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Warner Bros. Discovery (WBD) shares fell more than 2% through midday Monday after Wells Fargo downgraded the stock from obese to equal-weight, setting up a “risky earnings setup” to start the year.
“We conscientiously revised our 2024 WBD earnings estimates and the results were more negative,” Wells Fargo analyst Steve Cahall wrote in a note to clients on Monday. “Weaker earnings have been noted since the merger, and this trend limits long-term expansion. “
Cahall, which lowered its value target from $16 to $12, lowered its full-year adjusted profit estimate to $9. 98 billion from $10. 5 billion, a 5% decline.
By 2025, the analyst predicts that it will go from $11. 2 billion to $10. 4 billion, a decrease of 7%.
The analyst listed several reasons for the downgrade, including less favorable M&A probability, a tough year-over-year studios comparison, higher amortization, the migration of ads from linear to streaming, and content licensing as a “double edged sword.”
As for mergers and acquisitions, which will be a topic of discussion among Wall Street media watchers, Cahall said recent comments from corporate executives have thrown cold water on the idea.
“While we’ve pushed the prospect of CMCSA for WBD, CMCSA has talked it down of late,” he said, referring to comments made by Comcast (CMCSA) CEO Brian Roberts last week.
Roberts said the bar remains high for any kind of consolidation, telling investors on the company’s fourth-quarter earnings conference call, “I love the company we have. “
“Even if it makes sense, we don’t see any urgency in an election year,” Cahall said, adding that Warner Bros. Discovery is also unlikely to merge with a competitor like Paramount Global (PARA), even though both corporations are fueling those rumors after the assembly late last year.
“PARA, or some of its assets like CBS, are or could be available, but equity investors have a very limited tolerance for more debt regardless of the strategic rationale,” he said. “This means WBD’s opportunities are primarily organic.”
Content strategy may also play a factor, as WBD weighs licensed content rather than maintaining streaming exclusives for its flagship direct-to-consumer service, Max.
“One way to increase EBITDA and lose money would be to let big-name titles like ‘The Sopranos’, ‘Game of Thrones’ or ‘Friends’ go to streamers with deep pockets instead of Max; probably billions in potential without exploit. income,” Cahall argued. “But that would come at the expense of Max’s commitment. “
Despite a strong HBO slate planned for this year, which is expected to boost subscriber numbers, “the direction is stuck between offering direct-to-consumer service and deleveraging licensing deals,” he said.
In addition to licensing issues, continued strain on the network is also expected to eat into profits as the advertising market remains challenging, along with declining audiences and increased cable cuts.
Warner Bros. Discovery will report fiscal fourth-quarter effects at the end of next month.
Correction: A previous edition of this article showed a figure from Steve Cahall’s updated earnings forecast. We regret the error.
Alexandra Canal is a senior journalist at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn and email alexandra. canal@yahoofinance. com.
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