The news surrounding CNN in recent days could have been better. The Atlantic’s unflattering portrait of CEO Chris Licht’s tenure has many in the media industry speculating it won’t be long before Warner Bros. Discovery (WBD) CEO David Zaslav, Licht’s boss, sends Licht packing.
Zaslav’s ego-driven pursuit of WarnerMedia piled on billions in debt that will take years to pay down. In the meantime, he’s probably the most overpaid hired gun in corporate America.
The fact that Zaslav would let CNN devolve into a second-rate media outlet to keep John Malone happy -- the founder of the Liberty group of companies and a director with less than 1% ownership -- is just one of many reasons investors should stay away from WBD stock.
Why Cater to the Center?
The argument that CNN had moved too far to the left under former CNN boss Jeff Zucker is Malone's viewpoint and possibly Zaslav's. However, the latter says CNN is changing because it makes business and editorial sense. In 2021, Malone told CNBC what he thought about CNN.
“‘I would like to see CNN evolve back to the kind of journalism that it started with, and actually have journalists, which would be unique and refreshing,’ he said. Then he suggested a model: ‘Fox News, in my opinion, has followed an interesting trajectory of trying to have ‘news’ news, I mean some actual journalism, embedded in a program schedule of all opinions,’” Vox reported in August 2022.
Malone’s relationship with Zaslav goes back to 2006 when the media mogul recruited him away from NBC to run Discovery. Zaslav has gotten very rich ever since. I looked at Discovery and Warner Bros. Discovery proxies over 16 years. His total compensation over this period was $984.1 million, an average of $61.5 million annually.
He has a billion reasons to carry out Malone’s wishes.
“‘Anybody who underestimates the amount of space that [Malone] occupies in David’s strategic mind and emotional bandwidth has just not followed the last decade,’ says one of Zaslav’s friends. ‘He’s in awe of John,’ says another Zaslav pal,” Vox reported in the same August 2022 article.
Whether Zaslav, a long-time Democratic Party supporter, believed it made good business sense to move CNN to the middle ground between Fox News and MSNBC or was merely carrying out his mentor’s ideas on the subject as a thank you, we’ll never know.
An opinion piece by Poynter.org contributor Michael Bugeja from May highlights why moving to the center is a terrible business move, contrary to Zaslav and Licht’s philosophy.
“Profit margins are comparably low in the impartial center,” Bugeja wrote.
“Beyond that, however, America has become a politically sectarian society that views the opposition as alien, immoral and an existential threat. As The New York Times explained, “the two parties have not only become more ideologically polarized — they have simultaneously sorted along racial, religious, educational, generational and geographic lines.”
So, in a nutshell, CNN has virtually no chance of its ratings returning to record levels it experienced on Jan. 6, 2o21, and in the days and weeks following the insurrection at the Capital.
Trying to please everyone ultimately pleases no one.
The Business Case Against Owning WBD Beyond CNN
When the Warner Media and Discovery Communications merger was completed in April 2022, WBD stock traded at around $25. Today, it’s less than half that amount. If not for a 2023 resurgence, up 26% year-to-date, it would be trading in single digits.
Analysts, who rarely give Sell ratings on stocks, consider it a Moderate Buy (4.17 out of 5) with a mean target price of $19.53, 62% higher than where it’s currently trading. That’s impressive, given it has $46.3 billion in net debt, 1.6x its market cap.
As interest rates are expected to remain high for the foreseeable future, Zaslav and the company will have to thread the needle regarding meeting and exceeding expectations for its various businesses.
The company reported Q1 2023 results in early May with revenues of $10.7 billion, $80 million below analyst estimates, while on the bottom line, it lost 44 cents a share, considerably worse than the 1-cent profit predicted by analysts.
The best news was that the U.S. direct-to-consumer (DTC) streaming business made $50 million in the quarter. Further, the U.S. DTC business is expected to be profitable in 2023, well ahead of schedule.
In April, the company announced that HBO Max would lose the HBO to inform consumers that its DTC programming went beyond scripted television shows. WBD believes it can give Disney (DIS) and Netflix (NFLX) a run for their money.
At the end of the first quarter, its DTC business had 97.6 million streaming subscribers. Disney had 231.3 million (Disney+, ESPN+, and Hulu), while Netflix had 232.5 million. It will take much more content to get close to its two larger competitors.
And let’s not forget Netflix had $9.1 billion in net debt at the end of the first quarter, or 5.1% of its market cap, while Disney’s was $38.1 billion, or 22.6% of its market cap.
There is no question that both Disney and Netflix are far more financially stable than WBD. The fact that Zaslav throws out the carrot that its U.S. DTC will be profitable in 2023 is a nice sound bite. However, it will do little to reduce the burden of its excessive leverage in a higher-rate environment. Warner Bros. Discovery might have some attractive media properties for Max, but they can’t hold a candle to either Disney or Netflix’s DTC Offerings.
WBD is not a good bet at current prices.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
