hi i'm jimmy in this video we're looking
at warner brothers discovery ticker
symbol wbd
so we're going to start with the basis
of warner brothers business we're going
to look through what they do and how
they make money then we're going to try
to come up with a fair value of warner
brothers stock using discount of free
cash flow now in the name of full
disclosure i actually own some shares of
warner brothers discovery
and the way i got those shares i own
shares of at t and when att
took their warner media business what
they did is they spun it off and they
ended up combining it with discovery
that became warner brothers discovery
and that's the stock we're looking at
right now for me
as a owner of some shares of warner
brothers discovery it's less than one
percent of my portfolio but my question
is do i sell those shares do i buy more
and if i do where do i want to buy okay
now let's jump in and look at warner
brothers discovery's business so
straight out of their presentation the
first thing that caught my eye is how
much content they own of course they
control hbo they control cnn they
control the whole dc universe this is
very similar looks reminds me a lot of
another stock i own that's disney so
disney has the whole marvel universe
they too they have espn they have hulu
they have a whole bunch over there
this combined company is huge when it
comes to from a revenue generating
standpoint even though the stock has
really been beaten down a lot okay now
let's jump over to how they segment
their business so this is according to
their most recent quarters revenue and
that's important because they changed
the way they segmented their business
once they combined once more to media
and discovery combined so we can see
that their largest segment is their
network segment and that accounted for
about 53 of revenue this is where they
account for revenue from both domestic
and international television networks
then the next largest segment is their
studio segment this is kind of for about
a quarter of all their revenue now this
is where they account for the revenue
that they get from the production and
release of feature films also if they
create television shows and they license
those television shows out this is where
that revenue goes a good example of that
is hbo is one of the creators behind the
ted lasso show that streams over on
apple tv well hbo gets a piece of that
revenue this is part of this is where
that revenue would go and then their
final segment is direct to consumer you
might see this shortened as dtc and this
is obviously the revenue that they
generate for their premium paid tv
things like hbo or hbo max or even
discovery plus we can see that
illustrated here again this particular
slide came out of their most recent
investor presentation now many investors
are focusing on understandably their
direct to consumer business this is
their fastest growing segment which is a
good thing now one of the drawbacks to
this particular segment is the fact that
the margins tend to be fairly volatile
they have to constantly create good
content for people to come over and stay
over
plus there's a cost to that content
creation so if they create too much of
it or it cost too much that could
squeeze margins and as an investor that
would be a bad thing now
right now
this particular segment for hbo and
discovery plus and all of them are not
profitable so we're going to come back
to this one in a second but when we
compare that to something like their
studios business well their studios
business is one of their more stable
businesses this is one of their more
profitable businesses right along with
their networks business these are sort
of legacy media businesses but both of
these segments are declining so when we
focus on this direct to consumer
business well management has stated that
they believe it'll be 120 million
subscribers is what they need to make it
let's say a good investment for the
company right now they're sitting at
about 92 million so they got to pick up
a decent amount between now and 2025 is
when management says that that will is
their target to getting to 120 million
subscribers so that will really improve
this call it 20 or so percent of their
revenue that could help that grow as the
two other
lines of businesses could struggle just
a little bit
now in going through their management
discussion and analysis which is a great
report to read if you ever try to
understand a company well in going
through that they broke out their
revenue in another way that i also
thought was interesting and that
basically i put together this chart
using the data that they gave us here
their biggest group is obviously their
distribution network their distribution
revenue accounted for about 48
of total revenue and this is where they
bring in money for their from their
direct to consumer business the revenue
from that goes here but also the money
that they get from what they call linear
networks things like traditional hbo
where somebody would have cable they
paid for hbo they pay 10 14 bucks a
month whatever it is well that would
also fall in this category we can see
that's their biggest source of revenue
right now but then they also have their
content business and this is where this
is licensing fees this is a big
percentage of their overall revenue now
earlier i compare i compared warner
brothers discovery to disney and one of
the differences is that this particular
part of their businesses their licensing
fees uh licensing of let's say feature
films and uh television programs things
like that well their licensing they have
one of the biggest licensing
revenue sources in the industry they're
bigger than disney from that perspective
that could be a good thing or a bad
thing but it's probably right now looked
at as a negative because that is a
business that is declining from a growth
perspective so that could hurt them if
people perceive that to be a dying
business now i actually don't think it's
going to completely die i think that
there will always be versions of it
however repackage that becomes whether
it be we sign up for hulu we sign up for
youtube tv or something like that and
you end up with a version of cable
can we license hbo or discovery through
that and
then they will keep some revenue or uh
then that they will be able to
license out the content that they
currently create
the other piece of their business is
their advertising revenue and the
revenue generated here is for
traditional television ads if they're
part of that then they would get a piece
of that money but also their ad
supported hbo max and discovery plus now
that is one thing that they're talking
about in the most recent earnings call
they talk when they roll when they're
rolling out
they're rolling out a new plat platform
basically it will be everything that
they have all combined together all of
their content in one package and that
package will
ultimately have a few different versions
of it you could have a
ad supported version where maybe it
doesn't cost you anything an ad lite
version would cost you just a little or
an ad free version where perhaps it
would cost you more that that would be
the most logical way of doing it
a lot of people
had pushback coming out of the earnings
