Investors have been feeling the heat when it comes to Warner Bros. Discovery, with the company’s stock taking a hit since its formation in 2022 through a $43 billion merger between AT&T’s WarnerMedia and Discovery. Despite boasting a market capitalization of $43 billion initially, the company’s shares have slumped to just $18 billion. Factors such as a weak advertising market, cord cutting, high production costs, and concerns over losing NBA broadcasting rights have contributed to the decline, not to mention CEO David Zaslav’s hefty compensation package of $49.7 million. However, while the negative sentiment around the company is palpable, its financial statements paint a different picture.
Warner Bros. Discovery’s free cash flow has experienced a significant boost from $2.4 billion pre-merger to over $6 billion in 2023. This surge in free cash flow has led to a free cash flow yield per share of 30%, the highest among S&P 500 companies and above the average yield of 4%. CEO Zaslav’s substantial compensation increase in 2023 was tied in part to the company’s free cash flow targets, which he exceeded through cost-cutting measures. Despite the upheaval in the media landscape and concerns over the company’s performance, analysts like David Joyce of Seaport Research Partners argue that the market may not be giving Warner Bros. Discovery enough credit for its financial strength.
Investors are encouraged to look beyond traditional metrics like earnings per share and consider free cash flow as a critical indicator of a company’s financial health. Cash flows can provide valuable insight into a company’s ability to pay down debt, repurchase shares, or pay dividends without relying on additional borrowing. Warren Buffett, a proponent of using cash flow analysis for investment decisions, has emphasized the importance of evaluating a company’s future income streams. With its Max streaming service nearing 100 million subscribers and billionaire investors like Seth Klarman taking notice, Warner Bros. Discovery’s potential for growth remains a compelling prospect.
With ample cash flow at its disposal, Warner Bros. Discovery has been focused on reducing its debt burden post-merger. CEO Zaslav highlighted the company’s progress on this front during its recent earnings call, noting a reduction in debt from over $56 billion to $47.29 billion. While debt reduction remains a top priority, rumors of a potential merger with Paramount Global were put on hold earlier this year. As the company gears up to announce its earnings, analysts are looking for signs of improving advertising growth, particularly on Max. Despite market apprehension, analysts like David Joyce believe Warner Bros. Discovery is poised for success and are optimistic about its future prospects.
