At Warner Bros. Discovery (WBD), things are so bad it's good.
At least that seems to be the word on Wall Street.
In a new note out Friday, Peter Supino, an analyst at Wolfe Research, upgraded shares to Outperform from Peer Perform and put a 12-month price target on the stock of $20, suggesting roughly 40% upside from current levels.
Similarly, Wells Fargo analyst Steve Cahall upgraded WBD to Overweight from Equal Weight and raised his price target to $20 a share — up from the previous $13.
Warner Bros. Discovery stock rose as much as 5% in early Friday trading following the upgrades, but shares pared gains amid a broader sell-off in markets. Shares of the company have gained more than 50% from lows reached in late Dec. 2022.
"After a '22 rife with negative surprises around the Warner-Discovery integration & TV advertising market, and after two rounds of forecast reductions, today's expectations are attractive to underwrite," Peter Supino wrote in a new note on Friday.
"Networks segment estimates & valuation bake in cyclical & secular headwinds, and we believe that the skeletons in Warner's closet have been accounted for," he said, noting the streaming giant is "getting their sea legs."
Cahall cited improvements on cost synergies and execution in his upgrade of the stock, adding the upgrade "is predicted on de-risking the downside."
"The obvious negative risks are higher cord cutting and pressure on linear ads, forever more," the analyst said, but noted the company's networks segment continues to "generate a lot of cash" for the business, accounting for approximately 20% of free cash flow.
Consequently, even in a worst case scenario, the company would continue to delever its balance sheet — or pay down its debts — as cash generation protects against future downside risks, Cahall said.
WBD's network advertising revenue tumbled by 17% in the fourth quarter, or 14% excluding foreign exchange, after falling 11% (ex foreign exchange) in Q3 as macro headwinds continue to pressure legacy media giants.
Wolfe's Supino added given the "extremely low expectations" for the networks segment, coupled with management's disciplined spending approach, "there's minimal downside built into the valuation for linear TV networks."
"Overall, we see an attractive entry point among real signs of stabilization post the Warner-Discovery integration, a path to profitability for DTC, solid studio growth, and our belief that valuation and outlook already bake in a Draconian scenario for networks," he reiterated.
'Understanding what can go wrong'
The embattled media giant, which is now targeting $4 billion in cost saving synergies over the next two years, up from the previous $3.5 billion, reported a net loss of $2.1 billion in the three months ending December 31. It previously reported a loss of $2.3 billion in Q3 and a $3.4 billion loss in Q2.
"This promises to be a very exciting year for our company," Warner Bros. Discovery CEO David Zaslav told investors during the company's Q4 earnings call. "The bulk of our restructuring is behind us...we are one company now."
Zaslav emphasized the company's IP will be a clear driver in its success, announcing a new production deal for multiple "Lord of the Rings" movies, as well as a continued focus on its revamp of the DC Universe.
He also teased the much-anticipated relaunch of HBO Max/Discovery+ this spring. Details surrounding the service will be released at a virtual press event scheduled for April 12. Discovery+ will keep running as a standalone streaming service alongside the soon-to-launch combo platform.
"We think DTC/HBO is currently undervalued vs peers given the near-term break-even and future profit ramp," Cahall wrote in his note.
He added: "We thus think that for WBD the question is not 'what is the bull case?', but rather 'what is the bear case?' ...WBD could executive well, resulting in solid DTC results and synergy realization while linear trends also deteriorate more rapidly."
"We think many investors share our view that this management is excellent on execution, so the blind spot is understanding what can go wrong in the exogenous environment, and what that means for the levered equity story."