Warner Bros. Discovery Earnings: Hard to Find Any Positives, but the Stock Is Still Overly Penalized

The revenue decline at Warner Bros. Discovery remained severe during the second quarter. The pressure under which linear networks have been operating hasn’t shown signs of abating. Studios revenue continues to struggle. Sales in the direct-to-consumer segment, critical to the firm’s future, declined at a mid-single-digit rate while DTC EBITDA turned negative. Total adjusted EBITDA declined at nearly three times the rate of total sales. Uncertainty about the recent loss of NBA television rights causes concern that the decline in Warner’s linear television business will spiral more quickly. However, while adjustments we’ve made to reflect the NBA decision and some near-term cost pressures led us to cut our fair value estimate to $17 from $20, we still think there is significant value in Warner Bros. Discovery that the current stock price doesn’t adequately reflect. We don’t expect major near-term improvement in operating performance and don’t see obvious catalysts within the next year. However, we see value in Max and the firm’s studios and agree with management’s strategy. We rate Warner as a Very High Uncertainty company, but we expect the value to be unlocked eventually.