Warner Bros. Discovery, Inc. (NASDAQ:WBD) May Have Run Too Fast Too Soon With Recent 26% Price Plummet
Warner Bros. Discovery, Inc. (NASDAQ:WBD) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 50% share price drop.
Even after such a large drop in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may still consider Warner Bros. Discovery as a stock to avoid entirely with its 38.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Recent times have been advantageous for Warner Bros. Discovery as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
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Is There Enough Growth For Warner Bros. Discovery?
In order to justify its P/E ratio, Warner Bros. Discovery would need to produce outstanding growth well in excess of the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 39% last year. Still, incredibly EPS has fallen 64% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Shifting to the future, estimates from the seven analysts covering the company suggest earnings growth is heading into negative territory, declining 15% each year over the next three years. That's not great when the rest of the market is expected to grow by 12% per year.
With this information, we find it concerning that Warner Bros. Discovery is trading at a P/E higher than the market. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.
The Key Takeaway
Even after such a strong price drop, Warner Bros. Discovery's P/E still exceeds the rest of the market significantly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Warner Bros. Discovery's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
You should always think about risks. Case in point, we've spotted 3 warning signs for Warner Bros. Discovery you should be aware of, and 2 of them are significant.
If these risks are making you reconsider your opinion on Warner Bros. Discovery, explore our interactive list of high quality stocks to get an idea of what else is out there.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