call about this and understandably so if
i sign up for hbo i don't necessarily
want discovery so why make me pay for
both
now the way management has looked at it
is that if i sign up for my family
perhaps the kids want to see the dc
products and maybe my wife wants to
watch
you know the hbo products maybe i want
to watch the discovery products that
everybody would end up in their own
bucket and in theory it makes the
platform a bit stickier
i understand that it works for a
platform like netflix but disney does it
differently disney you can sign up for
espn you can sign up for hulu you can
sign up for disney plus you can do them
all individually
i think that the issue with this for hbo
for warner brothers discovery is
ultimately they have to have the
technology behind it it works for
netflix because they built their
platform from the ground up designed to
let the algorithm recommend what you
want the most
warner brothers discovery is going to
have to go a long way to make that
happen
we'll come back to this in a second sort
of but for now let's jump over to some
of the numbers
so these are numbers for ebitda and this
is important ebitda is earnings before
interest taxes and depreciation now this
is an important number because
management in their most recent call and
since the two companies have combined
have continued to talk about how
important this is now the first thing to
notice here is the big jump from the
past 12 months to them to projected 2022
numbers and after obviously i just
wanted to point out that this jump is
because of the merger now since we're
going to use discounted free cash flow
to try to value this business the reason
i showed the ebitda numbers expected
ebitda numbers well the reason i showed
that is because management has come out
and stated that they expect down the
road free cash flow will be about 60
percent of ebitda now it would take a
few years to get there but for now
management has come out and given their
guidance as to what they expect for free
cash flow to b over the next couple
years we could see that in 2022 they're
expecting to put up about 3 billion in
free cash flow
2023 they're expecting to put up about 5
billion and then analysts have them
putting up about 7.5 billion in 2024 now
what i found interesting about this is
that if we look at analyst estimates for
these same time periods well analysts
are actually a bit more aggressive in
the early years and less aggressive in
back going out to 2024. so this is
actually a website that we're building
that helps us calculate the fair value
of a stock quickly and easily basically
you punch in the ticker it kicks back a
fair value we use analyst estimates for
free cash flow to start us off and then
if we choose like i did here you could
make some custom adjustments after you
do your research to try to come up with
the most accurate fair value so we could
see that the numbers we're using right
now are numbers from analyst estimates
and using these numbers after accounting
for their debt and their cash and we
could see that they get about 50 billion
dollars in debt after accounting for
those numbers well we get a fair value
of about 25 bucks per share if we didn't
account for their debt and cash they'd
be worth about 45 dollars per share but
we'll come back to this one in a second
for now i think that it makes sense at
the current price of less than 13 a
share it looks like this could be a good
value if we believe analysts but now
let's be a bit more conservative and say
what if we were to switch this over to
what management has guided to which is
it's a logical place to start well
switching over we can now see that we
got three billion dollars in year one
then we have five billion in a year two
and then we go with slightly less than
seven billion from analysts then we've
gone out two additional years just to
normalize the growth and assume that
they get on their mark of getting to 120
million subscribers and they gradually
level off for a to a more reasonable
growth at a more reasonable growth pace
that being said what we'd end up with is
a fair value of about 23 bucks per share
now i do think it's important that we
look at their debt clearly this is a
large debt load and management has
stated that they expect to aggressively
pay off their debt over the next couple
years which is another reason why i
think it makes sense to take more
conservative numbers over the next few
years they expect to reduce their debt
load by about 40 percent
my only concern is that
there's a lot for management to tackle
all at once here so
i think it's tricky for them to tackle
everything at the same time for example
they have to lower their debt they're
going to be rolling out a new platform
with all their combined products they
anticipate next summer so the summer of
2023 that's a big expense they still
have all their traditional business
maintenance expenses creating new
content things along those lines plus
there's costs associated with merging
the two companies there's going to be
costs there
point is there's a lot of
there's a lot of balls in the air that
they have to juggle to make this all
come off smoothly and i think there is
added risk there with that being said i
think we can account for that risk by
adjusting their fair value so jumping
back to the fair value calculator well
we have a fair value about 23 bucks per
share taking the more conservative
numbers well we can adjust that over
here and add a margin of safety i think
a 25 margin of safety makes a lot of
sense here so we add in our margin of
safety it does the calculation for us
and it says now we should ideally buy
this stock below 18 per share again
right now the stock is trading less than
13 per share so there's huge potential
upside for this stock
so for me on a personal basis well i
plan on adding more shares more i plan
on leveling out my position
increasing my position size assuming the
stock stays stays down here over the
next couple days i like to wait a few
days after i do a video to let you guys
have time to do your own research see if
it's worth you buying before i jump in
and add my shares but as long as the
stock stays down in the 12 13 14 range i
do plan on adding shares to my
investment ports now if you'd like to
get access to this website this is just
the beginning of what we're doing the
discounted cash flow calculator is
working it's up and running and get
access to that right now but then we're
adding other different valuation methods
ways to value banks ways to value real
estate companies
other ways to value stocks small cap
stocks fast growing stocks best ways to
value each of those we could be using
enterprise value to ebitda
net asset value price to book value
there's a ton of different ways and the
plan is that you punch in the ticker it
will recommend the one two or three best
ways to value a stock and then it will
show you what the fair value of that
company would be using each method
you'll then be able to go individually
and look at each of them see which one
seems to fit your research so again if
you'd like to sign up i will leave a
link in the description below we also
have a private investing community that
you will get become a part of if you'd
like thank you so much and i will see
you in the next video