Warner Bros. Discovery skids as Barclays frets over 'bigger than anticipated' EBITDA cut
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Warner Bros. Discovery (NASDAQ:WBD) shares tumbled more 10% on Friday after the media and entertainment company reported second-quarter results that missed estimates and lowered its EBITDA targets for 2022 and 2023, prompting investment firm Barclays to call the results a "kitchen sink" quarter.
Analyst Kannan Venkateshwar, who rates Warner Bros. Discovery (WBD) shares neutral, noted that the company's cut to EBITDA for the next two years were "bigger than anticipated." And when coupled with the lack of any near-term catalysts, limited visibility and worries over execution risk, the stock is likely to see some valuation discount.
"Overall, with â23 numbers being in a more reasonable expectations range, debate among investors is likely to shift from this to the growth path beyond â23," Venkateshwar wrote in a note to clients, while cutting his price target to $17 from $19.
"However, given the macro backdrop, catalyst path and timing of synergy realization may mean that there is unlikely to be much visibility to get comfort around longer term trends, which is likely to be compensated for with lower valuation."
On its earnings call, Warner Bros. Discovery (WBD) lowered its 2022 EBITDA forecast to be between $9B and $9.5B and 2023 EBITDA to $12B, compared to a 2021 EBITDA for the two companies combined of $10.7B and guidance when the deal closed that EBITDA would be $14B in 2023.
The company also said free cash flow in 2022 and 2023 was likely to be $3B and $6B, as it works on post-closing cost cutting. However, Discovery generated $2.2B in free cash flow in 2021 and Warners used to generate $6B in free cash flow by itself, Venkateshwar added.
While the analyst conceded there "is likely some degree of conservativeness in this guidance," but given the weakening macro environment and the fact that the company looks to have misjudged the base earnings of the combined company "significantly," suggests the company may have overpaid to combine itself.
In addition to the lowered financial targets, much of the attention was on the company's plans for its DC brand, as well as added details of the company's streaming service. HBO Max and Discovery+, which now account for more than 92M subscribers, will be folded into one service, rolling out in the U.S. in summer 2023 under a yet-to-be-determined name.
The company expects to reach 130M subscribers for the combined service by 2025, down from previous estimates for 120M-150M just for HBO Max and more than 40M for Discovery+, a decrease of roughly 45M, Venkateshwar explained. 
"While this appears to be achievable as the company will have to do ~11mm subs on annually on average in the next 3.5 year vs the ~5mm that we expected Discovery+ alone to do annually, this goal may still prove to be a meaningful lift in the context of the broader competitive landscape," the analyst wrote.
Earlier this week, Warner Bros. (WBD) shocked Hollywood by canceling both its animated sequel to Scoob and the Batgirl movie, despite the fact that the comic book movie had a $90M budget and was essentially finished and in final editing.