Max Will Expand Globally With Renewed PayTV Partnerships

Key Takeaways

• International expansion and strategic partnerships aim to boost revenue and subscriber growth, enhancing market penetration and operational efficiency.
  
• Focus on Direct-to-Consumer profitability and sports rights strategies could significantly increase earnings and maintain profitability with stable costs.
  
• Warner Bros. Discovery faces profitability challenges due to high sports content costs, pressure on ARPU, and competition in a fragmented streaming market, impacting long-term financial targets.

Catalysts

Operates as a media and entertainment company worldwide.

• Warner Bros. Discovery plans to launch Max in international markets like the U.K., Italy, Germany, and Australia, aiming for global expansion and estimating 150 million subscribers by the end of 2026, likely increasing revenue and EBITDA through subscriber additions and market penetration.
  
• The new corporate structure implemented as of January 1 is expected to enhance strategic flexibility and create potential opportunities for unlocking additional shareholder value, potentially improving net margins and operational efficiency.
  
• The company has secured multiyear renewal agreements with major pay-TV providers, which promise overall rate increases and provide stability to the linear business, impacting revenue positively despite industry headwinds.
  
• Warner Bros. Discovery is focusing on enhancing the profitability of its Direct-to-Consumer segment, with expectations for EBITDA to nearly double in 2025, directly boosting earnings from its streaming operations.
  
• Strategic decisions around sports rights and bundling partnerships are seen as opportunities to drive subscriber growth and revenue without significantly increasing costs, maintaining profitability and possibly leading to higher net margins.

Warner Bros. Discovery Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Warner Bros. Discovery compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Warner Bros. Discovery's revenue will grow by 2.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -28.2% today to 1.2% in 3 years time.
• The bullish analysts expect earnings to reach $490.8 million (and earnings per share of $0.2) by about August 2028, up from $-10.8 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 bullish analyst cohort, the company would need to trade at a PE ratio of 161.2x on those 2028 earnings, up from -2.9x today. This future PE is greater than the current PE for the US Entertainment industry at 27.2x.
• Analysts expect the number of shares outstanding to grow by 0.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Warner Bros. Discovery Future Earnings Per Share Growth

Risks

• Warner Bros. Discovery's strategy of leveraging its global streaming service, Max, faces challenges due to the high cost of sports rights, which could impact profitability and EBITDA growth.
  
• Although there is potential for international subscriber growth, the company anticipates near-term pressure on average revenue per user (ARPU), particularly due to pricing concessions in new markets, which could suppress revenue growth.
  
• The weakening performance of the Network segment, particularly in domestic linear television, could continue to challenge revenue stability despite new affiliate agreements, which may not offset subscriber declines.
  
• The reorganization and restructuring efforts might involve complex financial implications, such as tax issues and operating efficiencies, which could impact net margins and create uncertainty in achieving projected EBITDA targets.
  
• The highly competitive and fragmented nature of the streaming industry raises concerns about achieving projected subscriber targets, which could affect long-term revenue and EPS growth if bundling strategies and content investments do not yield expected results.

Valuation

• The assumed bullish price target for Warner Bros. Discovery is $21.97, which represents two standard deviations above the consensus price target of $14.63. 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 bullish 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 $10.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $41.4 billion, earnings will come to $490.8 million, and it would be trading on a PE ratio of 161.2x, assuming you use a discount rate of 12.3%.
• Given the current share price of $12.72, the bullish analyst price target of $21.97 is 42.1% 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.