To The Moon

$Warner Bros. Discovery(WBD)$

WBD’s Recovery and Growth Potential

Hey, welcome back! We've seen WBD recovering significantly from recent lows, but as you'll soon see, there’s still plenty of potential ahead. Last quarter and the full year were actually solid, and the market responded positively. While overall performance was flat or slightly down, investors focused on the strong growth in DTC, where the company increased its subscriber base by about 20% year over year.

Low Expectations Create High Upside

That’s the key—when a stock is priced with such low expectations, even an okay (but far from outstanding) year can drive it higher. From my perspective, one of the most important aspects is their continued debt repayment. They’ve now reduced gross debt to $40 billion, bringing net leverage to 3.8x—a $4.2 billion reduction over 2024. Their long-term goal is a net leverage of 2.5x to 3x, and once they hit that target, they could shift towards significant dividends and buybacks. More on that later in the video.

Strong Cash Flow Supports Long-Term Growth

Another crucial factor is their cash flow. Despite a slight dip compared to the previous strong year, WBD still generated $4.4 billion in cash flow, maintaining a solid ratio of around six—even after the stock’s recent gains. This highlights the company’s strong financial potential.

Market Recognition is Key to Profitability

Beyond that, the market is starting to recognize this potential. As I’ll show later, that awareness is really all the stock needs to be highly profitable. WBD has the ability to generate $4–6 billion annually—an impressive figure for a company with a $25 billion market cap. For comparison, Netflix, valued at $420 billion, generates around $7 billion per year, while AMC Networks, with a $420 million market cap, brings in roughly $350 million. WBD’s performance can fluctuate based on major releases—whether a successful movie or a hit game, either of which could add another billion in revenue just like that.

Debt Management and Market Perception

Financially, their position is stable, though current assets don’t fully cover current liabilities. However, it's a matter of cash flow management and timing, with short-term credit available if needed. The market often sees a large debt figure and assumes the worst, even for companies that have the capacity to manage it well. This misconception applies to AT&T as well—companies of this scale don’t need to pay off all their debt at once, nor will they ever be completely debt-free.

Debt Repayment Unlocks More Value

The biggest opportunity for WBD lies in further debt repayment, which could free up another billion in interest expenses. Additionally, potential interest rate cuts and improved market sentiment could allow them to secure even cheaper debt in the future. Once they hit their leverage target, they can shift focus to dividends and buybacks, making the stock even more attractive.

Potential Spin-Offs to Unlock Value

WBD has also mentioned exploring spin-offs or other strategies to unlock value. They could follow AT&T’s example—offloading debt-heavy assets while keeping the more profitable, high-growth segments. This could mean splitting into a stable but declining cash-generator and a higher-growth segment focused on Max, gaming studios, and more. While it’s too early to predict, any announcement along these lines could trigger another jump in the stock.

Amortization and Changing Market Sentiment

Another potential catalyst is the amortization decline. Many market participants focus too much on headline profitability without fully understanding the underlying factors. A negative profit automatically seems bad to some investors who don’t look deeper. This issue is compounded by the fact that WBD shares were initially distributed to AT&T shareholders—many of whom prioritize stable dividends and likely weren’t interested in holding a high-debt, non-dividend-paying stock. Given that other investments, like treasuries and dividend stocks, have offered attractive yields, it’s understandable why many AT&T investors offloaded WBD.

Acquisition Interest from Tech Giants

However, as WBD continues reducing debt and disproving market concerns, institutional interest is growing. There’s even the possibility of a buyout by a major player like Apple or Amazon. Owning WBD’s extensive IP portfolio could be a huge advantage for them. If WBD keeps reducing debt without a major increase in market cap, it may become too cheap for these giants to ignore.

The Big Picture: Potential Catalysts and Risks

To put it in perspective, WBD’s enterprise value is roughly $60 billion. For a company like Apple or Amazon, acquiring WBD would result in only a 2–3% share dilution, while immediately boosting cash flow by 5–10%, not to mention additional synergies. This presents several potential catalysts that counter common market concerns.

Of course, risks remain. Poor management decisions—like prioritizing stock performance over business fundamentals—could hurt the company. Competition is another challenge, with Netflix, Apple, and Amazon all possessing significant liquidity and market dominance. If they don’t acquire WBD, they’ll continue being tough competitors. That said, we’re already seeing strategic interest from Disney, as shown in their recent bundling deal.

WBD Stock Valuation

Now, let’s evaluate WBD’s valuation in a challenging environment—one with intense competition, a rapidly declining cable business, and other industry headwinds.

Bearish Scenario: A Struggling Market

If WBD generates only $3 billion per year—roughly what Discovery was making before the merger—and maintains a valuation ratio of 5 (similar to today), that would result in a $15 billion market cap. This translates to a stock price of $6.11, representing a 40% decline, similar to its lows from just half a year ago. However, as WBD continues repaying debt and reducing interest expenses, cash flow would increase. Even at $3 billion annually, the company could afford substantial dividends and buybacks, potentially yielding 10% if half of that cash flow is distributed.

Base Case Scenario: Stabilized Growth

In a more balanced outlook, let’s assume WBD stabilizes at $4.2 billion in annual earnings, considering cable declines while Max and other segments mature. If the market values the stock at 10 times earnings—a conservative multiple for the industry—that would result in a $45 billion market cap, equating to a stock price of $18.34. That’s an 80-90% gain from current levels. With dividends and buybacks factored in, the stock could easily double in value, and even a 50% payout would yield nearly 9% annually at today’s prices.

Bullish Scenario: Debt Repayment and Expansion

Now, consider a scenario where WBD fully repays its debt, Max continues expanding, and other segments offset cable losses, stabilizing at $6 billion in annual earnings. With a much stronger balance sheet and a solid, consistent cash flow, the market could assign a 15x multiple, which is still reasonable compared to industry peers. This would result in a $90 billion market cap, translating to a stock price of $36.70, nearly a 4x return from current levels.

As debt decreases, WBD would have even more free cash flow for massive dividends and buybacks, which could drive further demand for the stock. If the market remains unresponsive, WBD could use buybacks to simulate demand, effectively increasing shareholder value.

Market Cap vs. Enterprise Value in Valuation

Some have asked why I focus on market cap rather than enterprise value (EV). If we were discussing an acquisition—say, by Amazon—EV would be more relevant. However, for individual investors, market cap is what matters most because that’s what we pay.

As WBD repays its debt, EV will decline, but market cap could rise simultaneously, making EV less relevant to our direct valuation. The market cap could double while EV remains stable, which is why I use market cap when assessing stock performance for retail investors.

Final Thoughts: WBD’s Long-Term Potential

I personally didn’t own WBD stock and believe it still a risky company, especially competition, debt and Enegative PS that would have otherwise gone toward interest. If the company can overcome all the issue and blunt management the this creates a snowball effect, accelerating debt reduction and turning WBD into a strong cash flow-generating machine.

Over time, WBD could shift toward massive dividends, buybacks, reinvestments, or strategic spin-offs, making it even more attractive to the market. Additionally, there’s always the possibility of a full acquisition by a larger company, further boosting its value. At the current price, I believe WBD remains an attractive investment. My target entry position is around $7 per share.

WBD is in a strong position, with multiple catalysts that could drive stock gains. Debt repayment, cash flow growth, spin-off possibilities, and potential acquisitions all contribute to its upside. As they continue executing their strategy, the market may finally start to value the company more appropriately.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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