Warner Bros. Discovery (WBD) experienced a decline in its stock price, dropping over 2% in midday trading on Monday, following a downgrade from Wells Fargo. The downgrade came as Wells Fargo cited concerns about a "risky earnings setup" at the start of the year. Wells Fargo analyst Steve Cahall expressed a negative outlook on WBD's earnings estimates, highlighting lower earnings and limited potential for future multiple expansion since the merger.

Cahall pointed out various factors contributing to the downgrade, including a less favorable probability of mergers and acquisitions (M&A), unfavourable year-over-year studios comparison, increased amortization, the shift of advertisements from linear to streaming platforms, and the double-edged sword of content licensing.

Regarding the potential for M&A, recent comments from Comcast CEO Brian Roberts cast doubt on the possibility. Roberts mentioned that the bar for consolidation remains high, expressing contentment with the current state of Comcast. This dampened the prospects of WBD's potential merger with Comcast. While there have been rumors linking Warner Bros. Discovery to Paramount Global after a meeting last year, Cahall dismissed the idea, citing investor resistance to increased debt.

The analyst also discussed the challenges WBD faces in determining its content strategy, weighing the options of licensing content versus maintaining exclusivity on its flagship streaming service, Max. Cahall argued that licensing marquee titles like "The Sopranos," "Game of Thrones," or "Friends" to deep-pocketed streamers could potentially accelerate earnings and free cash flow but might come at the expense of dwindling Max engagement.

In addition, the article highlights the impact of continued pressure on the networks side of WBD's business. This pressure stems from a challenging advertising market, declining ratings, and increased cord cutting. These factors are expected to weigh on earnings moving forward.

Warner Bros. Discovery is set to report its fiscal fourth-quarter earnings next month. Investors and industry observers will be closely watching to see how the company navigates these challenges and if it is able to overcome the obstacles that have contributed to the stock downgrade.

Correction: A previous version of this article contained incorrect figures for Steve Cahall's updated earnings forecast. We apologize for any confusion caused.