Update on Warner Bro Discovery: Media Gem at >20% FCF Yield

Ridiculously cheap!

We have discussed Warner Brothers Discovery (WBD) and deemed it as an interesting and cheap alternative to Disney. Share price has collapsed on the back of its heavy debt and poor earnings performance in 2023. The company is still losing money at the net income level for the past few quarters and looks like it could continue and even if it somehow breaks even, net income level will be low. As such, the stock is best valued using FCF.

To recap its investment thesis:

WBD was created in 2022 with the merger of Warner Media, which was spun out of AT&T, and Discovery. The current entity is an entertainment IP franchise powerhouse and a global media giant that operates cable TV networks with both premium entertainment and low cost family-friendly content as well as non-fiction science and lifestyle programming.

More interestingly, WBD is now home to iconic franchises like Game of Thrones, Harry Potter, Friends, Batman, Superman & the DC Justice League universe and Looney Tunes amongst others. It also houses distinguished media brands such as CNN, HBO, Cinemax, Discovery and Cartoon Network that most of us would be familiar with. As such, CEO David Zaslav estimated that WBD has 35% market share of the best content on Earth.

The investment thesis is therefore about owning such an entertainment content juggernaut which also generates tremendous amount of free cashflow at an attractive entry price today.

Let’s look at the simple financials which we skipped in the initial discussion.

Simple financials (Dec 2025 estimate, USD)

• Sales: 42.5bn

• EBITDA: 10.8bn, EBIT: 3.1bn

• Net income: -0.2bn, FCF: 5.8bn

• Current Debt: 40.0bn, Mkt Cap 21.0bn

EBITDA: Earnings before Interest, Tax, Depreciation and Amortization

Ratios

• ROE 16%, ROIC 9% in 2019, currently negative

• EV/EBITDA 5.8x (Dec 25), PER currently negative

• Past EBIT margins: 10-25%, 0% in Dec 23 and 7% in Dec 24

• FCF yield >20%

ROE: Return on Equity, ROIC: Return on Invested Capital

PER: Price Earnings Ratio, FCF: free cashflow

While net income is negative, the company has been generating positive free cashflow. The slide from the full year earnings deck above showed how FCF ended at a spectacular USD6.2bn. Analysts are estimating that EBITDA and FCF would be sustained into 2024 and 2025.

1. Business Segment Updates

In the initiation, we did not discuss the segments in detail. WBD has three business segments: Studios, Network and DTC.