Company Overview

Warner Bros. Discovery, Inc. (WARNER BROS) emerged from the merger of Discovery, Inc (Discovery) and the WarnerMedia Business of AT&T in April 2022. Discovery, a global entertainment company, started broadcasting through its Discovery Channel in 1985. The history of WarnerMedia in the American entertainment industry dates back to the 1920s. WARNER BROS has become a media conglomerate with interests in film production, game development, television networks, premium pay-TV and streaming services. The company owns popular brands such as CNN, Discovery Channel, Warner Bros. Motion Picture Group, Warner Bros. Television Group, HBO Max, Eurosport, Warner Bros. Television Group, Warner Bros. Games and Cartoon Network. The company’s shares are traded on the Nasdaq Stock Exchange in the US.

WARNER BROS has been committing a lot of resources to the expansion of the subscriber base of its streaming service, MAX. MAX is now being streamed in over 70 countries with plans to extend its services to major markets in countries like the UK, Italy, Germany and Ireland.

Samuel A. Di Piazza, Jr chairs the board of directors of the company; he was director of AT&T before he was named chairman of WARNER BROS in 2022. David Zaslav is the President and Chief Executive Officer (CEO) of WARNER BROS. Mr. Zaslav, as the CEO, is in charge of the company’s operations.

Investment Thesis

WARNER BROS has a global reach with its comprehensive content portfolio of news, sports, lifestyle and entertainment. It has three business segments, namely Studios, Networks and DTC (Direct To Customers). The Studios segment produces and distributes films, television and interactive games. WARNER BROS’s television networks are under its Networks business segment while the DTC segment comprises premium pay-TV and streaming services.

WARNER BROS is a reputable media and entertainment company with well-known television networks such as CNN, Discovery Channel and Cartoon Network. The television networks have been the primary source of its earnings, accounting for an average of 57.2% of total revenue and 42.7% of total adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) over the past three years. The company’s management is growing every business segment and ensuring that the other segments are contributing more to top and bottom lines. Studios, which produced less than 1% of total revenue in 2021, has been generating about 30% of total revenue in the last three years (2024: 29.5%, 2023: 29.5%, 2022: 28.8%). DTC’s contribution to total revenue rose from 7.1% in 2021 to 26.2% in 2024.

The company has been repositioning itself for growth and relevance through technological innovation. Its investment in MAX, its streaming platform, has started yielding results. MAX is being offered in more countries and it has become the key driver of the massive growth that has been experienced in the DTC business segment in the last three years. DTC’s adjusted EBITDA for the 2024 fiscal year was $677 million compared to $103 million in 2023. In 2024, the DTC subscriber base swelled by 19 million users or 20% year-over-year.

New technologies, such as Artificial Intelligence (AI), have brought about the establishment of new and low-cost studios which are giving traditional and old studios a strong challenge. WARNER BROS has not succumbed to competitive pressure. Studios’ revenue was $11.6 billion at 2024 year-end, compared to $20 million posted three years earlier. We expect WARNER BROS to continue to adapt its studios to emerging technologies in order to be relevant in the market.

WARNER BROS does not pay dividends at the moment; it has declared losses for three straight years. The company generates free cash flow in spite of the continuous spending on capital. We expect patient investors to benefit from the efforts of the management to position the business on the path of long-term growth.

Valuation

Our fair value estimate of a share of the company ranges from $13.41 to $19.13. The expected return on the share of WARNER BROS is 22%.

Financial Overview

The company’s total revenue decreased by 4.8 percent year-over-year to $39.3 billion in 2024. However, on a 3-Year Compound Annual Growth Rate (CAGR) basis, total revenue has risen by 47.8% compared to 57% in the previous year. Half of the company’s revenue comes from subscription fee and fee charged distributors of its brands and programming. Advertising revenue from its networks and digital platforms dropped 7.0% year-over-year to $8.1 billion or 20.6% of the total revenue (2023: $8.7 billion or 21.1% of total revenue). Content distribution (e.g., games and films) produced $10.3 billion or 26.2% of total revenue (2023: $11.2 billion or 27.1% of total revenue).

The revenues from all the business segments have risen over the years. But over the past three years, Studios has posted the strongest revenue increase. Studios’ revenue of $11.6 billion amounted to a 734.1% increase on a 3-Year CAGR basis. It accounted for 29.5% of total revenue in 2024.

DTC’s revenue has grown at a compound annual growth rate of 128.9% to $10.3 billion over the past three years. Revenue growth was due to the expansion of the premium pay-TV and streaming services offered by the DTC segment. Also, its contribution to total revenue increased from 7.1% in 2021 to 26.2% in 2024.

Its Networks segment generated revenue of $20.2 billion in 2024 compared to $21.2 billion in 2023. Although its revenue has grown by 21.3% over the last three years, the Networks segment’s contribution to total revenue has declined from 92.8% in 2021 to 51.3% in 2024.

Total expenses have exceeded the company’s revenue in the past three years. The company, as a result, has declared losses for three consecutive years. The operating losses for the past three years totaled $19 billion. Loss Before Tax rose from $3.9 billion in 2023 to $11.4 billion in 2024. Likewise, Loss After Tax almost quadrupled to $11.5 billion in 2024.

Total assets and total equity of WARNER BROS were $104.6 billion and $34.8 billion, respectively, at the end of the 2024 fiscal year.

Debt-to-equity ratio has been on the high side, which implies that the company has been relying on borrowing to finance its operations. Debt-to-equity ratio hovers around 146.9% while the debt-to-assets ratio averaged 46.1% in the past ten years. WARNER BROS has not been able to generate operating profit to pay off its debt obligations in the last three years. However, cash flow from operations has been sufficient to offset the interest expense. It also produces free cash flow for the shareholders. Meeting the maturing short-term obligations from the current assets has been a challenge in the last three years.

Business Risk

The media and entertainment industry is becoming more competitive with the emergence of accessible digital and streaming platforms for content production and distribution. Also, technological advancements are lowering the cost of producing and distributing content. Consequently, the revenue of big and traditional entertainment companies, such as WARNER BROS, from advertising and film distribution is under threat. Moreover, its sources of revenue are not sufficiently diversified; the bulk of its revenue is from the US; only about 39% of its revenue is made outside the US.

Recommendation: Overpriced