WBD could be leaving billions of dollars on the table, analyst says in downgrade



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Legacy media companies must navigate a tricky road in the streaming era, and a Wells Fargo analyst thinks Warner Bros. Discovery Inc. might be leaving billions of dollars in revenue on the table by not making one strategic move.

Companies that have their own media content face tough decisions as they figure out whether they should go all-in on their own streaming services or look to make money off their programming in other ways. Warner Bros. Discovery
WBD,
-2.54%
is experimenting with putting some of its content on Netflix
NFLX,
+1.06%
and other services, but Wells Fargo’s Steven Cahall wonders if the company should be going deeper.

Read: Netflix reported blowout earnings. Here’s why its stock got downgraded anyway.

Specifically, he thinks Warner Bros. Discovery is missing out on “billions of untapped [revenue] potential” by not shipping “marquee titles” including “Game of Thrones,” “The Sopranos” and “Friends” to other streamers.

There’s a trade-off, of course, as such a move “would come at the expense of Max engagement,” to the tune of perhaps 27 minutes a day spent on Warner’s own streaming service. “Management is caught between scaling [direct to consumer] and deleveraging through licensing deals,” Cahall added.

He downgraded Warner Bros. Discovery shares to equal weight from overweight Monday, while also cutting his price target to $12 from $16. Cahall said he’s moving to the sidelines on the stock until he sees “better visibility of a sustained recovery in revenue/earnings, and de-risked consensus estimates.”

WBD’s stock was falling 3% in afternoon action.

In Cahall’s view, there’s uncertainty about Warner Bros. Discovery’s earnings power that could hinder opportunities for the stock’s multiple to move higher.

“[W]e now acknowledge that linear is a bigger headwind to WBD’s multiple than we expected, deleveraging has not been as strong with earnings expectations coming down,” he wrote. “While HBO content remains strong, Max’s scale is not driving an earnings inflection.”

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