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Goldman Sachs Rates Warner Bros Discovery Stock as Neutral

On June 25, 2024, financial services giant Goldman Sachs issued a neutral rating on Warner Bros. Discovery (WBD) stock. This designation signifies that the analysts at Goldman Sachs believe the stock’s performance will likely mirror the broader market in the foreseeable future. The neutral rating accompanied a price target of $8.50 per share.

Goldman Sachs’ analysis projects modest revenue growth for Warner Bros. Discovery over the next six years. They anticipate an increase from an estimated $42 billion in 2024 to $46 billion by 2030, translating to a compound annual growth rate (CAGR) of approximately 1%. This growth is expected to be driven primarily by the direct-to-consumer (DTC) segment, with a projected rise of 7%. Studio revenues are also forecast to witness a moderate increase of 2%. However, these gains will likely be partially offset by a decline of 3% in the network segment.

The report expresses concern regarding Warner Bros. Discovery’s profitability. Goldman Sachs predicts a contraction in Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) at a CAGR of 5% from 2024 to 2030. This translates to a projected decrease in profit margins from 24% to 16%. The decline is attributed primarily to the rising cost of content, particularly related to sports rights. While the growth of the DTC segment offers a positive counterpoint, it is anticipated to be insufficient to fully compensate for the increasing expenses.

Goldman Sachs acknowledges the potential within the DTC space, citing the international expansion of Warner Bros. Discovery’s streaming service, HBO Max, as a key driver. Additionally, the report highlights the company’s ongoing investments in content creation and its efforts to reduce customer churn through strategies such as bundling subscriptions and forming partnerships.

However, the analysis also emphasizes the challenges faced by the company’s traditional linear network business. The report anticipates a continued negative impact from cord-cutting, a trend where consumers are increasingly abandoning cable and satellite television subscriptions in favor of online streaming services. This decline in viewership is expected to put pressure on both affiliate fees and advertising revenues, further squeezing profit margins.

Furthermore, Goldman Sachs raises concerns regarding the rising costs associated with linear TV sports rights. The report specifically mentions the Olympics, National Hockey League (NHL), and National Basketball Association (NBA) as significant contributors to these escalating expenses.

In conclusion, Goldman Sachs’ neutral rating on Warner Bros. Discovery stock reflects a cautious outlook on the company’s financial trajectory. The analysis acknowledges the growth potential within the DTC segment. Still, it remains apprehensive about the headwinds facing the traditional network business and the rising costs of content acquisition, particularly sports rights. This balanced perspective suggests that investors should carefully consider both the opportunities and challenges before making investment decisions concerning Warner Bros. Discovery stock.

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