Is it worth purchasing Warner Bros Discovery shares amid speculations about a possible Paramount offer?
Warner Bros. Discovery (WBD), a global content titan with a market capitalization of $45.2 billion, has reported a strong quarter, with several notable achievements. The company reduced its gross debt by $2.7 billion, bringing it to $35.6 billion, while maintaining a healthy cash reserve of $4.9 billion.
Despite a 1% increase in revenue year-over-year to $9.8 billion in the second quarter, falling short of expectations, the company's stock has seen a significant comeback this year. WBD's stock has surged over 140% from its year-to-date low of $7.52, with a 113% gain over the past year, a 70% rally in three months, and a 43% surge in five trading days.
The recent rally has been driven by several factors, including the company's strategic moves and ongoing M&A speculation. Analysts are optimistic about WBD shares due to the announced plan to split the company into two publicly traded entities and strategic franchise expansions. Wells Fargo identifies the streaming and studios division as a potential hot takeover target by Netflix starting in 2026, setting a base price target of $14 and a blue-sky scenario exceeding $20 per share, reflecting over 20% upside.
One of the key drivers of WBD's growth has been its studios division, which contributed significantly to the company's revenue. Studios saw a 55% increase to $3.8 billion, a profit of $863 million, and a 61% increase in content revenues to $3.6 billion. This was due to stronger theatrical releases, despite a decline in advertising revenue and distribution remaining flat.
Warner Bros. Discovery's streaming segment also saw growth, with a 9% increase in revenue to $2.8 billion, a profit of $293 million, and a rise in subscribers to 125.7 million. However, ARPU for the streaming segment decreased, with domestic ARPU falling to $11.16 and international ARPU to $3.85.
The ongoing M&A speculation, particularly the potential Paramount Skydance bid, continues to drive momentum in WBD stock. If the acquisition were to materialize, it could generate about $20 billion in TV ad revenue and $3 billion to $5 billion in annual merger synergies. Paramount Skydance is reportedly interested in acquiring WBD, which could drive up the value of the studio and streaming business.
Analysts, while cautious, remain cautiously optimistic on WBD stock, giving it a "Moderate Buy" rating. The stock is currently trading above its average analyst price target of $13.80 and just 6% shy of the Street-high target of $19. Despite the discount shaped by Wall Street's doubts over its aging cable assets, WBD's stock trades at just 1.2 times sales.
Management forecasts at least 150 million streaming subscribers by 2026 and a target of $1.3 billion in streaming profit this year, alongside $3 billion in EBITDA from studios. With its diverse portfolio including CNN, HBO, TNT, TLC, HGTV, and Discovery Channel, WBD is well-positioned to continue its growth trajectory.
