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Warner Bros. Discovery Launches as a Media Powerhouse

With a $40 fair value estimate, we think the stock is substantially undervalued

The long-awaited merger between Discovery and WarnerMedia is complete. We are maintaining our narrow moat rating for the successor firm and lowering our fair value estimate to $40 from $42 as we have updated our model to fully incorporate the pro forma results and to forecast the combined firm. For AT&T, we also maintain our narrow moat rating on the standalone telecom firm, with a $25 fair value estimate.

Warner Bros. Discovery WBD is now one of the largest media firms in the world with tremendous scale and reach. The merger has created a firm with tremendous content production and distribution capabilities along with a very deep and wide content library. The new company owns a number of well-known networks including HBO, Discovery, CNN, and TLC as well as a slew of major entertainment franchises like Superman, Rick and Morty, and Game of Thrones. We project that the new company, led by Discovery CEO David Zaslav, will use its combined programming library and production capabilities to drive further growth in its streaming services as it navigates the transition toward a more direct-to-consumer focused model, centered on combined HBO Max/Discovery+ services.

As for AT&T, we believe the firm is in a much stronger place, with renewed management focus and a stronger financial position. We remain optimistic about the wireless business and expect that AT&T and its rivals will compete rationally, allowing for steady, albeit slow, growth and solid cash flow. We also like the firm’s investment plans, which call for aggressive investment in wireless network capacity and the fiber network over the next several years. We expect AT&T will emerge from this period of investment in a unique place within the telecom industry, with the ability to use its combined wireless and fixed-line capabilities to grab market share across a large and growing portion of the U.S.

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