On Tuesday, Benchmark reaffirmed its Buy rating on Warner Brothers Discovery (NASDAQ:WBD) with a price target of $18.00. The endorsement follows the announcement of a significant distribution renewal agreement Warner Brothers Discovery secured with Xfinity in the U.S. and Sky UK.
This deal not only extends the reach of the company's linear networks but also includes provisions for the ad-supported video on demand (AVOD) versions of Max and Discovery+ to be integrated into Xfinity's streaming offerings.
While the deal's financial specifics remain undisclosed, Benchmark has confidence in its existing financial projections, even considering the anticipated loss of TNT's NBA broadcast rights after the 2024-2025 season.
Benchmark's valuation of Warner Brothers Discovery is based on a discounted cash flow (DCF) analysis. This method indicates that the $18 price target for the year 2025 is reasonable based on an adjusted EBITDA multiple of 7.9 times, derived from an estimated adjusted EBITDA of nearly $9.6 billion in 2025. Benchmark's analysis takes into account a relative cost of equity in line with the S&P 500 and applies it to Warner Brothers Discovery's financial outlook. The firm's approach includes a conservative assumption of a 1% negative growth rate post-2026.
The analyst at Benchmark further elaborated on the valuation methodology, referencing a blended DCF approach that contrasts with the current market's price-to-earnings (P/E) ratio. The analysis uses a normalized Shiller P/E of 20 times for the broader market, which is lower than the current actual market P/E of approximately 25 times. This conservative stance on market valuation supports the $18 price target for Warner Brothers Discovery.
In addition to the DCF model, Benchmark also explored a sum-of-the-parts valuation approach. This alternative method confirms the $18 target for 2025, assuming different growth rates for various segments of Warner Brothers Discovery's business post-2026. According to this approach, the studio segment would see a steady growth rate of 5%, the direct-to-consumer (DTC) segment would grow at 2.5%, while the networks segment is expected to experience a decline of 7.5%.
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