What’s the Path for Warner Bros. Discovery After Dismal Earnings, Sunk Stock Price and Shrinking Options? | Analysis

With Warner Bros Discovery’s stock price hovering near a 52-week low and a humiliating second quarter earnings in which the company took a $9 billion write-down on its linear assets, CEO David Zaslav needs to make a move to shift the fortunes of his listing entertainment conglomerate.

The question is: What moves are left?

The stakes are high. Zaslav has presided over a stunning 70% decline in the company’s stock price since the April 2022 merger between WarnerMedia and Discovery. And now WBD is on the brink of losing a massive NBA deal to competitors Amazon and Comcast, which will negatively impact lucrative cable carriage deals.

The once-mighty company’s market cap now stands at $17.75 billion, down from $27.39 billion at the end of 2023 and well-off the $280 billion market cap of AT&T in 2019, who sold off the WarnerMedia assets to Discovery.

Analysts, studio insiders and Hollywood investors who spoke to TheWrap suggested Zaslav’s options are limited, with the company weighed down by $41.4 billion in gross debt and after two solid years of cost-cutting moves.

Zaslav has indicated that the media giant will ramp up its streaming growth efforts to offset linear TV’s declines through an international expansion of Max, more bundling and continued price increases.

But observers said that is not likely to yield sufficient growth in the tight time frame facing the CEO. Other options include selling assets to raise cash and pay down the debt, or another financial deal that could include anything from an outright sale to a merger with another entity.

“None of the options facing WBD are great right now,” Ross Benes, a senior analyst at eMarketer, told TheWrap. “WBD will try to M&A its way out of its issues. But the AT&T and the Discovery mergers were financial disasters, so investors should take caution before buying into ‘synergies’ of any proposed merger.”

The company has already considered and rejected splitting off its debt and linear TV business from its studio and streaming businesses, concluding that would lead to lawsuits, according to a company insider.

“The loss of value has been so remarkable,” said a leading entertainment industry investor who declined to be named. Warner, he said, still has some of the greatest assets in Hollywood, and Zaslav should lean into those by investing in content.

“HBO is still the greatest programming team around,” said this observer. “Compared to Netflix, their hit rate is unbelievable. I would double down if I were him.”

Warner Bros. Discovery declined to comment for this story.

Is Zaslav’s job at risk?

Zaslav has made plenty of enemies in Hollywood as well as Wall Street. He has angered creatives by cancelling completed movies to get a tax write-off, and by removing content from streaming services as a cost-saving measure. He infamously said Warner didn’t need the NBA, and now finds himself in a lawsuit with the basketball league after its proposal to match Amazon’s $1.8 billion per year package of games was rejected.

Despite all that, one senior insider told TheWrap there is no particular momentum for him to step aside.

“The whole company, the structure, the staff is built around him,” this person said. “Taking him out would be a huge operational disruption.”

Zaslav, who was previously the CEO of Discovery from 2006 onward , has long been protected by his relationship with billionaire John Malone, who was a key shareholder in Discovery, owns 11 million shares of WBD and sits on the board.

“On paper, he could have been forced out already or placed under activist investor pressure, but that hasn’t happened,” Benes said. But he expects any calls to replace him will only grow louder if Warner loses its NBA lawsuit.

Moody’s Ratings senior vice president Neil Begley told TheWrap that while losing the NBA is a “pretty big” mistake, he’s not convinced that would be enough to threaten Zaslav’s position. But Begley acknowledged the pressure he’s under to turn the business around and scale streaming.

“At some point, this strategy is either going to come through and make him look like he’s a hero or he’s going to flop around for a while. It’s not always a straight line from here to there and Netflix zigged and zagged quite a bit,” Begley said.

But the WBD board could soon grow weary of all the time the company has squandered if the strategy doesn’t bear fruit, the Moody’s analyst added. “By the end of next year, we should have a good sense for whether it’s working or not,” he said.

Warner’s plan to boost streaming

Warner currently boasts 103.3 million direct-to-consumer subscribers and has forecast it will reach streaming EBITDA of at least $1 billion in 2025. Though it reported a DTC profit of $103 million in 2023 and $86 million in the first quarter of 2024, the segment posted a loss of $107 million in its second quarter, a huge jump from a $3 million loss in the prior-year period. The segment’s results includes Max, Discovery+ and traditional HBO cable subscriptions.

During WBD’s earnings call, Zaslav emphasized that the company would focus on expanding Max internationally over the next 18 to 24 months. The service is currently in 65 international markets, but is still not present in nearly half of global addressable markets, including Australia, Japan, the United Kingdom, Germany and Italy.

The company also will expand the role out of its ad-lite tier, which has launched in 39 markets across Latin America and a handful of European countries. And WBD is “reimagining” existing partnerships with international distributors of its linear channels to further support the expansion of Max, the CEO said.

“These partnerships help get Max on the devices of more consumers, faster and at a fraction of the acquisition cost,” Zaslav added. “We’ve done more than 150 of these deals to date in Europe and in Latin America, and you’ll begin to see them really pay off, and we have more to come.”

While Begley praised the move to expand internationally, emphasizing its importance to reaching scale, he warned that the company also needs to double down on its investment in original content.

