Max Will Expand Internationally, Increasing Subscribers And Reinforcing Industry Leadership

Key Takeaways

• Warner Bros. Discovery's streaming expansion and integration of sports and news aim to boost subscriber engagement and direct-to-consumer revenue.
  
• Strategic renewals and a new corporate structure seek to increase earnings, stabilize revenue, and unlock shareholder value.
  
• Challenges in television performance, ARPU pressures, high sports expenses, and debt management could constrain growth and profitability across business segments.

Catalysts

Operates as a media and entertainment company worldwide.

• Warner Bros. Discovery anticipates significant international expansion of its streaming service, Max, with a path to 150 million subscribers by 2026, expected to increase revenue and EBITDA.
  
• The company is focused on reinforcing industry leadership in its Studios division, targeting over $3 billion in EBITDA, which could bolster overall earnings.
  
• Recent affiliate renewals with major pay-TV providers include rate increases and longer-term agreements, providing stability and potential growth in revenue from linear television.
  
• Implementation of a new corporate structure aims to enhance strategic flexibility, potentially unlocking shareholder value and improving net margins.
  
• Efforts to integrate sports and news distribution within Max, along with experimenting with international models, aim to enhance user engagement and potentially increase revenue from direct-to-consumer services.

Warner Bros. Discovery Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Warner Bros. Discovery's revenue will decrease by 0.6% 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 -28.8% 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 $4.0 billion (and earnings per share of $1.61) by about April 2028, up from $-11.3 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 11.5x 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

• Challenges in the linear television segment, including weaker-than-expected ad sales and sub decline, could negatively impact network revenues and overall earnings.
  
• Potential ARPU pressures from international expansion and hard bundle deals may affect revenue growth in the direct-to-consumer segment.
  
• Significant expenses related to sports rights, including transitional costs and competitive pressures, could constrain net margins until cost savings are realized in later years.
  
• Debt management remains a priority, but any further increase in interest rates or challenges in achieving financial targets could impact free cash flow and balance sheet metrics.
  
• Delays or issues in realizing the projected subscriber growth and market expansions internationally could impede expected revenue growth and profitability in the direct-to-consumer business.

Valuation

• The analysts have a consensus price target of $13.358 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 $24.0, and the most bearish reporting a price target of just $7.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $40.1 billion, earnings will come to $4.0 billion, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 11.4%.
• Given the current share price of $7.92, the analyst price target of $13.36 is 40.7% 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.