about its streaming business and its market share gains or losses. The stock was trading at $7.9 on Monday, down from its all-time high of near $80.
Warner Bros. Discovery is undervaluedWBD is one of the most undervalued names in the media industry. This undervaluation is understandable because of the company’s mountain of debt and its ownership of legacy television brands that have lost significance today.
For example, while niche brands like HGTV and Cooking Channel were hot a few years ago, not many people watch them these days. The situation is worse among young people who are getting most of their content in social media networks.
Still, a closer look at Warner Bros shows a company that is severely undervalued on a sum-of-parts basis. This is a valuation approach where one looks at different parts of the company independently and then adds the figures.
Warner Bros has a market cap of $19.5 billion and over $3.8 billion in cash and equivalents. It also has over $41 billion in debt. While this debt load is hefty, the company has slashed it by over $7 billion in the past few years.
A high debt load is a big liability for Warner Bros since it limits its content investments as it seeks to compete with the likes of Netflix, Comcast, Paramount, and Disney.
Let’s unpack some of Warner Bros empire. First, there is the Max service, which is an alternative to Netflix. The most recent financial results showed that its direct-to-consumer business had over 97.7 million subscribers and brought over $2.5 billion in revenue or $25.5 per customer.
In the same period, Netflix made $8.8 billion from its 260 million subscribers or $33.3 per customer. Netflix has a market cap of $257 billion. Therefore, comparing the two means that Max has a bigger valuation than what Warner Bros is valued today.
Keep in mind that Max is available in just a few countries while Netflix is in most countries. Warner plans to increase the number of countries to about 65 later this year. That increase will lead to more subscribers and revenue in the coming quarters.
The other segment is its Warner Bros, its studio business, which I also believe has a significant valuation. Warner Bros is known for some of the top blockbusters like Dune, Godzilla X Kong, Shazam, Barbie, and The Matrix.
One way to value Warner Bros is to compare it with MGM, a studio that Amazon bought for over $8.5 billion. I believe that Warner is a significantly bigger brand than MGM because of its track record and its movie library.
Warner also owns some valuable TV brands that could fetch a high valuation. For example, while CNN’s business is dwindling, it is still a money machine that makes almost $1 billion in annual profits. If it were to be sold, I believe that the company would fetch a few billion dollars. For example, Fox Corporation is valued at over $14 billion.
The other valuation angle to consider is that Paramount is being sold for over $26 billion. Warner is a bigger brand than Paramount. In 2023, the company made over $41 billion in revenue against Paramount’s $29 billion.
To be clear: a sum of parts valuation is not always a good approach to value companies. In Warner’s case, it only makes sense if the management decides to spin off or dispose of its assets. Also, these valuations are also offset by some television brands in its portfolio.
Also, its stock performance will depend on its earnings and Max user growth. As such, even if it is undervalued, the stock could continue falling if its earnings are not all that good. Analysts expect its revenue to come in at $10.2 billion.
Warner Bros Discovery stock analysis
Turning to the weekly chart, we see that the WBD share price has moved sideways in the past few weeks, signaling that the bearish momentum is fading. Most importantly, the stock has formed a falling wedge pattern, which is nearing its confluence level.
In price action analysis, this is one of the most bullish patterns in the market. Therefore, there is a likelihood that the stock will bounce back in the next few weeks. If this happens, it could move above the psychological level of $10.
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