Nice analysis, but I think you may be drastically underestimating the overhang. Roughly 50% of all stock trading is by high frequency bots who round trip and don't hold their positions...so it is just padded noise to the volume levels. You are also assuming that all of the remaining volume represents selling by ex-T shareholders, and not by short term holders or ex-DISCA holders. If you relax your assumptions, you probably have a share overhang that lasts well thru summer especially as trading volume normalizes.
Thank you - that's a great point. These dynamics are hard for me to forecast and it could definitely last longer than planned, but I'm more than happy to ride the volatility. What if it does not drop further? At the same time, the price action of DISCK pre-spin leads me to believe that some of the long-term holders sold out waiting for the selling to materialize, and they could be getting back in now (of course, it's a small part of the float, but still a potential tailwind).
I agree 100 pct....and then NFLX (and cable stocks) ruined it for everyone. I suspect the way most people valued Newco going into the merger date was an SOTP analysis. That is, value the legacy linear businesses at X, and then value the DTC businesses at Y. Perhaps X was a discount to the cable EBITDA multiples and perhaps Y was a big discount to NFLX P/S multiple. Any math would show that DISCA was implying a super cheap WBD price. However, I suspect most potential buyers would want to wait until *after* the merger. After all, it was probably a safe bet that the price of WBD would be lower immediately following the merger, and the expected puke by retail T holders would provide a lot of liquidity. So perhaps there was a lot of pent up buying demand going into the merger date.
Then NFLX proceeded to blow up. And cable stocks swooned. The same SOTP analysis now probably shows that WBD is no longer a screaming buy (unless NFLX and the cable stocks are...which they may be at these levels, and perhaps better buys than WBD which has significant execution risk). The problem is that WBD is very levered, so any slight change in multiple assumptions has a big effect on the implied equity price.
The problem with saying NFLX could be a buy is that while it has little leverage the business in the short term seems like it will continue to be bumpy. Guiding towards -2m paid subs next quarter further indicates managements inability to get more net adds than churn. I think something that went under the radar for NFLX's last quarter was that all international (even excluding EMEA) was negative for net adds. International should be a growth engine for paid subs but they seem to be encountering trouble there. Password sharing crackdown and ads should increase average revenue per membership in the medium term. At least for the next quarter NFLX would seem to be in trouble. Management does seem to think that content-wise their second half slate is stronger and will draw more net adds. Could be a good catalyst to restore confidence later this year. I'm secretly hoping it gets even cheaper on somewhat disappointing results for the current quarter so I can scoop some up. Believe in the management and product long-term.
Is it possible to accurately predict a range of fcf over the next 10 years? If so, how will that be allocated. Surely the company will use a chunk if cash flow to delever. Is there evidence that this company has a capital allocation framewok? If in 5 years after delevering, the company sells at 5x fcf will they retire shares? Pay a dividend? Is there a large shareholder or conteol entity that can steer the company to do what is value accretive to minority shareholders? Would be thankful for any feedback.
FCF will obviously depend on content investments, but Time Warner was a good company pre-AT&T acquisition and Discovery consistently grew FCF/share historically. I would expect mid-single digit top line growth, and FCF growth above that.
Regarding capital allocation, note that leverage target (2.5x to 3.0x EBITDA) will likely be achieved in the next 24 months, if not sooner. I'm expecting significant buybacks after that. In the end, i's still a Malone company: he has significant ownership and is on the board. CEO/CFO are from Discovery. And outside of deleveraging periods following acquisitions, Discovery was buying back a ton of shares so I would expect exactly the same capital allocation framework (barring additional acquisitions). The only negative is that the current forced selling/market turmoil cannot be taken advantage of right now.
HI Scrooge. Have you revisited this thesis recently? Two years out it's halved, but the cash flows are there, debt falling, etc. This one is a tough nut. Curious what you think now..
Thanks for the write up! Is the guided fcf figure ‘to the firm’ or ‘to the equity’? Would think that it’s to the firm, and so a ev/fcf of 12x would be more appropriate?
Nice analysis, but I think you may be drastically underestimating the overhang. Roughly 50% of all stock trading is by high frequency bots who round trip and don't hold their positions...so it is just padded noise to the volume levels. You are also assuming that all of the remaining volume represents selling by ex-T shareholders, and not by short term holders or ex-DISCA holders. If you relax your assumptions, you probably have a share overhang that lasts well thru summer especially as trading volume normalizes.
