Warner Brother's Discovery (WBD)
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On 11/30/22, I initiated a position on WBD (Warner Brother's Discovery) at $11.06.
The high level rationale is as follows:
- The value of the intellectual property (media) WBD owns is likely worth more then the current valuation of WBD. The IP includes top tier names like The Matrix, Harry Potter, The Game of Thrones. WBD is also trading at a 1.85x NTM TEV/Rev vs. NFLX's 4.59x and DIS' 2.57x. WBD is also at a 28B market cap vs. NFLX's 141B. WBD appears too cheap.
- WBD's board is likely one of the best boards a media company can have. In particular, incredibly able executives from Liberty Media, including the legendary John Malone, compose the board.
- Obvious cost savings: the combination of Warner Brother's and Discovery means redundancies can be reduced. For example, both HBO and Discovery both have engineering teams which creates similar IP (engineering that distributes content).
- There is a temporary mispricing, possibly due to WBD's spinoff from ATT for whom, dividends were a reason to own the stock. Before 11/30/22, there was an increased trading volume of which, most volume was sales. On 11/30/22, there was a decreased level of volume which indicates that perhaps, the rapid fire selling has stopped.
- Both insiders and incredible investors (notably Seth Klarman) have been buying in droves. Seth Klarman's estimated acquisition price is about $17.15. In particular, John Malone, has been seen selling puts at $10: https://d18rn0p25nwr6d.cloudfront.net/CIK-0001437107/025976fe-b45f-488e-8dae-a5b564aab8b5.pdf.
- Macroenvironment is quite scary, consumer credit card debt is on the rise, consumer savings are down, interest rates are on the rise.
- Mitigant: WBD media is one of the cheapest forms of entertainment. Cheaper than eating out, cheaper than traveling, etc. Therefore it is likely a more durable cash flow.
- Misexecution on distribution of content (ie. combining Discovery and HBO platforms).
- Mitigant: WBD has already been distributing content on HBO. The IP already exists and WBD has already been increasing the number of subscribers rapidly.
- High debt. The spinoff from ATT and merger has left WBD with an incredibly high debt load.
- Mitigant: According to Blind, WBD has retained McKinsey to aid in cost cutting. They have been aggressively cutting both projects and human capital. In addition, much of the debt was issued at a time when the cost of capital was dramatically lower, so the interest expense load on the company is reasonable.