What Warner Bros. Discovery Haters Are Getting Wrong
The Takeaway
The share price of Warner Bros. Discovery has sunk to new lows of below $7 in recent days, 73% down from two years ago. That seems to be an overreaction: It’s not difficult to calculate a value of $15 a share, given the value of the different pieces of the company.
If there’s one sector of the stock market that is repellent to investors right now, it’s traditional entertainment. And if there’s one company that sums up how out of favor the sector is, it’s Warner Bros. Discovery.
The owner of HBO, Warner Bros. and the Max streaming service—once one of the premier entertainment businesses in the world—has seen its stock collapse to below $7 in recent days, down 73% in two years. Including its debt, WBD has a total enterprise value of just $54 billion, one-fifth of Netflix’s value.
Investors often go overboard, whether on driving stocks too high or selling them too low, and it looks like the current stock price is a rock-bottom valuation that doesn’t reflect the underlying worth of this company’s jewel, Warner Bros. film studio, or the potential of its Max streaming service. Applying what seem to be very conservative guesstimates to the value of the company’s businesses suggests a valuation of about $74 billion, which translates to a per-share price of about $15.
To be sure, everything appears to have gone wrong for Warner lately—most obviously the TNT cable channel’s loss of rights to NBA games—and it may be a year or two before investors recognize the potential value in the stock. On the current path, the bull case for WBD rests on its prospects for expanding Max overseas, with several major markets still to launch, which will help it become solidly profitable.
WBD CEO David Zaslav could do himself a favor by correcting some of his missteps: He has focused way too much on cost cutting, to the detriment of investing in new programming and marketing. Investors didn’t appear to care that last year he managed to turn WBD’s streaming segment profitable, at least temporarily, even as rivals such as Peacock continued to bleed massive amounts of red ink.
Changing the name of the Max streaming service to reclaim the HBO brand name might also help, reversing the blunder the company made when it dropped its best-known brand from the service.
Otherwise, there’s no getting around the reality that things will be rough for the next year or so, at least until WBD’s cable channels absorb the damage done by losing the NBA rights, which goes into effect in the fall of next year. The NBA is a significant driver of WBD’s cable advertising revenues of $8.3 billion. The NBA rights loss will deprive TNT of one of its most important sports franchises.
Value Breakdown
That loss will only aggravate a long-term decline in the cable channels business, which accounts for the vast majority of WBD’s profits. Those channels are slowly dying as people cut the cable cord or never subscribe in the first place. WBD said in a securities filing last week it was estimating the business would decline 3% a year for the long term. That could be too low a number, given the impact that the loss of the NBA rights might have.
The cable unit’s revenue last year was about $21 billion, translating to earnings before interest, taxes, depreciation and amortization of about $9 billion. For the first half of 2024, however, revenue has fallen 8%, dragging Ebitda down by about the same amount. Valuing the channels is difficult, given the uncertainty of knowing when they will stabilize.
It’s reasonable, though, to assume that some proportion of people subscribing to cable will stick with it. Let’s assume a fair multiple to put on the cable unit is 0.5 times forward revenue, or about $9 billion, using Guggenheim Partners’ projection for the company’s 2025 results.
WBD’s crown jewel asset is the Warner Bros. film and TV studio, which for years has had a leading box office market share, as well as one of the biggest film and TV libraries. The libraries are a major source of licensing revenue—and of programming for WBD’s own TV outlets, such as Max.
The studio would be strategically valuable to lots of companies, such as Apple and Amazon, both to help their video-streaming efforts with new productions and to provide a source of older programming. What’s it worth? One way to measure that is to apply a multiple of profits as measured by Ebitda.
Applying a multiple of 12.2 times expected 2025 Ebitda—where Lionsgate Studios is now trading, according to S&P Global Market Intelligence—puts a value of $30 billion on the studio.
The biggest question mark in valuation surrounds WBD’s streaming segment, including its Max flagship and smaller services like Discovery+. One way of calculating this is to compare Max to Hulu, Disney’s U.S.-only streaming service, which had 46.7 million subscribers as of June 30 (plus a few million more paying for a cable-like service). Hulu has been valued at between $27.5 billion and $42 billion in talks around Disney’s recent buyout of a 33% stake held by Comcast.
In that deal, Disney bought the Comcast stake at a minimum valuation on the whole service of $27.5 billion but with a final price still to be agreed upon. Disney has said it may have to pay up to $5 billion more, implying that the maximum value put on Hulu in the talks was $42 billion. (For more on Hulu’s value, see our piece from late last year).
Let’s assume Disney and Comcast settle on a $35 billion value for Hulu. That gives us a benchmark for WBD streaming, which claimed 103 million subscribers internationally at June 30, with about half of those in the U.S.
Hulu Versus Max
Unfortunately, extrapolating from Hulu’s value to WBD streaming’s value isn’t simple. For one thing, some portion of Max’s subscribers are cable subscribers to HBO, who automatically get Max as part of their HBO subscription. That arguably diminishes their value.
These cable subscribers accounted for two-thirds of Max’s U.S. subscriber base two years ago, immediately before Warner and Discovery merged to create WBD. The merger put Max and Discovery+ together, making it harder to figure out how the Max service is doing. What we do know is that the number of cable subscribers mixed into the Max customer group has been shrinking, thanks to cord cutting. That’s likely one reason why WBD streaming’s overall subscriber count has grown only 12% in two years.
Including the HBO cable subscribers, Max likely has about as many subscribers in the U.S. as Hulu. Max subscribers don’t appear to be actually watching the service as much, though: Nielsen data for June showed that Max has less than half Hulu’s share of the U.S. streaming audience.
Another issue is that while Hulu has been profitable for a while, WBD’s streaming segment has toggled between breaking even and losing money lately. That’s despite the fact that the U.S. business has an average revenue per subscriber close to Hulu’s.
Part of the problem is WBD's international streaming business, where the average revenue per subscriber overseas is under $4, about a third what it is in the U.S. That partly reflects the fact that Discovery+ is sold at a low price in other countries, dragging down the average in some key overseas markets, such as Britain.
Warner’s previous management also sold the HBO Max streaming service (the forerunner to Max) at cut-priced deals overseas, in some cases offering subscribers a lifetime discount or giving distribution partners a big cut of the revenue.
WBD should be able to improve its international economics longer term, by replacing those deals. The company has lately launched Max in Latin America and parts of Europe, including with tiers that carry advertising. And after 2025 it will be able to launch Max in Britain, Italy and Germany, where its programming is now offered through previously arranged deals with satellite operators.
That expansion should lift WBD’s streaming revenue overseas, potentially increasing its subscriber count internationally as well. Given that potential, it seems reasonable to suggest WBD’s streaming segment should be worth at least as much as Hulu.
Let’s put a $35 billion value on WBD’s streaming business. Including the studio and the cable channels, a conservative valuation on WBD would be $74 billion. Deducting WBD’s debt of about $37 billion leaves an equity value of $37 billion, or $15 a share.
Few investors are ready to hear this kind of argument right now. But there’s a good chance that in two or three years’ time, we’ll look back at WBD’s stock price and say it was a raging buy at current levels.