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Warner Bros. Discovery’s brutal year in the stock market hit a new bottom, as shares of the media conglomerate sank 8.1% Thursday — taking a bigger punch than peers.

With the stock drop Thursday, to close at $13.65/share, WBD’s market cap stands at about $33.1 billion. That’s well under its current debt load of some $55 billion. The share price is down 45% since WBD began trading April 11 following the close of Discovery’s deal for WarnerMedia.

On Thursday, J.P. Morgan initiated a “neutral” rating Warner Bros. Discovery stock (previously not rated by the firm) after a period of restriction. Analysts cited the need for more “clarity” around the media conglomerate’s direct-to-consumer strategy.

“WBD has the assets and potential cost savings to reinvest in DTC, but we are skeptical of the company’s ability to grow in aggregate on the other side of synergies,” J.P. Morgan analysts led by Phil Cusick wrote in the note. “[W]e are not negative on WBD shares, but prefer to wait for more clarity around the updated DTC strategy (timing, pricing, content) and pro forma financials before getting more excited – particularly at 5x 2022 leverage as integration efforts ramp.”

The analyst team added that, “We confident WBD will achieve the announced synergy target of $3b within 24 months of [the WarnerMedia] deal close, but we are wary of its growth profile beyond that due to exposure to the linear video ecosystem and questionable direct-to-consumer strength.”

Overall, major U.S. market indexes were down again Thursday. That came after Wednesday’s brief rally following the Federal Reserve’s move to raise its key interest rate by 0.75 percentage point, the biggest increase since 1994, in a bid to control inflation.

The Dow Jones Industrial Average fell 2.42% Thursday, declining 741.46 points to 29,927.07 — dropping below 30,000 for the first time since January 2021. The S&P 500 declined 3.25% and the Nasdaq Composite index was off 4.1%. Other media companies notching losses were Disney (-1.85%), Paramount (-5.7%) and Comcast (-5.6%), while Netflix declined 3.75%.

With respect to Warner Bros. Discovery, investors may be concerned about its relatively high leverage ratio as interest rates are rising. WBD assumed $43 billion in debt with the WarnerMedia deal. On the company’s April 26 earnings call, CFO Gunnar Wiedenfels said the debt-to-equity ratio for the combined company was about 4.6x following the WarnerMedia acquisition.

For the first quarter of 2022 — prior to the Warner Bros. Discovery deal closing — WarnerMedia’s operating income was $1.3 billion, down 33% year over year and operating income margin was 15.1%, compared with 23.0% in Q1 2021. That decline, AT&T said, was largely a result of “continued investments in HBO Max” as well as in CNN+, the subscription-streaming service that WBD almost immediately shuttered post-close, coming less than a month after its launch.

“Q1 operating profit and cash flow for WarnerMedia were clearly below my expectations,” Wiedenfels told analysts on earnings call, noting that the WarnerMedia contribution to WBD’s profit for 2022 would be about $500 million lower than previously expected. That, he added, should be partially offset by “a couple of hundred million dollars on the Discovery side of the combined company.”

“As we've explained all along, 2022 will undoubtedly be a messy year, so a lot of moving pieces and now a somewhat less favorable starting position in Q1,” Wiedenfels said.

Correction: An earlier version of this article said that J.P. Morgan had downgraded Warner Bros. Discovery stock. In fact, the firm initiated a rating of "neutral"; previously, the stock was not rated by J.P. Morgan.

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