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Warner Bros. Discovery Q2 Results Show a Weak Start to New Future

We expect a modest cut to Warner Bros. Discovery fair value estimate, but we still think the stock is undervalued.


In its first quarter as a combined company, Warner Bros. Discovery (WBD) posted weak second-quarter results with pro forma revenue (excluding currency effects) down 1% year over year. Management laid out its streaming plans, including the launch of a single streaming platform that will combine HBO Max and Discovery+ next summer in the U.S., with a global rollout to 70 countries to follow over the next two years. However, some countries, notably the U.K., Germany, and Italy, will not receive the new platform until after 2025 due to the HBO/Sky deal.

While we understand the underlying strategy and the need to ensure a quality user experience, the delayed rollout could create hurdles for growth as the service will be well behind not only Netflix, Disney+, and Amazon but also Apple TV+ and Paramount+. The new platform will have the advantage of a strong scripted and unscripted library, but many of its peers have similarly deep catalogs. Management expects the U.S. direct-to-consumer business to be profitable in 2024 and the overall streaming business to generate $1 billion in EBITDA in 2025, which seems aggressive, given the historical and planned spending of its competitors. We plan to modestly lower our $40 fair value estimate when we update our model to reflect lower revenue growth in 2022 and lower EBITDA in 2022 and 2023.

The combined firm now has three segments: studios, networks, and direct to consumer. DTC revenue improved 4% on a currency-adjusted pro forma basis to $2.4 billion. Total DTC subscribers increased to 92.1 million from 90.4 million in the first quarter and 75.8 million a year ago. WBD redefined DTC subscribers to exclude nonpaid users, subscribers to DTC products other than discovery+, HBO, and HBO Max, Cinemax subscribers, and HBO international basic customers. Distribution revenue (90% of segment revenue) increased 1% as subscriber growth just offset the loss of the subscribers from the end of the Amazon Channels pipeline in September 2021.

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