Goldman Sachs thinks its favorite media stock can rally more than 60% despite Hollywood strikes

Published Tue, Jul 18 20237:28 AM EDTUpdated Tue, Jul 18 202311:07 AM EDT

Goldman Sachs sees big gains ahead for Warner Bros. Discovery . Analyst Brett Feldman said Warner Bros. Discovery remained his top pick in the space with a buy rating. While he shaved $1 from his price target, Feldman's new $20 target still shows shares could surge 62.5% over the next year. "While we expect investors to continue to debate the long-term outlook for traditional media companies, we see the risk/reward skew for WBD as most attractive vs. its peer group with key execution catalysts … largely within management's control," Feldman said in a note to clients Tuesday. Across the board, Feldman expects the earnings season to show media companies continue to feel pressure on linear affiliate revenues as cord cutting becomes more popular and cyclical advertising is still hurting despite some areas of improvement. Companies will likely continue keeping focus on profitability in streaming with subscriber growth likely nonexistent or minimal. The outlook is also uncertain heading for the rest of 2023 and into 2024, particularly due to the potential for the writers and actors strike to take a while to resolve. The Writers Guild of America has been on strike since May. The union representing actors, called the Screen Actors Guild – American Federation of Television and Radio Artists, also began striking Friday, effectively bringing Hollywood to a halt . In this environment, Feldman said he prefers media stocks that are driven by company-specific execution rather than secular trends. He said those execution catalysts are largely within the company's hands, pointing specifically to the fact Warner Bros. Discovery repaid more than $1 billion of debt, which he believes came from free cash flows. That can signal the company, which is the parent of brands such as CNN and HBO, is ahead of its free cash flow target for the first half of 2023, he said. It can also indicate that the balance sheet should come in where it was expected for the year and help drive upside. Feldman cut expectations for 2023 revenue to $43 billion and adjusted EBITDA to $11 billion, from prior estimates of $43.2 billion and $11.2 billion, respectively. He also lowered 2024 revenue and EBITDA forecasts. That's because he's now accounting for second-quarter linear subscriber estimates and the moderating recovery expectations for advertising in the second half of this year. These forecasts also now reflect box office performance and expectations, with Feldman pointing to underwhelming stats from "The Flash" while noting "Barbie" could be a success. Feldman noted studio underperformance as a reason for lowering his price target. It's also accounting for new streaming numbers. Warner Bros. Discovery saw a four-million subscriber overlap between Discovery+ and Max, formerly known as HBO Max. The company also saw muted international growth ahead of Max's Latin American launch in the final quarter of this year, with similarly stunted growth also expected in the third quarter. — CNBC's Michael Bloom contributed to this report.