Warner Bros. Discovery may not see any significant mergers or acquisitions this year, according to analysts at Wells Fargo. Due to negative trends in its TV and streaming businesses, the media conglomerate’s stock rating was downgraded by the firm. Shares of Warner Bros. Discovery were trading down 2.4% on Monday, at about $10.36 per share.
Downgrade Reasons
The Wells Fargo team believes that the chances of a major merger or acquisition involving Warner Bros. Discovery happening in 2024 are less favorable. Despite speculation about potential deals, Comcast CEO Brian Roberts recently downplayed the need for any significant transaction. The analysts noted that even if an M&A transaction between Warner Bros. Discovery and Comcast makes sense, there is no urgency in an election year. Although Paramount Global and some of its assets might be available, equity investors have a limited tolerance for more debt, regardless of the strategic rationale.
Organic Growth Opportunities
In the absence of an M&A deal, Warner Bros. Discovery’s growth opportunities are primarily organic, according to the Wells Fargo analysts. The ad market has not improved, and the growth of direct-to-consumer streaming has slowed down. The analysts also mentioned that licensing marquee titles seems to be off the table, affecting the engagement of the streaming service HBO Max. The firm forecasts that HBO Max’s net additions in 2024 will be over 2.5 million, driven by international expansion. However, this growth rate lags behind that of competitors like Netflix, Disney+, Peacock, and Paramount+.
Ad Revenue and Licensing
The analyst firm expects Warner Bros. Discovery’s ad revenue to reach $8.7 billion in 2023, including a 13% decline in its TV networks. Linear ads have not shown much improvement during the fourth quarter, and ad-supported video-on-demand (AVOD) is facing pressure from an abundance of inventory, likely to continue from Amazon Prime ads. Content licensing is seen as a double-edged sword. While licensing marquee titles like “The Sopranos,” “Game of Thrones,” or “Friends” to third-party streamers could bring in billions in untapped revenue potential, it would decrease engagement with HBO Max and drive up churn.
Earnings Estimates and Future Initiatives
After reassessing earnings estimates for 2024, Wells Fargo reduced its projected adjusted EBITDA for Warner Bros. Discovery by 5%, to $9.98 billion. The analysts mentioned that HBO’s originals slate is stronger in 2024 and could support better net additions for HBO Max, while a licensing-first strategy could re-accelerate earnings. However, growth initiatives for 2024 remain to be determined, and NBA rights could contribute to lower future EBITDA.
F5 Magazine is keeping a close eye on the developments surrounding Warner Bros. Discovery and its future prospects.
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