Michael Burry, the investor famed for his role in 'The Big Short', used Warner Bros. Discovery Inc to illustrate a market phenomenon where stocks continue to fall even after becoming undervalued. In a post on X, Burry argued that a stock can decline so significantly that it becomes detached from the underlying business reality, a pattern he said applies to Warner Bros. Discovery. The commentary underscores the risks and potential rewards for value investors holding through sharp downturns.

Burry described a hypothetical scenario where a stock falls from 100 to 10, a 90% decline, before an investor buys in believing it is worth 30. Instead of recovering immediately, the stock continues to fall to 5, leaving the investor down 50%. Burry stated that this detachment from business value is almost exactly what occurred with Warner Bros. Discovery.

According to Burry, investors who hold through such declines can benefit from a rebound. He noted that an investor who bought at 5 and saw the stock recover to 30 would realize a sixfold gain from the bottom. However, he acknowledged that many investors exit before the recovery occurs, selling at levels like 8 or 5 as the decline deepens.

The recovery in Warner Bros. Discovery did not take a decade, Burry added, noting that such rebounds often happen faster than expected. Shares of the media giant are down about 8% year-to-date but have rallied roughly 150% over the past 12 months.

Burry's comments arrive as Paramount Skydance Corp cleared a major regulatory hurdle in its proposed $110 billion acquisition of Warner Bros. Discovery. The U.S. Department of Justice approved the deal last week, signaling no major antitrust concerns. Shares of WBD fell 0.15% on Thursday at $26.20 and declined an additional 0.31% in extended trading.

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