Warner Bros. Discovery Gets Wall Street Upgrades as Stock Makes Post-Merger Debut

One analyst touts the "first direct-to-consumer free cash flow machine," while another compares it with Disney; but a third expects "the elevated debt load and uncertainty around key strategic questions to be an overhang for shares" for now.

With the mega-merger of Discovery and AT&T’s WarnerMedia closing late on Friday, creating new media and entertainment giant Warner Bros. Discovery, Wall Street is turning its attention to the outlook for the new conglomerate’s stock that began trading on Monday under the ticker symbol “WBD.”

In early Monday trading, the shares of the conglomerate, led by CEO David Zaslav, were down 1.8 percent, at $23.99.

But before the new trading week kicked off, the new Hollywood titan and former Discovery stock was met with some Wall Street love, earning upgrades from at least two analysts.

Atlantic Equities’ Hamilton Faber upgraded his rating on Warner Bros. Discovery shares from “neutral” to “overweight” on Monday with a $40 stock price target.

“With a portfolio of some of the world’s strongest content brands, we believe WBD is positioned to be equally as successful as Disney in direct-to-consumer, yet the new company is trading at a very material discount,” Faber wrote in a report.

Given that a portion of AT&T shareholders who all received WBD shares in the merger will want to sell off the entertainment company’s stock, “there will likely be some near-term selling pressure on the shares, but this will probably be short-lived,” he also noted.

But overall, he is bullish on the new stock. “We believe investors will be drawn to the opportunity of investing directly in the Warner assets, the first time in four years this has been possible,” Faber wrote. “These are among the best in the industry and are close to, if not on par with Disney.”

The analyst took the Disney comparison further, arguing: “The combined direct-to-consumer (DTC) presence will be similar to Disney. On closing, WBD will have 96 million combined Discovery+ and HBO Max DTC subscribers. We suspect management will consolidate the two services and have assumed 60 percent of Discovery+ subs will be subsumed into HBO Max, giving the company a pro forma total of around 83 million subs, ahead of Disney+ excluding India at 74 million.

Both HBO Max and Discovery+ have shown strong traction, adding a combined 25 million subs in 2021. We see both WBD and Disney+ ex-India reaching 150 million subs in 2024 and also see both companies spending a similar $10-$11 billion on DTC content that year.”

Evercore ISI analyst Vijay Jayant also upgraded the former Discovery stock on Monday from “in line” to “outperform” with a $40 stock price target in a report entitled “Deep Dive Into The First Direct-to-Consumer Free Cash Flow Machine.” That was a reference to Discovery management’s comments  in recent years, touting the company’s free cash flow momentum.

The merger created “the second-largest media company after Disney with 2021 revenues of $46 billion, a content budget of over $20 billion annually supporting a library with over 200,000 hours of programming, and most importantly the assets to successfully compete in the global direct-to-consumer (DTC) video streaming opportunity,” Jayant explained.

“We think the shares are undervalued,” the analyst concluded, while also acknowledging that the “spin-merge transaction structure is likely to create a massive supply of stock,” meaning that “we recommend long-term fundamental investors to take advantage of this technical aberration as our year-end 2023 price target of $40 per share provides over 60 percent upside from current levels.”