Warner Bros. Discovery Stock Plunges Over 11% After Taking $9.1 Billion Impairment Charge on Linear TV Networks

Warner Bros. Discovery shares plunged more than 11% on Thursday as Wall Street is revising its expectations for the company following its dismal earnings results for the second quarter of 2024.

The company posted a wider-than-expected net loss of $10 billion during the quarter, which included a $9.1 billion non-cash goodwill impairment charge related to its networks segment and $2.1 billion in restructuring expenses and other adjustments.

The impairment charge was triggered in response to the difference between WBD’s market capitalization and the book value of the networks segment, continued softness in the U.S. linear advertising market, and uncertainty related to affiliate and sports rights renewals, including the NBA. Additionally, WBD reported a 6% year over year decline in revenue to $9.7 billion.

WBD shares, which have fallen over 70% since the April 2022 merger, briefly hit a 52-week low of $6.73 per share on Thursday, but have since reversed some of its losses.

Bank of America analyst Jessica Reif Ehrlich said the results validate the firm’s thesis that WBD needs to explore strategic alternatives.

“Notably, WBD remains committed to an investment grade rating which potentially precludes certain options near term. However, alternatives such as asset sales or mergers could still be utilized to create shareholder value,” she wrote in a note to clients. “Meanwhile, given the persistent secular headwinds, coupled with the prospect of losing the NBA, we believe it is imperative for the company to show meaningful progress in Studios and DTC profitability to give investors confidence in the ability for the consolidated entity to grow.”

While reiterating a buy rating, BofA lowered its price target from $14 to $12 per share after lowering its fiscal year 2024 revenue and adjusted EBIDTA estimates to $39.8 billion from $40.2 billion and $9.13 billion from $9.67 billion. Additionally, it lowered its forecasts for full year 2025 EBITDA to $9.2 billion from $9.7 billion and full year 2026 EBITDA estimates from $9.9 billion to $9.1 billion, reflecting the estimated impact from the loss of the company’s NBA rights.

Wolfe Research’s Peter Supino reiterated an underperform rating on WBD stock and lowered the firm’s price target from $7 to $6 per share. He also lowered full year revenue and EBITDA estimates by 2% year over year to $40.3 billion and and 9% year over year to $9.3 billion, respectively, “reflecting slower top-line trends across segments primarily at DTC and Studio, reflecting flow through, a struggling gaming business, and less [third-party] licensing from Max.”

“With Warner unlikely to pursue a spin due to operational and litigation concerns, the company is left with limited viable options to salvage profitability. Marquee asset values for the Studio, Max and CNN are overshadowed by collapsing linear businesses, while a potential takeout would face antitrust scrutiny and potential buyers lack urgency,” he wrote. “Warner’s next best option is to bundle Max, expand DTC scale, and shift viewership of its content from linear to streaming.”

While he acknowledged that the company is progressing on the right long-term path, he argued that a streaming share that’s multiples below its linear share makes for a “long & challenging” transition, particularly without the NBA and all major affiliate renewals coming up in 2025.

“Loving Warner’s & HBO’s libraries isn’t enough with so much linear TV, austerity, and 4.0x leverage,” he added.

MoffettNathanson’s Robert Fishman maintained a neutral rating on WBD stock but reduced the firm’s price target from $10 to $9 per share and lowered full year adjusted EBITDA for 2024 to $9.4 million and adjusted EBITDA for 2025 to $9.6 billion, citing “continued certainty around the final outcome of the NBA and impact to future affiliate fee negotiations.”

In addition to the NBA, Fishman expressed concern about the ongoing decline in the linear business and said it “probably serves the company’s best interest to explore asset sales to accelerate the timing of paying down its debt.”

“The appetite among advertisers to spend on linear cable networks outside of sports (and to a lesser extent, news) has simply gone away as eyeballs exit the ecosystem and digital alternatives grow in sophistication and reach,” he wrote. “DTC may have a more compelling story. The segment has stopped shedding money (even though there was a step-back in the quarter thanks to a final wave of international launches), and with decent subscriber growth globally and limited cost growth, may as soon as next year become a meaningful contributor to EBITDA. That said, DTC segment also includes the negative headwind
of a dwindling HBO Linear business that likely still contributes a sizable share of its profits.”

Seaport Research analyst David Joyce said he wasn’t surprised by WBD’s results, but reduced estimates for 2024 and 2025.

“At WBD we believe the negatives have been pondered for some time and factored into the punishing valuation levels, so there is nothing really new here – just efforts, being exhibited, to manage a stabilization (at Networks, where
the negative ad trend is improving) and possible turnaround (likely, and significant, for Studios and DTC),” he said in a note maintaining the firm’s buy rating.

He argued that the company needs to continue “blocking and tackling on its opportunistic debt buybacks/paydowns,” upcoming film releases such as “Beetlejuice 2” and “Joker 2,” the path to normalcy for its TV studio, advertising prowess given its significant scale in sports programming despite the NBA headwinds, and the rollout of Max in Europe and the Asia-Pacific region.

WBD shares are down 51% in the past year and 28.9% in the past six months.

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