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Warner Bros. Discovery (WBD) stock was down 2.2 in midday trading on Monday after Wells Fargo downgraded the stock from overweight to equal weight at the start of the year, citing “risky earnings settings.” It fell by more than %.
“We have thoroughly reviewed our 2024 WBD earnings forecast and are now more negative,” Wells Fargo analyst Steve Cahall said in a note to clients on Monday. “Returns have been declining since the merger, and this trend limits multiple expansions in the future.”
Cahall lowered his price target to $12 from $16 and lowered his full-year adjusted profit forecast to $9.98 billion, down 5% from $10.5 billion.
The analyst lowered his forecast for 2025 to $10.4 billion from $11.2 billion, a 7% decline.
The analyst said the reasons for the downgrade include a low likelihood of M&A, difficult year-on-year changes for studios, increased depreciation costs, a shift in advertising from linear to streaming, and the “double-edged sword” of content licensing. He mentioned that.
M&A appears to be a hot topic among Wall Street media watchers, but recent comments from company executives have thrown cold water on the idea, Cahall said.
He referenced comments made last week by Comcast (CMCSA) CEO Brian Roberts, saying, “We’ve been pushing the CMCSA possibility for WBD, and CMCSA has recently nixed that.” ” he said.
Roberts said the hurdles for any kind of integration remain high, telling investors on the company’s fourth-quarter earnings call: “I love this company.”
“I don’t think there’s any urgency in an election year, even if it makes sense,” Cahall said, adding that Warner Bros. Discovery’s merger with a competitor like Paramount Global (PARA) He added that it was unlikely that the two companies would meet late last year despite fueling such rumors.
“While some assets such as PARA and CBS are available or could become available, equity investors’ tolerance for further debt is very limited, regardless of the strategic rationale,” he said. ” he said. “This means that the WBD opportunity is primarily organic.”
Content strategy may also be an issue, as WBD weighs licensing content against maintaining streaming exclusive content for its flagship direct-to-consumer service, Max.
“One way to accelerate EBITDA and free cash flow is to have big-name titles like “The Sopranos,” “Game of Thrones,” and “Friends” distributed to deep-pocketed streamers rather than Max. “There’s probably billions in untapped revenue potential,” Cahall said. he claimed. “But this will come at the cost of Max’s involvement.”
Even though HBO has strong plans for subscriber growth this year, “management is caught between expanding direct-to-consumer sales and deleveraging through licensing deals,” he said. Stated.
In addition to licensing challenges, continued pressure on networks’ businesses should also weigh on revenue as advertising market challenges persist, including declining ratings and increased cord-cutting.
Warner Bros. Discovery is scheduled to report its fiscal fourth quarter earnings later next month.
Correction: A previous version of this article had incorrect numbers for Steve Cahall’s latest earnings forecast. We apologize for the error.
alexandra canal I’m a senior reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, Email alexandra.canal@yahoofinance.com.
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