Cost Reduction And Max Platform Expansion Will Strengthen Net Margins And Reduce Debt

Key Takeaways

• Focus on cost reduction and subscriber growth is set to improve margins, enabling debt reduction and impacting earnings positively.
  
• Strategic expansion in streaming and international markets boosts revenue potential and supports long-term profit goals.
  
• Key operational challenges in TV and studio segments, along with intense competition, could hinder Warner Bros. Discovery’s revenue growth and long-term earnings targets.

Catalysts

Operates as a media and entertainment company worldwide.

• Warner Bros. Discovery is focused on reducing its expense base and increasing free cash flow conversion, which is expected to enhance net margins and facilitate debt reduction, ultimately impacting earnings positively as the company pays down more than $16 billion in debt.
  
• The global rollout and development of the direct-to-consumer platform Max, with strong progress in driving subscriber growth, is anticipated to lead to significant revenue and profitability growth. This focus on expanding their streaming service is expected to have a favorable impact on future revenue and EBITDA.
  
• The optimization of Warner Bros. Discovery's Networks business, including innovative agreements like the renewal with Charter Communications, aims to stabilize and potentially grow traditional network revenues, supporting overall financial stability.
  
• Efforts to return the Studios business to industry leadership through strategic focus on core franchises in gaming and more consistent output in film and television are expected to improve earnings consistency and contribute to long-term profit growth.
  
• The investment in and expected profitability from international expansion, including partnerships and innovative bundling, should enhance revenue growth, supporting the target to exceed $1 billion in EBITDA for the D2C segment by 2025.

Warner Bros. Discovery Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Warner Bros. Discovery's revenue will grow by 1.0% annually over the next 3 years.
• Analysts are not forecasting that Warner Bros. Discovery will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Warner Bros. Discovery's profit margin will increase from -28.4% to the average US Entertainment industry of 8.5% in 3 years.
• If Warner Bros. Discovery's profit margin were to converge on the industry average, you could expect earnings to reach $3.5 billion (and earnings per share of $1.39) by about February 2028, up from $-11.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.8x on those 2028 earnings, up from -2.2x today. This future PE is lower than the current PE for the US Entertainment industry at 26.2x.
• Analysts expect the number of shares outstanding to grow by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

Warner Bros. Discovery Future Earnings Per Share Growth

Risks

• Warner Bros. Discovery faces challenges in its U.S. linear television business, which is an important profit generator, potentially impacting future earnings and funding for other growth initiatives.
  
• The company’s studio operations exhibit inconsistency, with underperformance and significant game-related impairments impacting net margins, requiring focused improvements for consistent contributions to financial results.
  
• Competitive pressures and complex rollout requirements in the global direct-to-consumer market pose risks, potentially affecting subscriber-related revenue growth and long-term earnings targets.
  
• The company is required to balance investments for international expansion and subscriber acquisition with profitability goals, impacting immediate free cash flow and net margin forecasts.
  
• Challenges in the game business, compounded by write-downs due to underperforming releases, could continually affect Studios' segment profitability and pose risks to future earnings contributions.

Valuation

• The analysts have a consensus price target of $12.983 for Warner Bros. Discovery based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $22.0, and the most bearish reporting a price target of just $9.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $40.8 billion, earnings will come to $3.5 billion, and it would be trading on a PE ratio of 12.8x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $10.16, the analyst price target of $12.98 is 21.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.