Warner Bros. Discovery has faced a steep decline in its stock price since its $43 billion merger in 2022, with shares falling from $11 to under $8 in the first four months of this year. The company has been dealing with challenges such as a weak advertising market, cord-cutting, and high production costs, as well as concerns over retaining NBA broadcasting rights. CEO David Zaslav’s hefty pay raise has also drawn criticism from investors. However, the company’s financial statements show strong free cash flow, which has more than doubled since the merger, reaching over $6 billion in 2023. Despite the stock price decline, Warner Bros. Discovery’s free cash flow yield is the highest among S&P 500 companies, indicating strong financial health.
Investors are urged to consider Warner Bros. Discovery’s free cash flow in addition to earnings per share, as free cash flow can provide valuable information about a company’s ability to pay down debt, buy back shares, and pay dividends without needing to borrow more money. A 2017 study in the Financial Analysts Journal found that cash flows are more predictive of future stock returns than earnings, highlighting the importance of this metric for investors. Value investors like Warren Buffett favor free cash flow analysis for assessing a company’s valuation, as it provides insights into the company’s future income streams.
Warner Bros. Discovery’s Max streaming service is approaching 100 million subscribers, and the company has been focusing on reducing its debt with its strong cash flow. CEO David Zaslav highlighted the company’s debt reduction efforts during its recent earnings call, emphasizing the importance of stabilizing the company’s financial position for future growth. While rumors of a potential merger with Paramount Global surfaced last year, discussions reportedly stalled earlier this year, leaving Warner Bros. Discovery to focus on organic growth strategies. Analysts are optimistic about the company’s potential for generating over $4 billion in free cash flow this year, which will help further reduce its debt and strengthen its financial position.
One notable investor who sees potential in Warner Bros. Discovery is hedge fund manager Seth Klarman of Baupost Group, who increased his stake in the company during the second quarter of 2022. Klarman, known for his value investing approach, has shown confidence in the company’s prospects despite the stock price decline. As the company prepares to announce its earnings in May, analysts are watching for signs of improving advertising revenue across its platforms, particularly on the Max streaming service. With a focus on de-leveraging and strategic growth initiatives, Warner Bros. Discovery aims to overcome market skepticism and capitalize on its strong financial foundation for future success.