I’m not sure what spooked investors about Warner Bros. Discovery’s third-quarter earnings, but whatever it was sent the stock down 19 percent on Wednesday. Frankly, I don’t have any concern about WBD beyond its pre-existing challenges, many of which plague its whole industry: WBD has too much debt, too much leverage, a barely breakeven streaming business, and a linear TV unit suffering from a declining advertising market. This has been the story since the company was created in April 2022.
Since WBD started trading, its stock is down 59 percent. It now has a market value of around $25 billion and market capitalization of $68 billion, including $43 billion of net debt. And WBD will, justifiably, continue to struggle as an equity play as long as its leverage remains so high. No matter how you slice it—and even with a weighted average coupon of 4.6 percent, and with long-dated maturities—$43 billion is still a lot of debt. Heavy cake.
And yet, I read the third-quarter earnings differently than the market. This is not investment advice, but it seems to me David Zaslav and C.F.O. Gunnar Wiedenfels are starting to turn the WBD battleship around in the face of the strong headwinds rattling the industry. I’ve often described WBD as a publicly traded leveraged buyout. And it is, and will continue to be, until it pays down more of its debt. That’s the bad news. The good news is that Zaz & Co. are paying down that debt. In fact, since the start of the WBD journey, according to Zaz, the company has paid down $12 billion of debt and is generating “over $5 billion in free cash flow” at the moment. (The market may have overreacted on Wednesday; the stock was up 5 percent on Friday, but still was down 13 percent for the week.)