Warner Bros. Discover Stock Downgraded. Why Paramount Deal Reports Add ‘Elevated Risk.’

Warner Bros. stock was falling on Tuesday. (Yuki Iwamura/Bloomberg)

Key Points

About This Summary

• Warner Bros. Discovery stock fell after a TD Cowen analyst downgraded his rating of the entertainment media company to Hold from Buy.
• The downgrade follows reports of a potential acquisition bid from Paramount Skydance that sent Warner Bros. Discovery stock soaring.
• The analyst noted the risk of the rally given that the possible bid has not been confirmed, shares could fall if a bid doesn’t materialize.

Warner Bros. Discovery stock was falling after a TD Cowen analyst downgraded his rating of the entertainment media company, citing the recent stock run that followed reports of a potential acquisition bid from Paramount Skydance.

Analyst Doug Creutz downgraded shares of Warner Bros. to Hold from Buy and maintained his price target of $14, which implies a 28% decline from the stock’s closing price of $19.46 on Monday.

“Given the speculative nature of the current rally and the elevated risk profile at these levels, we are downgrading WBD,” Creutz wrote in a note.

Shares of Warner Bros. were down 8.4% to $17.82 and were on pace for their largest percentage decrease since April 10, according to Dow Jones Market Data. The stock was also the worst performer in both the S&P 500 and Nasdaq 100 indexes on Tuesday.

As of the stock market close on Monday, Warner Bros. stock has soared 55% since the close on Sept. 10. The Wall Street Journal reported on Sept. 11 that Paramount Skydance was preparing a takeover bid for the media and entertainment company, which has the Harry Potter film franchise and the HBO Max streaming service.

Wall Street was excited about the possible combination of two companies that could stand against other entertainment media giants in both the TV and streaming spaces.

“We believe larger scale would make the combined company a more formidable competitor to NFLX , DIS , CMCSA, AMZN , etc,” Needham analyst Laura Martin wrote in a research note on Sept. 12.

But Creutz wrote on Tuesday that Warner Bros’ stock rally came even though the possible bid hasn’t been confirmed yet.

“While PSKY may come in with a $20+ bid, we don’t love the risk-reward here given the potential for WBD shares to quickly round-trip to $11-$12 if the bid doesn’t materialize,” he said.

Warner Bros. declined to respond to a Barron’s request for comment on Tuesday, and Paramount didn’t immediately respond to a comment request.

Paramount stock was down 2.2% on Tuesday.

Write to Angela Palumbo at angela.palumbo@dowjones.com