Warner Bros. Discovery's stock down 50% since merger — why analysts are still bullish

Warner Bros. Discovery (WBD) has faced an uphill battle since the completion of its $43 billion merger in April 2022, plagued by challenges that include executive shake-ups, box office bombs, company-wide layoffs, and more.

But with a sinking stock price that's fallen roughly 50% since its debut, some have questioned whether the merger was even worth it.

"There were mistakes made but also separate issues out of their control," Bank of America analyst Jessica Reif-Ehrlich told Yahoo Finance, referencing macro challenges like the weakening ad market and increased linear cord-cutting.

Still, the analyst, who has a Buy rating on the stock and $21 price target, said she remains confident in WBD's future as it works to pare down its massive debt load.

"I am optimistic [this merger] will work. It's still very early in its lifecycle," she said. "If [Discovery] can't make it work, somebody else will. Warner Bros. has the best asset class and the best library."

Attorney Bryan Sullivan, partner at Early Sullivan Wright Gizer & McRae, echoed the same sentiment, explaining the two companies are stronger together than apart.

"I'm buying stock in it," he told Yahoo Finance. "I think it has way too much IP that's valuable."

WBD currently has 18 Buy ratings, 10 Holds and 1 Sell, according to data from Bloomberg.

The media giant, which is targeting $4 billion in cost saving synergies over the next two years, saw streaming losses reverse in the first quarter as subscriber growth came in above consensus estimates.

"We’ve come through some major restructurings and have repositioned our businesses with greater precision and focus. And we see a number of positive proof points emerging, with DTC perhaps the most prominent," Warner Bros. Discovery CEO David Zaslav said at the time.

The company revised previous guidance, saying it now expects its US direct-to-consumer business to be profitable by this year. Previously, the company said the streaming division will break even by next year before hitting profitability in two years.

"[WBD] has its costs in a really good place now," Ehrlich said. "When revenue starts to improve — whether it's from advertising, film, or subscription now that Max has launched — the company is in a phenomenal position, and they'll have significant leverage."

The analyst added she expects WBD to benefit from stronger free cash flow and improved margins in the quarters to come, which should help drive the stock price higher.

Zaslav 'corrects' his mistakes

The recent debut of "Max" comes at a critical time in the streaming wars with competitors like Disney (DIS), Netflix (NFLX) and Apple (AAPL) all vying for subscribers.

At the time of the platform's debut, Zaslav touted the company's strong storytelling IP from franchises like "Lord of the Rings" and "Harry Potter" to successful shows like "Friends" and "The Big Bang Theory."

According to Bloomberg, the company is planning to add live programming from CNN to Max later this year — a move Ehrlich says makes sense.

"News drives engagement," she said. "News may not bring subscribers on, but it it does drive engagement and keeps people on for a while. Since they own it, having news as part of Max makes perfect sense."

WBD, which did not immediately respond to Yahoo Finance's request for comment, has been rethinking the future of CNN as the network grapples with historically low ratings, mass layoffs, a failed foray into streaming with CNN+ and, most recently, the firing of former chief Chris Licht.

Ehrlich said that decision underscores the decisiveness of Zaslav, explaining, "When he makes a mistake, he corrects it. He doesn't stick with the mistake. That's the right thing to do."

"I think he's extremely decisive and wants to everything to move forward as quickly and efficiently as possible," Sullivan added. "But Warner Bros. has had issues for a number of years. That's not something that can change on the dot."

"You can't bring in a head coach and expect to compete for the championship that season. You've got to rebuild," he said.

Zaslav's no-nonsense leadership style has led to atypical strategies like licensing content to competitors.

According to Deadline, the company is shopping its HBO titles to Netflix (NFLX), which would mark the first time in nearly a decade that HBO shows would exist on a rival streaming service in the US, the outlet noted.

"I think everybody's going to follow," Ehrlich said. "They don't need all of that content behind a walled garden. Warner Bros. is a massive producer of television. They already supply shows to Apple, Amazon and other streamers. Why not sell to Netflix?"

The company did not immediately respond to Yahoo Finance when asked about the report.

Warner Bros. Discovery shares are are up about 30% year-to-date but down roughly 10% on the year.

Alexandra is a Senior Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at alexandra.canal@yahoofinance.com

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance