Warner Bros. Discovery’s streaming rebrand under the Max name had Hollywood and Wall Street all ears late on Wednesday, in line with the streamer’s new tagline “The One to Watch.” And on Thursday, analysts started sharing their takes on what the change would mean for the company and its stock. The early verdict is … well, the jury is still out.Warner Bros. Discovery has had a starring role as one of the Wall Street darlings among Hollywood stocks so far this year, with its shares gaining more than 50 percent in the first quarter. That set a high bar and made a big jump driven by Wednesday’s unveiling of a streaming strategy for the combined sector giant, and bringing together programming from the current HBO Max and Discovery+ under one umbrella, less likely.Warner Bros. Discovery’s stock actually slid on Wednesday to $14 a share, the day that saw executives, such as Warner Bros. Discovery CEO David Zaslav and head of HBO and Max originals Casey Bloys, tout Max, set to launch in the U.S. on May 23, as the streaming destination for everyone in a household. But observers noted that the broader market was also weaker. In early Thursday, with the streaming event fully behind the company and experts having started to digest the takeaways, Warner Bros. Discovery’s stock was virtually unchanged.That was in contrast to innovation, new functionality and features, as well as new content promised by the Warner Bros. Discovery management team in its streaming update. For example, Max will offer not only the Warner Bros. Discovery’s library product and new intellectual property, but also double down on beloved franchises with the likes of a live-action Harry Potter scripted television series and new installments of The Big Bang Theory and Game of Thrones.“HBO Max Sequel or Big Bang?” therefore seemed the fitting question that Wolfe Research analyst Peter Supino asked in the headline of his report, summarizing the good, the bad and the lack of the ugly in the early Wall Street reaction. He maintained his “outperform” rating and $20 price target on the stock of Warner Bros. Discovery.“As the industry transitions from landgrab to efficiency, bundles/consolidated services will support better subscriber acquisition cost and churn trends. To that end, Warner Bros. Discovery announced Max, its new consolidated streaming offering, and outlined several new features and an expanded content pipeline,” Supino wrote, recounting the positives. But he also cautioned: “While free cash flow and profit growth remain key priorities, in the near term, selling, general and administrative (SG&A) expenses) will be elevated, with Warner Bros. Discovery indicating it will launch the largest marketing campaign in Warner Bros. Discovery’s history.”Addressing the initial stock drop, Supino offered several possible reasons behind it. He highlighted “uncertainty around near-term subs and earnings before interest, taxes, depreciation and amortization (due to the transition of existing combo HBO Max-plus-Discovery+ subs that will be getting more for less and higher SG&A), alongside limited details on Warner Bros. Discovery’s streaming sports strategy, and overall market weakness (Wednesday) afternoon.”Meanwhile, Morgan Stanley analyst Benjamin Swinburne stuck to his “equal weight” rating on Warner Bros. Discovery with a stock price target of $17. “The new Max streaming service should expand the opportunity for Warner Bros. Discovery in streaming, but it will take time to assess the magnitude of that expansion in a highly competitive marketplace,” he concluded. “Key to Warner Bros. Discovery’s long-term fundamental growth potential is turning its direct-to-consumer segment, anchored by Max, into a meaningfully profitable and growing asset.”Looking ahead, Swinburne sees upside from the combined broader streaming offering. “If successful, Max should increase engagement, lower churn and increase average revenue per user at levels superior to HBO Max historically,” he argued. “However, linear HBO declines and potential Discovery+ churn may mask those improvements at least in the near to medium term.” As a result, he forecasts net subscriber additions in the 9-10 million range this year, “similar to ’22 as Warner Bros. Discovery navigates these tailwinds and headings.”The analyst also cautioned that he would closely monitor “near-term advertising pressure,” streaming revenue growth trends and free cash flow generation. With a key stock story and driver currently being a reduction in debt leverage, Swinburne wrapped up his take on the conglomerate’s outlook this way: “If the ad market does improve and Warner Bros. Discovery can show growth year-over-year in the second half (of 2023), that should help de-risk the de-leveraging and would make us more bullish (about the stock) at current levels.”Others on the Street also touched on the good and the unknown in the Hollywood giant’s streaming strategy update. “Warner Bros. Discovery hopes that by providing users with a greater breadth of content it will drive a flywheel approach of more engagement and better retention, reducing churn, scaling subscribers, and increasing monetization,” highlighted Guggenheim analyst Michael Morris in a report entitled “Taking It to the ‘Max.'” The analyst, who has a “buy” rating on the stock, added that “sports and news remain potential differentiators for the service.”But he also noted that “questions remain around the role of live sports and news in the overall strategic vision for Max.” After all, management emphasized that it was a global leader in sports and news, but did not provide any details on their inclusion in the streamer, only saying it would share a plan in a few months that would help grow the firm’s streaming business further.Third Bridge’s Jamie Lumley similarly noted that the unveiling of Max is answering key questions about Warner Bros. Discovery’s streaming strategy and direction, while also raising new questions. “Max looks to be a platform with broader appeal than its predecessor in an effort to grow its base in different audience segments,” he highlighted. “At the same time, … there are inherent challenges in trying to be something for everyone. Expanding into kid-friendly content will be tough given Disney’s strong position in this area, and Netflix has been leading the way when it comes to providing content to a wide range of people and families.”Given management’s focus on cost management and cutting and maximizing existing franchises, he also emphasized: “Considering HBO’s historical strength in scripted drama, it is unclear how successful the platform may be in expanding its appeal while simultaneously paring down costs.”Max will cost $15.99 per month ($149.99 a year) for its advertising-free version and $9.99 per month ($99.99 a year) for an ad-supported tier. A third “ultimate” ad-free version, including 4K UHD resolution, 100 offline downloads and Dolby Atmos sound, will be available for $19.99 a month ($199.99 a year). To date, Warner Bros. Discovery has 96.1 million streaming subscribers across HBO, HBO Max and Discovery+.Meanwhile, Goldman Sachs analyst Brett Feldman maintained his “buy” rating and $19 stock price target on Warner Bros. Discovery in a bullish note. “We see Max as well positioned relative to other premium streaming services based on its breadth of content and materially improved in-app experience,” he wrote in a Thursday report. “A successful rollout of Max during 2023-2024 could be an incremental positive catalyst for the stock, beyond investors’ outlook for material cost synergies.”Feldman also emphasized that Warner Bros. Discovery remains his top pick among media stocks. Explained the analyst: “While we expect investors to continue to debate the long-term outlook for traditional media companies, we see the risk/reward skew for Warner Bros. Discovery as most attractive versus its peer group with key execution catalysts (merger milestones, Max relaunch, improved franchise management) largely within management’s control.”
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