WarnerMedia and Discovery completed their merger earlier this month to form Warner Bros. Discovery (WBD -2.17%). The massive new media company is looking to transform into a streaming video powerhouse as consumers transition from the cable bundle.
Not only is Warner Bros. Discovery well positioned to navigate the transitioning media industry, but the stock also looks like a bargain right now. Here are four reasons to like WBD.
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1. A potential streaming giant
The biggest focus of the company going forward will be its streaming services. CEO David Zaslav has already shaken things up by shuttering CNN+ as the service sputtered quickly following its launch. The company will likely fold CNN+ content into HBO Max and Discovery+, its two remaining streaming services. Zaslav intends to scale them to compete with Netflix and Disney.
Zaslav sees total subscriptions reaching "200, 300, 400 million" at some point in the future. For reference, HBO ended the first quarter with nearly 77 million global subscribers, and Discovery counted 22 million subscribers for its direct-to-consumer service at the end of the year. Adding another 100 million viewers over the next few years isn't out of the question.
Disney saw its total streaming subscribers across its three services reach 196 million at the end of 2021, up about 50 million for the year. Netflix added 18 million to reach 222 million.
Using a bundling strategy like Disney could also push subscription rates higher through both gross additions and higher retention rates.
2. Room to improve the cable network business
The combination of Turner Networks and Discovery gives WBD a huge number of cable networks. That gives it leverage over distributors to increase affiliate fees and stuff more of its channels into the bundle.
Turner and Discovery combined to take 30% of viewing time for cable customers last year. The two combined for just $8.6 billion in U.S. advertising revenue, though. Advertisers still spend over $60 billion per year on TV commercials. Even segmenting just cable TV advertisements, the combined company is taking less than 25% of total ad spend.
Warner Bros. Discovery has an opportunity to increase its share of both affiliate fees and ad spend, which will help offset the pressures of cord-cutting.
3. Synergies
As part of the merger, Zaslav expects to produce $3 billion in synergies.
The big area where those synergies will come to bear is in building out and marketing its streaming services. It can be more efficient in its marketing spend with a single streaming platform and bundle. It can build a single platform with fewer engineers than it would take to build out multiple platforms.
There are also cost savings possible on the linear network side as it combines teams to manage cable networks, distribution, and ad sales.
Importantly, Zaslav has a good track record of meeting synergy goals. Discovery's combination with Scripps led to $600 million in synergies after initially expecting just $350 million.
4. Valuation
Not only is Warner Bros. Discovery in a good position to grow its streaming business, maintain its cable network revenue despite cord-cutting, and become more operationally efficient, its stock is cheap.
Shares currently trade at a forward EV/EBITDA multiple of about eight times. By comparison, Disney trades about 17 times its 2022 EBITDA, and Netflix trades for 14 times.
There may be some additional uncertainty about WBD versus the two media giants. For example, the $30 billion in additional debt the company took on to complete the merger will be a large overhang for several years as management works to deleverage. Still, the odds are WBD's valuation moves closer to Disney's and Netflix's over the next few years, meaning a multiple in the mid-teens. That opportunity for multiple expansion gives the stock significant upside.
