Why ‘Barbie’ May Not Be Enough to Put Warner Bros. Discovery Back in the Pink

In Warner Bros.’ summer hit “Barbie,” Ryan Gosling’s Ken has a breakthrough when he realizes he can find meaning without the titular doll played by Margot Robbie. Warner Bros. Discovery CEO David Zaslav will have to do the same on Thursday, demonstrating to Wall Street that there is more to the company’s growth story beyond the film’s recent success.

“Barbie” is an undeniable hit, on pace to reach $1 billion in global box office by Sunday. But it’s unlikely to do more than balance out some recent superhero flops. And Warner Bros. Discovery still has a heavy debt load that it’s struggling to shed, which is where analysts will likely focus their questioning on the company’s second-quarter earnings call.

“Going into earnings this week, Warner Bros Discovery will likely tout the recent box office brilliance of ‘Barbie’ and hope less attention is paid to some recent swings and misses,” Third Bridge analyst Jamie Lumley told TheWrap. “As big as the July results are, the releases last quarter of ‘The Flash’ and ‘Shazam’ did little to reignite energy in theaters.”

Rosenblatt Securities analyst Barton Crockett told TheWrap that the company’s upcoming results will be a “tale of cross-currents.”

“How are they handling the pressure on pay TV, which drives most of their cash flow right now, versus the hope that at some point streaming and Max can make up for those pressures?” he asked. “Our sell rating on the stock presumes that this will be difficult to navigate. To that end, we know that pressures on pay TV are mounting [and] ratings at CNN are challenged.” 

Investing.com senior analyst Jesse Cohen told TheWrap that he believes the second-quarter results will support the view that “the company faces an uncertain demand outlook as it struggles to defend its market share.” The company recently reorganized its sales teams to better unify its revenue efforts.

Time to talk “Barbie 2”?

One interesting question is whether Zaslav will present “Barbie” as the base of a future franchise, which would transform it in investors’ eyes from a one-off to an ongoing revenue stream.

Former HBO programming executive Andy Goldman, now an adjunct professor at New York University’s Tisch School of the Arts, called the film’s release a “zeitgest moment” and thinks “Barbie” presents a growth opportunity for the company.

However, he warned against “a tendency to overleverage an unproven ‘universe'” by announcing potential sequels or spin-offs. And he pointed out that Warner Bros. is still in the midst of rebooting its DC Universe under James Gunn and Peter Safran, an effort that likely won’t bear fruit until 2025.

Crockett pointed out that the recent success of “Barbie” has “pretty well offset the headwinds” from the underperforming “The Flash,” but he noted that the movie industry as a whole remains “a hit-and-miss business.”

Hollywood’s strikes are just adding to that uncertainty. Crockett wondered if Zaslav would address the possibility of delaying movies because striking actors won’t be available to promote them.

Streaming profits

In addition to the Warner Bros. studio, analysts will be laser-focused on profitability in its direct-to-consumer business, which includes Max streaming subscriptions as well as traditional HBO customers.

Streaming media analyst Dan Rayburn is curious to see if the division’s $50 million profit last quarter was a one-off or a trend that will continue, he told TheWrap. Executives have forecast that the division will turn profitable by the end of 2023.

Profitability in streaming has become increasingly important for legacy media amid ongoing pressure on linear TV, which Lumley warned is “likely in for a rough fall season” due to the historic double strike by SAG-AFTRA and the Writers Guild of America.

“Understanding the full impact of the strike will be crucial for looking at Warner Bros Discovery’s trajectory,” Lumley said, warning that a slowdown in new content on streaming services could lead to a rise in cancellations.

Cohen believes that Warner Bros. is “well-positioned to deal with the ongoing writers’ strike in Hollywood thanks to its solid pipeline of content,” but warned that “a lengthy strike by writers and actors will eventually cause damage.”

In the short term, the dual strikes halting scripted production will give the debt-laden entertainment giant an opportunity to save some money as Zaslav looks to cut more costs across the company, Goldman said.

The Writers Guild of America has accepted a request from Hollywood studio leaders, who negotiate with the guilds through the Alliance of Motion Picture and Television Producers, to discuss resuming contract negotiations, and the two groups plan to meet on Friday.

Cutting cable costs

In addition to wanting clarity on how pay TV pressures are impacting affiliate fees and ad revenue at WBD’s Turner networks, Crockett is also curious how far Zaslav’s cost-cutting can go to mitigate these pressures.

The company previously estimated that it will incur up to $5.3 billion in total restructuring charges before taxes, including up to $3.5 billion in content impairment and development write-offs. That restructuring is expected to be completed by the end of 2024.

As for Max, Crockett will be focused on subscriber, ARPU and ad growth and “cost controls balanced against investment in growth.”

“This has trended to become a breakeven-ish business,” Crockett said. “It needs to be much more than that to overcome the pressures on pay TV.”

Deutsche Bank analyst Bryan Kraft, who currently has a $33 price target on WBD stock, lowered the firm’s estimates for the company in a July 13 research note, citing a “slower-than-anticipated advertising market recovery in [the second half] and continued woes at the box office.”

Kraft lowered the bank’s estimate for Studios EBITDA because of “the perfect storm of ‘Barbie’ marketing expenses ahead of its release in [the third quarter], and significant underperformance from ‘The Flash.'” 

However, the firm retained its buy rating on the stock based on the “core idea that WBD’s top tier content engine and library, plus sports and news, positions the company well to succeed once the macro environment is more favorable.”

Additionally, Kraft expressed confidence in the company’s continued transition to streaming with the relaunch of Max in Latin America in the fourth quarter and the Europe, Middle East and Africa and Asia-Pacific markets next year.

He added that the studio division may see some lift in the second half of 2023 following the November release of “Harry Potter: Legacy” on the Nintendo Switch in November and the release of “Mortal Kombat” in September as the fighting game franchise celebrates its 30th anniversary.

While Deutsche Bank believes that the Max launch has gone well, Kraft lowered the firm’s DTC subscriber expectations by 1.5 million given “the steep content fall-off from ‘The Last of Us’ to the disappointing ‘The Idol’ in combination with some churn from the 4 [million] overlapping subscribers that had both Discovery+ and HBO Max heading into the relaunch, and less marketing in international markets ahead of those relaunches.” 

The bank expects WBD to report 54.8 million domestic subscribers and 41.3 million international subscribers and post an adjusted EBITDA loss of $243 million in the second quarter.

Wells Fargo analyst Steve Cahall, who has an overweight rating on WBD stock, said in a July 13 note that investors need to see a path in which the company is able to offset its networks-driven EBITDA pressures. Cahall thinks licensing HBO and Warner Bros. content to other streamers and paring back DTC investments “could help drive earnings regardless of linear trends.”

A Warner Bros. Discovery spokesperson didn’t immediately respond to TheWrap’s request for comment on the range of questions raised by analysts.

Analysts surveyed by Zacks Investment Research are expecting a loss of 38 cents per share on revenue of $10.5 billion. Ahead of the quarterly results, Warner Bros. Discovery shares are up 34.9% year to date, closing Tuesday at $12.87.

The gap between the company’s current stock price and Wall Street’s more ambitious targets might remind observers of the harrowing journey from Barbie Land to the Real World. Like the pink-clad protagonist in “Barbie,” Zaslav has some painful encounters ahead.

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