Warner Bros. Discovery (WBD)

Global entertainment and media company Warner Bros. Discovery (NASDAQ:WBD) missed Wall Street’s revenue expectations in Q1 CY2025, with sales falling 9.8% year on year to $8.98 billion. Its GAAP loss of $0.18 per share was 39% below analysts’ consensus estimates.

Company Overview

Formed from the merger of WarnerMedia and Discovery, Warner Bros. Discovery (NASDAQ:WBD) is a multinational media and entertainment company, offering television networks, streaming services, and film and television production.

The advent of the internet changed how shows, films, music, and overall information flow. As a result, many media companies now face secular headwinds as attention shifts online. Some have made concerted efforts to adapt by introducing digital subscriptions, podcasts, and streaming platforms. Time will tell if their strategies succeed and which companies will emerge as the long-term winners.

Competitors in the local media and digital marketing industry include iHeartMedia (NASDAQ:IHRT), Cumulus Media (NASDAQ:CMLS), and Beasley Broadcast (NASDAQ:BBGI).

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Luckily, Warner Bros. Discovery’s sales grew at an exceptional 28.1% compounded annual growth rate over the last five years. Its growth beat the average consumer discretionary company and shows its offerings resonate with customers.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Warner Bros. Discovery’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 4.9% over the last two years.

Warner Bros. Discovery also breaks out the revenue for its three most important segments: Distribution, Advertising, and Content, which are 54.4%, 22.1%, and 20.8% of revenue. Over the last two years, Warner Bros. Discovery’s revenues in all three segments declined. Its Distribution revenue (licensing fees) averaged year-on-year decreases of 1.7% while its Advertising (marketing services) and Content (films, streaming, games) revenues averaged drops of 8.8% and 8.1%.

This quarter, Warner Bros. Discovery missed Wall Street’s estimates and reported a rather uninspiring 9.8% year-on-year revenue decline, generating $8.98 billion of revenue.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. Although this projection indicates its newer products and services will spur better top-line performance, it is still below average for the sector.

Warner Bros. Discovery’s operating margin has been trending down over the last 12 months and averaged negative 14% over the last two years. Unprofitable, high-growth companies warrant extra scrutiny, especially if their margins fall because they’re spending loads of money to stay relevant, an unsustainable practice.

This quarter, Warner Bros. Discovery generated a negative 0.4% operating margin. The company's consistent lack of profits raise a flag.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Warner Bros. Discovery, its EPS declined by 28.5% annually over the last five years while its revenue grew by 28.1%. This tells us the company became less profitable on a per-share basis as it expanded.

In Q1, Warner Bros. Discovery reported EPS at negative $0.18, up from negative $0.40 in the same quarter last year. Despite growing year on year, this print missed analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Warner Bros. Discovery’s full-year EPS of negative $4.40 will reach break even.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Warner Bros. Discovery has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 15% over the last two years, better than the broader consumer discretionary sector. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Warner Bros. Discovery’s free cash flow clocked in at $302 million in Q1, equivalent to a 3.4% margin. This cash profitability was in line with the comparable period last year but below its two-year average. In a silo, this isn’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts’ consensus estimates show they’re expecting Warner Bros. Discovery’s free cash flow margin of 11.3% for the last 12 months to remain the same.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Warner Bros. Discovery’s five-year average ROIC was negative 0.9%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Warner Bros. Discovery’s ROIC averaged 2.5 percentage point decreases over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Warner Bros. Discovery reported $3.87 billion of cash and $41.43 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $9.04 billion of EBITDA over the last 12 months, we view Warner Bros. Discovery’s 4.2× net-debt-to-EBITDA ratio as safe. We also see its $1.85 billion of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results. Its revenue missed significantly and its EPS fell short of Wall Street’s estimates. A bright spot was its EBITDA outperformance, but overall, this was a softer quarter. The stock surprisingly traded up 4.2% to $8.95 immediately after reporting.

Updated: May 16, 2025 at 10:58 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Warner Bros. Discovery, you should also grasp the company’s longer-term business quality and valuation.

We cheer for all companies serving everyday consumers, but in the case of Warner Bros. Discovery, we’ll be cheering from the sidelines. Although its revenue growth was exceptional over the last five years, it’s expected to deteriorate over the next 12 months and its declining EPS over the last five years makes it a less attractive asset to the public markets. And while the company’s projected EPS for the next year implies the company’s fundamentals will improve, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Warner Bros. Discovery’s P/E ratio based on the next 12 months is 166.4x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $13.47 on the company (compared to the current share price of $9.10).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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