Reduced streaming losses, strong free cash flow and a focus on debt reduction – those were some of the positives in Warner Bros. Discovery’s fourth-quarter earnings update on Feb. 24 that were dissected by Wall Street experts overnight. But some also turned their attention to questions about the future.“Turning the Corner?” asked the MoffettNathanson team led by Robert Fishman and Michael Nathanson in a Friday report. The firm maintained its “market perform” rating on Warner Bros. Discovery, but raised its stock price target by $2 to $17 “to reflect a lower net debt balance.” However, the team also emphasized: “That said, we still expect the elevated debt load, macro headwinds and growing secular pressures from faster cord-cutting along with uncertainty around key strategic questions to keep the stock price rangebound.”One key question is whether the company’s improvement in streaming losses “should overshadow the weakness at networks,” the experts mentioned. “While direct-to-consumer (DTC) fourth-quarter losses came in much better, … we also must acknowledge networks earnings before interest, taxes, depreciation and amortization (EBITDA) declined by 9 percent both in the fourth quarter and full year 2022. Given secular and cyclical pressures on advertising and distribution revenues, it isn’t clear to us that the company is clearly out of the woods yet.”However, management’s body language and optimism got a big thumbs up from the MoffettNathanson analysts. “Talk about a change in tone! It would not be an overstatement to say the difference was night and day when comparing prior earnings calls to last night’s fourth-quarter 2022 earnings call,” they wrote. “CEO David Zaslav summed this up nicely as ‘Last year was a year of restructuring. 2023 will be a year of building and off we go.'”While reiterating a “buy” and a $21 price target, Bank of America’s Jessica Reif Ehrlich noted that “Studios revenue came in below our forecast, Networks were inline and DTC were modestly above,” but “we continue to believe management is taking the appropriate corrective measures to the business and view the company’s more balanced and holistic approach to generating growth” and adding that “We remain extremely bullish on the long-term potential of Warner Bros. Discovery.”Macquarie analyst Tim Nollen raised his price target 10 percent to $22 with an “outperform” rating, writing that Warner Bros. Discovery “has made rational decisions on the revenue side, such as what content to license to linear and FAST channels (such as some of the 60% of HBO content that is little-watched and hence sold to Tubi and Roku) vs. what to put on its own streaming services.”Wells Fargo analyst Steven Cahall stuck to his “equal weight” rating on Warner Bros. Discovery’s stock with a $13 price target. But he lauded “significant direct-to-consumer progress.” After all, Warner Bros. Discovery’s quarterly streaming losses of $217 million narrowed significantly compared with the more than $600 million recorded in the third quarter. “DTC losses of $217 million versus our $580 million and Street’s $534 million (estimates) were the clear highlight of the fourth quarter,” he argued.Also noting Warner Bros. Discovery’s guidance that it will be near streaming break-even in the first quarter before marketing costs for the combined HBO/Discovery+ service for the U.S. and Latin America hit in the second quarter, Cahall concluded: “Management has increased conviction around DTC targets.”But “the biggest takeaway” from the latest earnings report and conference call was guidance for 2023 adjusted operating income before depreciation and amortization (OIBDA) in the low to mid-$11 billion range, compared with the Wall Street expectation of $11.3 billion, continued strong free cash flow and a focus on debt reduction. “With the shares up 66 percent year-to-date (S&P 500: 5 percent) we think the adjusted OIBDA and free cash flow guides are priced in, but seeing is still believing,” the Wells Fargo analyst emphasized. “Execution improves the balance sheet outlook.”So where does Warner Bros. Discovery stand now? “Out of the dark, but have they made it to the light?” Cahall summarized the key question. “There’s no doubt the worst is behind Warner Bros. Discovery following a challenging merger integration period.”Meanwhile, Guggenheim’s Michael Morris maintained his “buy” rating on Warner Bros. Discovery and raised his stock price target by $1.50 to $18. “Management raised its 2024 synergy guide ($4 billion-plus versus $3.5 billion prior) reflecting improved visibility,” he noted in his report.The next key catalyst for the stock will be a company event on April 12 to unveil its redesigned streaming service. “Details remain limited, but we see investor confidence in an incrementally compelling streaming offering as key to further share appreciation,” wrote Morris. “We see potential to further leverage marque general entertainment for both growth and efficiency as undervalued at the current share price.”But Cahall noted some concern. “Warner Bros. Discovery is re-launching a combined service in April. Discovery+ will remain as a niche stand-alone service,” he said. “For the new combined HBO/Max (name TBD), we think Warner Bros. Discovery is trying to solve for higher engagement to either reduce churn or drive more ad impressions with lean-back content beyond HBO’s originals. The big question is whether the legacy Discovery content fits that bill.”Barrington Research’s James Goss also emphasized the positives and the open questions in his Friday report, in which he maintained his “market perform” rating on Warner Bros. Discovery without a stock price target. He sees “increased clarity” on Warner Bros. Discovery’s combined streaming offerings as key as management is set to unveil its plans in mid-April. “Warner Bros. Discovery can offer a broader array of programming options within the product and still intends to offer Discovery+,” Goss said. “Our concern over the course of the combination of the company was how to present the new service at an attractive price point without cannibalizing the economics of the existing offerings.”Investors will pay close attention. “Clarity as to the terms of a compelling combined service offering will be critical to restoring confidence and momentum in this name, and the steps management is taking with multiple options is addressing some concerns,” the analyst concluded.Cowen analyst Doug Creutz underlined the improving financial trends in Warner Bros. Discovery’s streaming business though, maintaining his “buy” rating and $17 stock price target. “DTC earnings before interest, taxes, depreciation and amortization (EBITDA) performance is improving far more quickly than we expected,” he wrote, noting that the company’s trajectory “looks appealing.”His takeaway: “Overall, management’s commentary struck us as very upbeat and clearly excited about being able to focus on turning out top-caliber content (including a newly-announced set of Lord of the Rings movies) now that most of the work of the postmerger restructuring is out of the way.”A few minutes after, Warner Bros. Discovery’s shares were up 1.8 percent at $16.01.
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