Warner Brothers Discovery (NASDAQ:WBD) is a newly-formed media entity. It came about from the merger of Discovery with AT&T’s (NYSE:T) media assets. AT&T has been looking to reduce its debt, and unloading its non-core operations is a big step toward reaching that goal. And by pairing operations such as HBO and Warner Brothers with Discovery, the thinking is that the newly-combined company will be large enough to reach critical mass and compete against Walt Disney (NYSE:DIS) and Netflix (NASDAQ:NFLX).
Seemingly, the company’s first quarterly results were a positive. The company highlighted that HBO added almost $3 million subscribers, for example, in its most recent quarter. That was in stark contrast to Netflix, whose stock collapsed following an unexpected decline in its subscriber growth.
As the newly-formed Warner Brothers Discovery gets up to speed, perhaps it will find synergies to achieve further growth against its rivals. In the meantime, WBD stock seems like a deep value. Shares are trading at less than 10 times analysts’ 2023 earnings estimates. That seems like a bargain.
However, there are some complicating factors. For one, these assets were not being well-managed previously. AT&T, in particular, reportedly did a poor job of leading its media assets. For example, we just saw the massive blunder that was CNN+. This short-lived streaming service was supposed to be built around CNN personalities.
However, there simply wasn’t much demand for things such as cooking shows and book clubs hosted by CNN anchors. CNN+ was cancelled just a month after launch, however it ended up costing $300 million before they pulled the plug.
The CNN+ misfire was part of a broader series of mistakes for Warner Brothers Discovery. On its first conference call as a combined entity, CFO Gunnar Wiedenfels said 2022 would be a “messy year” for the company and noted that profits are likely to come in roughly half a billion dollars below previous estimations.
Troublingly, he stated that Warner Brothers Discovery is generating virtually no free cash flow despite its massive top-line revenues. Wiedenfels specifically said that: “I don’t want to go through sort of a list of specific examples, but there’s a lot of chunky investments that are lacking what I would view as a solid analytical, financial foundation.”
So this is where WBD stock investors find themselves today. In theory, there’s a highly-profitable and powerful media business here. However, it’s been hobbled by a series of expensive investments in projects of dubious value, such as CNN+. Part of that can probably be blamed on AT&T, which was way out of its depth trying to run a media company in addition to its core telephony operations.
Still, it requires a leap of faith to buy WBD stock while the turnaround is just getting under way. Shares look cheap here, but it could be many quarters before financial results start to improve.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.