Wells Fargo Downgrades WBD Stock Due to Risky Earnings Setup

WBD Stock

Warner Bros. Discovery (NASDAQ:WBD) experienced a more than 2% decline in its stock during midday trading on Monday following a downgrade by Wells Fargo. The financial institution shifted its rating from Overweight to Equal Weight, citing a “risky earnings setup” at the beginning of the year.

In a note to clients on Monday, Wells Fargo analyst Steve Cahall expressed a negative outlook, stating, “We’ve taken a thorough scrub of our 2024 WBD earnings estimates and come out more negative.” Cahall highlighted the ongoing trend of lower earnings since the merger, emphasizing that it limits the potential for future multiple expansion.

The analyst, who adjusted his price target to $12 from $16, also revised down his full-year adjusted earnings estimate for 2024 from $10.5 billion to $9.98 billion, reflecting a 5% decrease. Additionally, Cahall lowered his 2025 forecast to $10.4 billion from $11.2 billion, representing a 7% drop.

Several factors contributed to the downgrade, including a less favorable probability of mergers and acquisitions (M&A), a challenging year-over-year comparison for studios, increased amortization, the shift of ads from linear to streaming, and the complex nature of content licensing.

Regarding M&A prospects, Cahall noted that recent comments from company executives, particularly Comcast (CMCSA) CEO Brian Roberts, have dampened expectations. Roberts expressed a cautious stance on consolidation during the company’s fourth-quarter earnings call, indicating that the bar remains high and downplaying the urgency, especially in an election year.

Cahall also addressed the possibility of a merger with Paramount Global (PARA) after meetings late last year, but he highlighted equity investors’ limited tolerance for additional debt, despite potential strategic benefits.

The analyst pointed out potential challenges in Warner Bros. Discovery’s content strategy, particularly the decision between licensing content and maintaining streaming exclusives for its flagship direct-to-consumer service, Max. Cahall suggested that allowing marquee titles like ‘The Sopranos,’ ‘Game of Thrones,’ or ‘Friends’ to go to other streaming platforms could unlock significant revenue potential but might impact Max’s engagement.

Licensing challenges, coupled with continued pressure on the networks side of the business due to a challenging advertising market, declining ratings, and increased cord-cutting, are expected to weigh on earnings. Warner Bros. Discovery is set to report its fiscal fourth-quarter earnings later next month.

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