Warner Bros. Discovery jumps 9%, as BofA sees 68% upside after near-term volatility
Warner Bros. Discovery (NASDAQ:WBD) is the No. 2 gainer in all of the S&P 500 today (behind only American Airlines), up 8.8% after a very bullish initiation at BofA.
Analyst Jessica Reif Ehrlich launched coverage at Buy with a $45 price target, implying a further 68% upside from today's already strong gain.
Like others, she's expecting near-term price volatility as investors digest the transformational transaction that created the new company (and the income-oriented AT&T (T
+0.3%) investors rethink their WBD holdings). But "Ultimately, we view any near-term weakness as a particularly attractive long-term buying opportunity."
"In our view, the merger of Warner Bros. and Discovery creates a global media powerhouse that offers a compelling growth and deleveraging profile," she says - including compound annual growth in EBITDA of 14%-plus, driving net leverage to go from 4.5x to about 1x by 2025.
It's the third major media transformation in two decades, along with Bob Iger's takeover at Disney in 2005 and Comcast taking over NBCUniversal in 2011, she says.
Strong" WBD management has spent months formulating a plan to hit the ground running, and "Now it is time to execute on multiple levels, including building out a new organizational/leadership structure, go-to-market strategy in DTC, and roadmap for realizing revenue/expense synergy potential.
The cost synergy target of $3 billion is "highly achievable, if not conservative" considering the areas of duplicated expenses. And there are areas lacking management guidance where there are incremental revenue opportunities, such as scale in advertising/distribution, pricing, and ad-supported video on demand.
The $45 target is based on a 14x multiple of pro forma calendar 2030 streaming enterprise value-to-EBITDA, discounted to calendar 2023.
Reports yesterday suggested the news streaming service that WBD inherited, CNN+, is about to see slashed investments amid low uptake.