“There’s a cost to launching these businesses, but are they going to essentially do what they appear to have been doing in the U.S., which is really not investing significantly in new content and relying just on licensed and library content?” Begley said. “Or are they going to really try to drive the subscription growth by investing in original content, both exported out of Hollywood, as well as locally produced in each of these markets that they’re going into?”

Warner Bros. Discovery has been a proponent of bundling, with Max recently teaming up with Hulu and Disney+. Subscribers for Venu Sports, its planned joint venture with Fox and Disney, will also have the option to bundle the service with Max. Venu is slated to launch in the fall, subject to regulatory approval, though its launch could at the very least be delayed in the event Fubo is successful in its antitrust lawsuit attempting to block the offering.

WBD also plans to start cracking down on password sharing by the end of the year , with a broader rollout in 2025, and recently raised prices in the United States on Max’s ad-free tiers.

In a research note, Wolfe Reseach’s Peter Supino agreed that scaling the DTC business and transitioning viewership from linear to streaming is the “next best option” after a possible break-up — and the right long-term path for the company. But he warned the loss of the NBA coupled with affiliate fee renewals coming up in 2025 will make that transition “long and challenging.”

Will M&A save the day?

Warner Bros. Discovery is reportedly considering sales of smaller assets , such as Polish broadcaster TVN or a stake in its gaming division. Bank of America has said spinning off those two assets could be worth $3.5 billion and $5.6 billion, respectively.

While many have suggested also offloading CNN — Ehrlich has estimated the network could be worth $6 billion spun off — WBD management remains against a sale, with an insider emphasizing it is part of the company’s “core thinking.”

Wall Street has also long pondered the possibility of Comcast acquiring WBD in an outright sale. Begley believes Comcast CEO Brian Roberts would covet a lot of Warner’s assets and that a transaction could be done in the next couple of years. But Roberts likely wouldn’t want to overpay or catch a falling knife given that the majority of WBD’s cash flow is tied to linear, the analyst added. Outside of Paramount Global, WBD has the most exposure to linear, with its networks segment making up $5.27 billion of the company’s $9.7 billion in revenue reported during its second quarter of 2024.

“If he’s going to make a run at it, he’s going to wait until it’s the optimal valuation,” Begley said. “By ripping [the NBA] away from Warner Bros. Discovery, it may accelerate that knife that’s falling to get to a point where maybe you reach that optimal valuation point sooner… Brian Roberts likes to build through acquisition more than he does organically.”

Comcast and NBCU are also likely to face less regulatory scrutiny and less overlap than some other potential combinations since they don’t have broadcast network assets in their portfolios, S&P Global streaming analyst Seth Shafer told TheWrap.

Tech companies or private equity firms could also be potential buyers, Shafer added. “But there still seems to be some hesitancy in general for buying traditional media companies with heavy exposure to the traditional linear TV world given the ongoing declines we’re still seeing there due to cord cutting and an overall shift to streaming.”

Though Benes agreed that Warner could become an attractive takeover option if its value keeps declining, he argued it would make more sense for Comcast to pull out of the linear business rather than go deeper.

Roberts himself has previously stated that the company has a “high bar” when it comes to M&A deals.

Keeping their heads down

For now, WBD is staying heads down, continuing to reduce its debt, grow streaming and look for where it can be opportunistic, the insider said. Outside of streaming, WBD’s executives touted its Studios division and particularly the DC brand as areas for growth and opportunity.

“There’s a recognition that on one hand we have some of the best brands and assets in the world. We’re way undervalued right now,” the insider said. “There’s no magic bullet, no flip of the switch that makes this immediate.”

“None of the options facing WBD are great right now,”

Ross Benes, senior analyst at eMarkete

Zaslav told analysts last week that while the company feels “very good about where we are,” they are also open to opportunities surrounding M&A or other strategic partnerships.

“We have to look at all, and consider all options, but the number one priority is to run this company as effectively as possible,” he said. “And you will see as our studio begins to grow, and if our global direct-to-consumer business scales the way we believe it’s going to, then that’ll be very apparent to investors, and we expect that will create shareholder value.”

Over the next five years, WBD has a “ton of firepower,” the insider said, estimating the company could have about $45 billion to $50 billion of EBITDA to play with and “plenty of free cash flow to help this transition.”

The Hollywood investor said that Zaslav needs to invest much more heavily in the quality content that will drive loyalty to his streaming platforms. Warner has more than double the monthly churn rate of Netflix — 7% — and he attributes that to a dearth of buzzy, culturally relevant content.

“There’s a direct correlation between what you spend on programming and churn,” said the investor. “The guys that spend the most have the least churn, and that’s because you’re always waiting for the next thing.”

Begley emphasized that the future of Warner and its legacy media competitors depends on how well they can manage their declining linear businesses, and that figuring out the right strategies to do so is an “existential issue.” He warned that if WBD is serious about leaning into the growth of the DTC business, the company’s financials, debt and credit metrics in the near-term will likely get worse before they get better.

“This company has the cash flow and it has the assets. The only excuse they have is that they’ve only had a year or two now to really work with it,” Begley added. “It takes time.”

The post What’s the Path for Warner Bros. Discovery After Dismal Earnings, Sunk Stock Price and Shrinking Options? | Analysis appeared first on TheWrap .