Global entertainment and media company Warner Bros. Discovery (NASDAQ:WBD) fell short of the market’s revenue expectations in Q3 CY2024, with sales falling 3.6% year on year to $9.62 billion. Its GAAP profit of $0.05 per share was 173% above analysts’ consensus estimates.

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Company Overview

Formed from the merger of WarnerMedia and Discovery, Warner Bros. Discovery (NASDAQ:WBD) is a multinational media and entertainment company, offering television networks, streaming services, and film and television production.

Media

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Sales Growth

A company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Thankfully, Warner Bros. Discovery’s 29% annualized revenue growth over the last five years was exceptional. This is a useful starting point for our analysis.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Warner Bros. Discovery’s recent history marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 5.7% over the last two years.

We can dig further into the company’s revenue dynamics by analyzing its three most important segments: Distribution, Advertising, and Content, which are 51.1%, 17.5%, and 28.3% of revenue. Over the last two years, Warner Bros. Discovery’s revenues in all three segments declined. Its Distribution revenue (licensing fees) averaged year-on-year decreases of 2.3% while its Advertising (marketing services) and Content (films, streaming, games) revenues averaged drops of 10.3% and 7.8%.

This quarter, Warner Bros. Discovery missed Wall Street’s estimates and reported a rather uninspiring 3.6% year-on-year revenue decline, generating $9.62 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 1.8% over the next 12 months, an improvement versus the last two years. Although this projection indicates the market thinks its newer products and services will catalyze better performance, it is still below average for the sector.

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Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Warner Bros. Discovery has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 13% over the last two years, better than the broader consumer discretionary sector. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Warner Bros. Discovery’s free cash flow clocked in at $632 million in Q3, equivalent to a 6.6% margin. The company’s cash profitability regressed as it was 14.1 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren’t a big deal because investment needs can be seasonal, but we’ll be watching to see if the trend extrapolates into future quarters.

Over the next year, analysts’ consensus estimates show they’re expecting Warner Bros. Discovery’s free cash flow margin of 13.4% for the last 12 months to remain the same.

Key Takeaways from Warner Bros. Discovery’s Q3 Results

Streaming is a key area of focus for this stock, and Warner Bros. Discovery added 7.2 million Max subscribers, beating expectations and representing the largest single-quarter jump. We also liked that Warner Bros. Discovery improved its operating margin year on year. The company also beat analysts’ EPS expectations this quarter. On the other hand, its Distribution revenue missed and its revenue fell short of Wall Street’s estimates. Overall, this quarter was mixed, but positive news out of the streaming business is driving the stock higher. The stock traded up 10.2% to $9.20 immediately following the results.

So should you invest in Warner Bros. Discovery right now? What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.