Note : English is not my first language, sorry if i can't articulate my point properly.
Background
Early this year AT&T spinoff their entertainment division, WarnerMedia to merge it with Discovery. The combined entity is now known as Warner Bros. Discovery (WBD).
WBD started their first trading day, on April 11, 2022 closing at $24.78, but now the share price is at $13.78
Why the stock dropping so much
There are several reasons that might explain:
1)General market condition
During April to July, we see a market correction across all indices, so WBD might be a victim of “IPO” at the wrong time.
Moreover, there seems to be general apathy toward media stocks as of right now that contributed to the price performance. You named it, from social media like Meta, Snap. Streaming co like Netflix, traditional media co like DIS, PARA, video game maker like TTWO, Ubisoft, RBLX.
2)AT&T shareholder don't want to have anything to do with WBD
Most AT&T shareholders are in it for the dividends, and yet WBD don't pay dividend and will likely to remain so in the few years as their priority is to reduce their leverage. So, it is likely that the stock tanked due to selling pressure from forced owner.
3)Management quality?
This is probably the major overhang. David Zaslav, the CEO seems like a capable and competent guy for the jobs, a long time veteran in media business. But unlike Disney, WarnerMedia on its own is a clusterfuck with no clear vision. Adding Discovery makes it even harder. Can Zaslav fixed it?
So far there are already questionable decisions like shutting off Batgirl when it is already finished, relaunching of new streaming services (when they have already invested billions growing HBO brand), DCEU problems, etc.
4)Very high leverage
Thanks in large part to AT&T, WBD is saddled with very high level of debt. Of the $142 billion of total assets, about $53 billion is funded by debt, and total liabilities of $89 billion. To put thing into perspective, the current market cap for WBD is $33 billion. So every profit that they make, mostly will go to debt holder, instead to shareholders (yes, this is oversimplification).
5)Last result is not encouraging
The consesus estimate EPS for Q2 2022 is $0.12, yet the company record an earning loss (EPS) of $1.5
Why this trade might work?
1)It is cheap
Yes, a terrible investment thesis, especially when they just recorded an earning loss. All the potential synergy might never realizes, making this investment a total value trap. But again, it is cheap as of right now, and for all we know, all the bad things have already been priced in, no?
2)They have a strong collection of IP
DC Universe, Wizarding World (Harry Potter), Every shit HBO made (Game of Thrones, and i dont know), CNN, Oprah Winfrey, etc.
Also, this can possibly makes them for prime takeover target.
Netflix prove that you need strong IP to win long term in media business, something that they severely lacks. Amazon bought MGM last years. It is no secret that big tech, whether it is Apple, Amazon, Microsoft, Google and even Meta has lofty ambition in media industry.
3)Seems to be a favorite amongs superinvestor?
Michael Burry, David Einhorn, Seth Klarman loads up the position during Q2 2022. Buffett, bought shares in PARA, but i believe there are not much differences in business thesis between WBD and PARA.
4)Industry Tailwind
Both Disney and Netflix are planning to raise prices, signalling the priority for profits amongs media business. Cinema is making a comeback, midterm election means increasing ad spent for both parties, etc.
An industry going back to its roots should be perfect time for David Zaslav to shine.
What do you think?
Personally, i have small position in the stocks. I see this as special situations where heavy selling pressure exist due to AT&T shareholders selling their stake instead of business performance issue.
While high debt level is cause of some concern, they manage to lock the interest rate between 3%-5%.
Overall still manageable. Earning loss probably related to M&A, and in due time should normalize to profitability.
What do you think? Please share what you though.
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