Citi cuts Warner Brothers Discovery target to $11 from $14 on disappointing results

On Tuesday, Citi revised its financial outlook for Warner Brothers Discovery (NASDAQ:), adjusting the price target downward to $11.00 from the previous $14.00 while keeping a Buy rating on the stock. The adjustment comes after the company reported second quarter 2024 revenue and adjusted EBITDA that fell short of market expectations.

Despite the lower financial metrics, Warner Brothers Discovery’s management has confirmed their expectation to achieve approximately $1 billion in direct-to-consumer (DTC) profitability by 2025.

The updated model from Citi reflects the company’s performance to date and its future prospects. The analyst from Citi stated, “Updating Our Model – WBD reported 2Q24 revenue and Adj. EBITDA below the Street. Management reiterated that it expects 2025 DTC profitability of approximately $1 billion. We are updating our model to reflect performance to date and our latest outlook.”

With the new target price set at $11, Citi’s valuation of Warner Brothers Discovery is approximately 7 times the projected adjusted EBITDA for 2024. The firm’s analyst maintained a positive stance on the stock, emphasizing a strategic shift in the company’s capital structure, moving from a debt-focused approach to one that favors equity.

The analyst further commented on the rationale behind maintaining the Buy rating, “Maintaining Our View – Following our update, our target price goes from $14 to $11, still akin to ~7x 2024 Adj. EBITDA. We maintain our Buy rating, as we continue to like the rapid shift in the capital structure from debt to equity.”

This reevaluation by Citi signals a cautious but still optimistic perspective on Warner Brothers Discovery’s financial trajectory and its potential for profitability in the burgeoning DTC market. The company’s ongoing strategic adjustments and the anticipated profitability by 2025 are key factors in Citi’s continued recommendation to buy.

In other related news, Warner Bros. Discovery has reported significant growth in its direct-to-consumer business, adding 3.6 million subscribers in Q2, largely due to the Olympic Games in Europe. The company plans to expand its sports offerings with the launch of Venu Sports in the fall and rebranding efforts in the UK and other markets.

Despite facing challenges such as a non-cash impairment of goodwill in its linear networks and a decrease in distribution and network ad revenues, Warner Bros. Discovery remains on track to achieve its EBITDA target of $1 billion by 2025. The company’s long-term strategy focuses on international market expansion and leveraging existing content to secure carriage agreements.

InvestingPro Insights

As Citi adjusts its stance on Warner Brothers Discovery (NASDAQ:WBD), it’s essential to consider the latest InvestingPro data and tips that offer additional context to the company’s financial health and market position. The market capitalization of WBD stands at $17.33 billion, reflecting a significant player in the entertainment industry. Despite a challenging period with a price drop of over 11% in the last week, the valuation suggests a strong free cash flow yield, indicating potential for future financial stability.

An InvestingPro Tip highlights that analysts have recently revised their earnings estimates downwards for WBD, signaling caution in the short term. Additionally, the company’s revenue has seen a decline of 4.67% over the last twelve months as of Q2 2024, which aligns with the lower-than-expected financials reported in the second quarter of 2024 cited by Citi. Furthermore, WBD’s current P/E ratio is -1.48, and it operates with a moderate level of debt. This is complemented by the fact that Warner Brothers Discovery does not currently pay a dividend, which may be a consideration for income-focused investors.

For investors seeking a deeper analysis, there are additional InvestingPro Tips available that discuss the company’s position in the entertainment industry, its profitability outlook, and liquidity concerns. According to InvestingPro, there are 9 more tips that can provide further insights into the company’s financials and market performance. These metrics and tips can be found on InvestingPro’s dedicated page for Warner Brothers Discovery at https://www.investing.com/pro/WBD, offering a comprehensive tool for investors to make more informed decisions.

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