Warner Bros. Discovery (WBD -1.07%) finally started trading independently on April 11 after being spun off from AT&T (T -1.37%).
This brand new company was created after AT&T decided to spin off WarnerMedia -- the assets it acquired from its takeover of Time Warner in 2018 -- and merge the business with Discovery. AT&T's shareholders received a new 0.24 share of WBD for each share of AT&T they held.
As a subsidiary of AT&T, WarnerMedia struggled to catch up to Netflix (NFLX 1.74%) and the other streaming video leaders. But by spinning off WarnerMedia and merging it with Discovery -- a fellow underdog in the streaming race -- AT&T believed it could create a more streamlined media company that wasn't beholden to its legacy telecom business.
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I recently compared WBD to AT&T and decided that this media company was a more compelling investment than the aging telecom giant. But can WBD actually catch up to Netflix in the saturated streaming market?
How big is Warner Bros. Discovery?
WarnerMedia's HBO Max and Discovery+ had 74 million and 22 million streaming subscribers at the end of 2021, respectively, so they potentially have a combined audience of nearly 100 million subscribers today (there might have been some who subscribed to both).
But that still makes it about half the size of Netflix, which ended 2021 with 221.8 million subscribers; as well as Disney, which served 196.4 million subscribers across all of its streaming services in its latest quarter.
By 2023, WBD aims to generate $52 billion in annual revenue, with $15 billion coming from its direct-to-consumer (DTC) services, and $14 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). For reference, analysts expect Netflix to generate $37.7 billion in revenue and $9.3 billion in adjusted EBITDA in 2023.
On its own, WBD's DTC business -- which mainly revolves around its streaming services -- will still be much smaller than Netflix. However, WBD will still generate most of its revenue from its theatrical movies, cable networks, and the production of licensed content for other media companies. The addition of those businesses makes it a larger and more complex company than Netflix.
That key difference makes WBD much more similar to Paramount Global (PARA -3.94%), formerly known as ViacomCBS, than Netflix. Like WBD, Paramount has also been expanding its streaming services as it nurtures the growth of its film and TV divisions. Paramount ended last year with 56 million streaming subscribers across Paramount+ and Showtime.
The other ways it differs from Netflix
WBD plans to leverage its massive library of content -- which includes the DC comics franchises, Harry Potter, Game of Thrones, Looney Tunes, Friends, Oprah, CNN, and live sports -- to lock in a wide range of viewers. That scattershot approach differs from Netflix's heavy usage of artificial intelligence (AI) algorithms to develop original shows and movies.
Netflix still licenses a lot of older content from other media companies, but most of its top franchises -- including Stranger Things, Squid Game, and Bridgerton -- are original IPs that were developed by tracking the viewing habits of its massive global audience. Netflix also uses AI algorithms to keep viewers engaged with personalized recommendations.
Netflix also doesn't dabble with live sports, which require high licensing fees, or offer any live news channels. It's also repeatedly refused to launch cheaper or free ad-supported tiers to gain more viewers.
WBD, however, has expressed interest in expanding its streaming services with both ad-free and ad-supported options. Therefore, WBD could generate lower revenue per streaming viewer than Netflix -- but it might still pull viewers away from ad-supported platforms like Comcast's Peacock and the Roku Channel.
Lastly, AT&T unloaded a lot of debt onto WBD with its spin-off. As a result, WBD's current net debt-to-adjusted EBITDA ratio of 4.5 is significantly higher than Netflix's projected ratio of 1.3 for 2022, but it intends to reduce that leverage to "3x or below" by the end of 2023.
An apples-to-oranges comparison
WBD's enterprise value stands at just seven times its adjusted EBITDA target for 2023. Netflix trades at 17 times its adjusted EBITDA for the same year, while Paramount trades at 10 times its adjusted EBITDA.
Based on those valuations, WBD looks very cheap relative to its peers. However, investors should remember that WBD -- like Paramount, Disney, and Comcast -- isn't a "pure play" streaming company like Netflix.
Therefore, trying to guess if WBD will become the "next Netflix" is a flawed comparison of apples to oranges. WBD will certainly compete against Netflix in the streaming market and benefit from the slow death of linear TV platforms, but it's ultimately a very different kind of media juggernaut that should be compared to companies like Paramount Global instead.