Thank you - that's a great point. These dynamics are hard for me to forecast and it could definitely last longer than planned, but I'm more than happy to ride the volatility. What if it does not drop further? At the same time, the price action of DISCK pre-spin leads me to believe that some of the long-term holders sold out waiting for the selling to materialize, and they could be getting back in now (of course, it's a small part of the float, but still a potential tailwind).
I agree 100 pct....and then NFLX (and cable stocks) ruined it for everyone. I suspect the way most people valued Newco going into the merger date was an SOTP analysis. That is, value the legacy linear businesses at X, and then value the DTC businesses at Y. Perhaps X was a discount to the cable EBITDA multiples and perhaps Y was a big discount to NFLX P/S multiple. Any math would show that DISCA was implying a super cheap WBD price. However, I suspect most potential buyers would want to wait until *after* the merger. After all, it was probably a safe bet that the price of WBD would be lower immediately following the merger, and the expected puke by retail T holders would provide a lot of liquidity. So perhaps there was a lot of pent up buying demand going into the merger date.
Then NFLX proceeded to blow up. And cable stocks swooned. The same SOTP analysis now probably shows that WBD is no longer a screaming buy (unless NFLX and the cable stocks are...which they may be at these levels, and perhaps better buys than WBD which has significant execution risk). The problem is that WBD is very levered, so any slight change in multiple assumptions has a big effect on the implied equity price.
The problem with saying NFLX could be a buy is that while it has little leverage the business in the short term seems like it will continue to be bumpy. Guiding towards -2m paid subs next quarter further indicates managements inability to get more net adds than churn. I think something that went under the radar for NFLX's last quarter was that all international (even excluding EMEA) was negative for net adds. International should be a growth engine for paid subs but they seem to be encountering trouble there. Password sharing crackdown and ads should increase average revenue per membership in the medium term. At least for the next quarter NFLX would seem to be in trouble. Management does seem to think that content-wise their second half slate is stronger and will draw more net adds. Could be a good catalyst to restore confidence later this year. I'm secretly hoping it gets even cheaper on somewhat disappointing results for the current quarter so I can scoop some up. Believe in the management and product long-term.
Love this article! Very well done. We came to very similar conclusions + valuation despite me just stumbling across your article a few minutes ago https://scroogecapital.substack.com/p/warner-bros-discovery-wbd?r=orfi8&utm_medium=ios
Is it possible to accurately predict a range of fcf over the next 10 years? If so, how will that be allocated. Surely the company will use a chunk if cash flow to delever. Is there evidence that this company has a capital allocation framewok? If in 5 years after delevering, the company sells at 5x fcf will they retire shares? Pay a dividend? Is there a large shareholder or conteol entity that can steer the company to do what is value accretive to minority shareholders? Would be thankful for any feedback.
FCF will obviously depend on content investments, but Time Warner was a good company pre-AT&T acquisition and Discovery consistently grew FCF/share historically. I would expect mid-single digit top line growth, and FCF growth above that.
Regarding capital allocation, note that leverage target (2.5x to 3.0x EBITDA) will likely be achieved in the next 24 months, if not sooner. I'm expecting significant buybacks after that. In the end, i's still a Malone company: he has significant ownership and is on the board. CEO/CFO are from Discovery. And outside of deleveraging periods following acquisitions, Discovery was buying back a ton of shares so I would expect exactly the same capital allocation framework (barring additional acquisitions). The only negative is that the current forced selling/market turmoil cannot be taken advantage of right now.
Excellent write-up summarizing the situation, thank you
Absolutely fantastic piece of work! I greatly enjoyed it. Thank you very much.
Thank you!
I really enjoyed the Analysis, thank you very much!
Thank you!
HI Scrooge. Have you revisited this thesis recently? Two years out it's halved, but the cash flows are there, debt falling, etc. This one is a tough nut. Curious what you think now..
Thanks
Thanks for the write up! Is the guided fcf figure ‘to the firm’ or ‘to the equity’? Would think that it’s to the firm, and so a ev/fcf of 12x would be more appropriate?
Thank you! The guided FCF figure is FCF to equity (investor presentation states CFFO minus CAPEX in the footnotes).