What a fantastic six months it’s been for Warner Bros. Discovery. Shares of the company have skyrocketed 73.4%, hitting $18.02. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Warner Bros. Discovery, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Warner Bros. Discovery Will Underperform?
We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons you should be careful with WBD and a stock we'd rather own.
1. Revenue Tumbling Downwards
We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. Warner Bros. Discovery’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 4.2% over the last two years. 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Warner Bros. Discovery, its EPS declined by 30.9% annually over the last five years while its revenue grew by 29%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Warner Bros. Discovery’s ROIC decreased by 4.7 percentage points annually over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Warner Bros. Discovery doesn’t pass our quality test. After the recent rally, the stock trades at 4.9× forward EV-to-EBITDA (or $18.02 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
Stocks We Like More Than Warner Bros. Discovery
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