Direct-to-consumer Streaming Expansion Will Unlock Global Opportunity

Key Takeaways

• Expansion into underrepresented international markets and strategic content focus are driving subscriber and revenue growth for Warner Bros. Discovery's streaming segment.
  
• Corporate restructuring and strategic partnerships aim to unlock shareholder value while maintaining earnings amid the decline in traditional television.
  
• Warner Bros. Discovery faces revenue and margin challenges from linear TV decline, streaming ARPU pressures, costly international growth, and potential restructuring risks.

Catalysts

Operates as a media and entertainment company worldwide.

• The expansion of Warner Bros. Discovery's direct-to-consumer segment is projected to add a significant number of subscribers internationally, particularly in underrepresented regions such as the U.K., Italy, Germany, and Australia, which is expected to increase revenue.
  
• The company's focus on high-quality content for its streaming service, along with strategic sports licensing, sets a stage for increased subscription growth and diversified revenue streams, potentially impacting net margins positively.
  
• Strategic partnerships and renewals with major distributors for linear channels, ensuring rate increases, provide stability and may moderate the impact of the decline in traditional television, which should help maintain earnings.
  
• The ongoing corporate restructure aims to better highlight the profitability of Warner Bros. Discovery's studios and streaming business, which could unlock shareholder value and improve financial metrics like EBITDA.
  
• A targeted sports strategy with selective investments ensures controlled spending, allowing for more predictable margin growth and the potential to refocus on areas that generate higher returns, thereby positively influencing net margins.

Warner Bros. Discovery Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Warner Bros. Discovery compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Warner Bros. Discovery's revenue will decrease by 2.1% annually over the next 3 years.
• The bearish 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 -28.8% to the average US Entertainment industry of 9.9% in 3 years.
• If Warner Bros. Discovery's profit margin were to converge on the industry average, you could expect earnings to reach $3.7 billion (and earnings per share of $1.49) by about April 2028, up from $-11.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.2x on those 2028 earnings, up from -1.7x today. This future PE is lower than the current PE for the US Entertainment industry at 24.0x.
• Analysts expect the number of shares outstanding to grow by 0.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Warner Bros. Discovery Future Earnings Per Share Growth

Risks

• The ongoing linear television pressures, highlighted by Warner Bros. Discovery executives, suggest a potential decline in this area, which could lead to impacts on future revenue stability and net margins.
  
• Although the company is achieving growth in its direct-to-consumer (DTC) streaming business, there are concerns about the impact of potential rate and ARPU pressures due to expansion into lower ARPU regions, which may affect revenue per user and overall streaming revenue.
  
• Continued dependency on sports and news, discussed as an experimental strategy in streaming, might result in short-term revenue volatility and potentially impact the net margins if the strategy fails to attract sufficient new subscribers.
  
• The need for substantial international growth amidst growing competition globally might strain Warner Bros. Discovery’s financial resources, affecting earnings if the expected number of subscribers does not materialize.
  
• The commentary around potential restructuring and project work related to corporate restructuring poses execution risks and might lead to unforeseen reorganization costs, impacting net earnings in the near term.

Valuation

• The assumed bearish price target for Warner Bros. Discovery is $9.84, which represents one standard deviation below the consensus price target of $13.36. This valuation is based on what can be assumed as the expectations of Warner Bros. Discovery's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $24.0, and the most bearish reporting a price target of just $7.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $36.9 billion, earnings will come to $3.7 billion, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $7.92, the bearish analyst price target of $9.84 is 19.5% 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.