5. Warner Bros. Discovery, Inc. (NASDAQ:WBD)
Year to Date Gain: -33.45%
Number of Hedge Fund Holders: 48
Warner Bros. Discovery, Inc. (NASDAQ:WBD) is a communication services company that operates as a media and entertainment company. The company creates and distributes content and brands across television, film, and streaming.
The stock has declined 33.45% year to date, underperforming the overall market. The underperformance has been fueled by disappointing second-quarter results whereby the media giant posted a more considerable than-expected loss of $4.07 a share as revenue also fell short of expectations at $9.7 billion amid declines across all business segments.
Warner Bros. Discovery, Inc. (NASDAQ:WBD)’s underperformance has also been fueled by the company’s challenges in linear advertising. In an environment of cord-cutting and other shifts in the media industry, the media giant has found it challenging to secure distribution deals.
The company’s challenges have been exacerbated by the fact that the media industry, the TV and streaming industries, are going through a difficult moment. Due to market saturation, the growth of streaming subscribers has slowed to a crawl, and the cable television industry is still contracting.
At the same time, intermediaries like Warner Bros. Discovery, Inc. (NASDAQ:WBD) are finding it more and more costly to operate in the TV industry. The cable giant must now compete with Amazon for the rights to broadcast a limited number of NBA games.
Nevertheless, the company’s outlook has improved with the signing of a multiyear distribution agreement with Charter Communication. The pact opens the way for the integration of linear video and direct-to-consumer streaming services expected to offer more value to Warner Bros. Discovery, Inc. (NASDAQ:WBD) customers. The updated deal includes increased fees Charter will pay to carry Warner Bros.
In addition to growing its subscriber base, Warner Bros direct-to-consumer (DTC) division is just beginning to expand internationally and increase its advertising revenue. The stock was held by 48 hedge funds in Q2 2024.
Here is what Bonhoeffer Capital Management said about Warner Bros. Discovery, Inc. (NASDAQ:WBD) in its first quarter 2024 investor letter:
In remembrance of Charlie Munger, I listened to and read his investment speeches in Poor Charlie’s Almanac. His speech to the University of Southern California business school specifically dealt with the application of worldly wisdom to investment management and business. There were five ideas presented by Munger in that speech which are particularly relevant in the Bonhoeffer portfolio. First, over the long term, it’s hard for a stock to earn more than the underlying business earns. As an illustration of this principle, we examined two firms, Old Dominion Freight Line (ODFL) and Warner Bros. Discovery, Inc. (NASDAQ:WBD).
WBD is an example of a value stock whose value has been impaired by a declining intrinsic value over time. Historically, WBD has been consolidating media content and distribution firms. However, the media content and distribution industry has been fragmenting over the past 20 years, with many new competitors and lower barriers to entry. Based upon Morningstar’s estimates, WBD is almost always undervalued, but stock price declined by 13.4% per year less than intrinsic value which declined by 5% per year, which is still a disaster compared to the index which increased by 12.7% per year. The average RoE was 7.2% and was declining through the period and ended negative. The chart below shows both the stock and Morningstar’s estimate of its intrinsic value over time.
These trends of growth and their effects on returns are reflected in the new investments we have invested in and those firms we have sold recently. We have sold most of our telecom and media firms (which have had flat to declining intrinsic values over time). These firms have been replaced by consolidating capital light distribution firms and specialized financial services firms (which have had increased intrinsic value over time) one of which is described below.
