Warner Bros. Discovery’s Zaslav is strategically ‘following the Disney roadmap’: Analyst
Needham & Co. Senior Media & Internet Analyst Laura Martin joins Yahoo Finance Live to examine fuboTV's latest earnings, Florida Governor Rob DeSantis' revocation of Disney's special tax district, and Warner Bros. Discovery's content rebranding.
Video Transcript
- Fubotv-- it's a top trending ticker on Yahoo Finance today and you can see why. Shares off just about 14% after the company's fourth quarter results. New subscribers, a narrower than expected loss initially helping the stock. But the shares certainly did reverse after Fubo disclosed that it did sell shares at, quote, "negotiated discounts."
For more on this also where we stand in the streaming space at large, we want to bring in Laura Martin, Needham, a senior media and internet analyst. Laura, it's great to see you again. So let's start with what we heard this morning from Fubotv-- lots of questions about the direction of this company, what would be the best case scenario moving forward. What do you think?
LAURA MARTIN: So, I thought, let's make a distinction between fundamentals and the money they raise this morning. So, shares were up, like, 5% before they announced that they've done a big block trade at a discount to Friday's close. So I really think the softness today, which started it down 19% as soon as they announced that they'd raised $70 million, round numbers, is now down, I don't know, 10% to 13%.
But the fundamentals here are really very impressive-- 39% revenue growth, 39% subscriber growth, 30% advertising revenue growth. They hit 1.8 million subs, adding 270,000 subs, which is twice our estimate, which means they're acceleratingly adding subscribers at a time where Disney and Netflix are slowing their subscriber adds and guiding us to lower long term subscribers-- so, sort of bucking the trend fundamentally. They still lose money, which Wall Street has a big problem with, and they needed to raise the money today, which sort of puts a cap on how much appreciation I think Wall Street's worried. They worry that every time this company has good earnings, they're going to sell shares, which then puts a cap on the appreciation potential for Wall Street investors.
- Yeah, two sides of that coin right there. But I want to move on to something related here. Florida Governor Ron DeSantis, he just signed a bill into law this morning giving him greater control over Disney's special taxing. It's called the Reading Creek Improvement District. Now, what implications does this have for the parks business and the company's bottom line?
LAURA MARTIN: OK, so, two things-- philosophically, I think DeSantis is making a run at the presidency, and I think a lot of people who don't really understand the issue very well, a lot of Republicans, he's doing this because Disney is too woke, and Disney has 75,000 employees in Florida, and it is their largest employer. And by the way, in a content company, you actually can't find employees unless you are woke.
So you just don't have a business unless you have woke employees that create content and are in the parks doing service. So I'm not sure Disney has a choice. I also think it's on the right side of history is my opinion.
But DeSantis is running for President. In two years, my opinion is, he'll be gone because I think it's-- you know, he just will be out of this seat. And then I will see.
The problem with him taking away these-- which he didn't really do, actually. But there's $1 billion debt on that Disney-- that's Disney's. And they pick up $1 billion year costs and for the roads and all this stuff.
All that would transfer to the communities locally that house the Walt Disney if they actually took away their benefits. So, he's doing it in name, but there's a lot of liabilities that would get put onto the Florida State budget if he actually did it. So he's basically taken a victory lap for actually not very much substantively.
- So Laura, you don't see this at all complicating how Disney runs its parks at least in the near term.
LAURA MARTIN: I do not. Mm-mm, I do not. I mean, in theory, it makes them get more approvals from local governments to build the next hotel. But their next hotel brings employment.
So, what local government in Florida says, no, we don't want you to build it that way, we want you to build it this way? So no, I don't think so. I actually think nothing happens to Disney. And by the way, we have a much kinder, gentler CEO here who I do not think this would have happened if the CEO had had a different guy in the seat when this legislation that's the big fight over was happening.
- Keeping the Disney theme here, you said in a recent note CEO David Zaslav for Warner Brothers is repositioning the company to be a storytelling company. This has some parallels to Disney. Just wondering where you can go from there.
LAURA MARTIN: OK, OK, so Warner Brothers media has nothing to do with theme parks. So we're leaving companies. What it does-- what it is saying is what I think Disney has demonstrated very successfully over the last decade, which is what Warner Brothers-Discovery is now saying is we want to have film franchises, and we want to expand them into consumer products and into video games and into merchandise and into, like, into global streaming, and we want to bundle all that together and have all revenue streams from theatrical to streaming to linear TV.
Like, that's all super smart, and we want to focus on our franchises, like DC Comics and Harry Potter. Like, they have some world class franchises. Superman-- they haven't had a Superman movie in 10 years.
So, this is a long term standing, Disney under Iger, a long time-- where they only give money to their franchises because when you build a new Superman film, you basically generate traffic and viewing of your old Superman library. So this is a smart play. So they're following the Disney roadmap strategically. Now we have to see if they can implement it.
- Laura, what are you going to be focused on first? Because I think there's lots of questions about implementing the plan going forward, what this mess currently looks like inside the walls of WBD at least today. What's your assessment just in terms of the changes that we have seen and kind of how they've done 180 on a couple of those initial changes?
LAURA MARTIN: So, I think-- so let's go through. So on the cost side, we really have an outstanding chief financial officer here who has a track record of whenever he tells you he's going to cut costs, he's really going to cut costs two or three times more, which means we're going to see margin expansion. So I'm very highly confident-- like, 80% confident that the cost will overdeliver estimates so we'll get margin expansion.
On the revenue side, I'm also highly confident that David Zaslav, the current CEO of Warner Brothers-Discovery who has been running Disney, has a-- I'm sorry-- has been running Discovery assets, he's going to continue to do a great job there. The big question mark is the big allocation of capital this year, which is allocate rebuilding up that film slate. Can DC films do a better job of closing the gap with Marvel?
Revenue, fandom-- you know, the reason the Disney engine works is they have, like, Star Wars. They have the princesses. They have massive fan bases in these properties.
Warner Brothers, never been able to do that. So let's see if, under David Zaslav and his management team, whether the film business can actually create these huge properties that Disney has, and it takes three years. So he will spend a ton of free cash flow this year of the Empire of Warner Brothers-Discovery, and you won't get a bucket of revenue until the film comes out three years from now. So you won't know how well they're executing for three years, but you will have invested round numbers $10 billion in films. So that's risky.
- Yeah, Laura, so then that points to the fact that-- what do you make of the current valuation day with share price, what, right below $16 a share? Certainly has been off to a strong start for the year coming off what it was a very rough 2022, that jump that we've seen. Do you think it's fairly valued where it's trading today?
LAURA MARTIN: So, we have a hold because we don't like being in front of this usage of free cash flow. So you're going to see income statement margin expansion. But we think they're going to be eating free cash flow in the background as we rebuild this film slate. So we'd rather stay on the sidelines in the near term and watch how they execute the integration, let's say.
- Laura Martin, always great to have you. Thanks so much for joining us this afternoon. Have a good week.
LAURA MARTIN: Thank you.
