WBD’s IP is undeniably rich, but few believe it at $7.50 a share offers a pathway to growth ahead to even take a strong dice roll shot at the price.
The historical pattern of a decimated stock not in particular financial trouble is that sooner or later, bottom fishers will show up. It’s as simple as this: Everyone, from your daily Amazon clicker to the most sophisticated trader, cannot resist a bargain. Sometimes it’s real—as when a credible alpha is discovered—and sometimes it’s a delusion based on falling victim to a fool’s errand.
Above: A bottom with no bottom? Or a great entry point for fishers?
But either way, when a stock falls to a market cap so far below its enterprise value, there are bottom fishers who swim into the pool and begin buying the stock. Whether that sudden discovery of hidden value metabolizes the shares dramatically higher, is another story. Mr. Market has become a far bigger skeptic about bottom fishing stocks than ever. He’s armed with bedazzling data he never had before. It makes him feel smart, even if he is just another sucker for a false flag bargain.
As WBD continues to fall, we see no sign thus far that a bottom will begin swimming into the stock in large enough numbers to ignite a real upside move. It sits at $7.50 among massive schools of other dead or live fish on the bargain counter. There are countless stocks with destroyed valuations sitting all over the exchanges.
Among them, related to WBD in its sector, is ROKU, Inc. (ROKU.) It soared to as high at $413.73 in mid-2021. By Feb. 24 of 2024, dogged by no vitality shown in its ARPU, it has fallen to $58.17. It traded as low as 2X it EV/s. And it appears to be headed even lower.
The irony here is that, looking at the possible pathways for the streaming sector out of its current mess, the one that appears to be most logical is some kind return to an ad supported, low sub price model. That’s ROKU. Yet, there are few believers around this stock with anxious fishing pools. Nothing in its present data set, nor what can be seen ahead, provokes the poles into the water. In essence, ROKU is a dead fish stock until somebody demonstrates why it’s a buy many others begin to believe.
And so does WBD not join any school of discoverers at $7.50. Nobody, it appears, has figured out why and how it may revive closer to a value related to its scale.
WBD arrives at the bottom fishing grounds at $7.50 and still no sloshing of fishing poles
Let’s explore the key reasons we believe investors are not biting on the $7.50 WBD bait yet:
WBD has a beta of 1.53, which implies that over a given trading period, say 100 day simple moving average, the stock pops both a buy signal at $8.50 and a sell signal at $8.85. This cannot build strong conviction that the stock is at a true bottom and will stay there as it gathers momentum. Which it has yet to do. Mr. Market has yet to buy into the Zaslav/Malone public statements that WBD will take time to recover a strong price trajectory as the new strategy unfolds. The reason: Every operator in the sector is saying the same thing. Steady incremental growth does not play in today’s market diverted by AI madness and other distractions in pure tech.
The FCF theory does work, as I have suggested in other articles. WBD’s powerful surge of FCF every quarter partially diverted into debt repayment is a strong case for a buy. WBD has repaid ~$10b of the $50b inherited debt and expects to repay another $50b shortly. This should earn a “good housekeeping seal of approval” from Mr. Market, with at least some toe dipping at $7.50 a share. But it has not. The reason: The sector has yet to get past the negativity assigned to it after its business model has been proven flawed short term. Linear TV is indeed a melting ice cube, no matter what kind of slash and burn cost-cutting lies ahead.
The widespread belief that theatrical released films can once more draw massive audiences beyond occasional blockbusters has died. Production costs will be cut and pasted by AI, which is still in early-stage development for filmmaking. Fed action on rates still has the market worried going forward, despite Powell’s current stable outlook. But companies still stuck with massive debt are most vulnerable if inflation doesn’t start kicking up again. WBD’s average cost of debt is in a good place: 4.6%. It is the mother of its solid FCF performance and debt reduction. Yet, any Fed upside move going forward can materially slow debt repayments. Yet, Mr. Market is still unimpressed by financial housekeeping and only takes notice of DTC subscription gains.
PTs: Consensus among BUY analysts $12.40
Overall sentiment among 20 analysts at writing leans ~$12.25. But there are 8 guiding sell and 4 guiding hold. Their PT at over $12 represents a hefty rise above WBD’s current price. Yet no mass of bottom fishers come closer. It is best summarized as a moderate buy.
WBD’s five-year high reached $59.24 in March of 2021—before the investors ran out of patience and dumped everyone in it. It’s fair to state that any lingering positive outlook for the sector has yet to show up, even if WBD— for example— can be bought for as little as ~12% of its all-time high.
Conclusion
The question begged going forward is just how low must WBD fall to begin attracting serious interest by bottom fishers? Some of my colleagues see something around $5. “At that point,” said one of my most active speculators over many years, “You get into what I call the gritty greed factor we all harbor.” It’s below a 100-day moving average range that could signal some safety. And you can buy a position in a $17.7b market cap company under no financial distress.
“It’s a chump change risk against even a projected PT. If it happens, you can pocket over 60% with low risk.” The reality is that bottom feeders make money from other fish joining the party.
This to us suggests the best approach now at $7.50 or less is covered calls. This options strategy consists of buying a stock and selling a call. It avoids a big crash, generates 2-4% income, is favorable leverage and long term assures you a place among the big winners if the bullish take pays out.
Roll the dice if you agree.
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