On Tuesday, CFRA revised its price target for Warner Brothers Discovery (NASDAQ:) shares, lowering the target from $10.00 to $9.00, while keeping a Hold rating on the stock.
The adjustment was made based on a reduced risk premium and a forward Total Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization (TEV/EBITDA) multiple of 6.24 times, which is below the average of its direct peers.
The firm noted that Warner Brothers Discovery is expected to experience negative adjusted EBITDA in the first half of the year but anticipates a positive turn in the second half of 2024. The company’s programming content for 2024 may be impacted due to actor and writer strikes, presenting a challenge to production schedules.
Despite these setbacks, Warner Brothers Discovery remains focused on enhancing its major movie franchises, including Game of Thrones, Harry Potter, and Superman. The company reported a free cash flow of $3.3 billion for the fourth quarter of 2023 and $6.2 billion for the full year.
CFRA also expressed skepticism about the speed of growth and profitability for Warner Brothers Discovery’s MAX video streaming service. The firm suggested that the consensus price target of $13.70 might be overly optimistic, implying a high-growth scenario that may not materialize as quickly as expected.
Lastly, CFRA pointed out that while last year’s expectations were for significant EBITDA growth in 2024, the current consensus estimate stands at $9.9 billion, slightly below the $10.2 billion actual EBITDA for 2023.
The 2025 consensus estimate of $10.4 billion indicates an EBITDA growth of less than 5%. According to CFRA, the current share price reflects a reduced patience among investors for Warner Brothers Discovery to successfully transition its linear networks to the MAX streaming platform.
InvestingPro Insights
In light of CFRA’s recent price target revision for Warner Brothers Discovery (NASDAQ:WBD), a glimpse at real-time data from InvestingPro provides additional context for investors. With a market capitalization of $20.57 billion, the company is trading at a low Price/Book multiple of 0.45, suggesting that the stock may be undervalued relative to its book value. This aligns with one of the InvestingPro Tips highlighting the stock’s low valuation on this metric.
Another noteworthy InvestingPro Tip for WBD is its strong free cash flow yield, which is reflected in the company’s reported free cash flow of $6.2 billion for the full year. Despite a challenging outlook with anticipated negative adjusted EBITDA in the first half of 2024, this financial strength could be a buffer for the company. Moreover, the stock’s recent price movements have been quite volatile, with a 3-month price total return of -24.61%, which should be considered by investors looking for stability.
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