Bill Gates once penned that "content is king," and two decades later, legendary entertainment giant Disney (DIS -0.22%) and the newly combined but equally formidable Warner Brothers Discovery (WBD 8.28%) are both vying for that title. Which stock is the better buy going forward?
Disney boasts an iconic content collection that spans generations and geography, ranging from mainstays like Mickey Mouse and the Disney princess movies to franchises that millennials grew up with, like The Lion King. More recently, zoomers have grown up with the likes of Frozen and Cars. Disney rejuvenated Marvel and has expanded the Marvel universe with blockbuster films like Black Panther and the Avengers movies. Disney is also a juggernaut in the world of sports with ESPN.
While this is a daunting content portfolio to compete with, Warner Brothers Discovery is likely the only company that can credibly make the case that it is Disney's equal. HBO is home to prestige dramas like The Sopranos, The Wire, and Game of Thrones. Brands like Harry Potter and Lord of the Rings have large and passionate fanbases, while Sesame Street has enthralled and educated multiple generations of children. Warner Brothers Discovery has extensive sports rights with the NBA, MLB, and NHL. Add in thousands of hours of unscripted programming and reality TV ranging from HGTV, the Food Network, and the Discovery Channel (think anything from TV host and restaurateur Guy Fieri to the crab-fishing series Deadliest Catch), plus cable news like CNN, and this is an all-encompassing and compelling portfolio of content.
One can make the case for Disney or Warner Brothers Discovery having the superior content catalog, but there's little separation here. It's more of a 1a versus 1b.
Zaslav vs. Chapek
Since taking over as Discovery CEO in 2006, David Zaslav has guided Discovery on its journey from a small network into a global heavyweight, acquiring the Food Network and HGTV with the Scripps acquisition in 2018. He led the launch of Discovery+ and the merger with WarnerMedia that turned the company into Warner Brothers Discovery.
Bob Chapek took over as CEO of Disney in February 2020 after previously running Disney's Parks and Resorts division. Disney's stock is down since he took over, but he has only been at the helm for two years. This time period includes a large sell-off during the peak of COVID and the added challenge of Disney's theme parks being shut down. A two-year time frame is too narrow of a window to judge Chapek's reign on, especially as it includes such a massive macroeconomic event.
That said, I am giving the edge to Zaslav based on his long tenure leading Discovery, his greater experience in media, and his extensive history with mergers and acquisitions, which should be useful going forward as he integrates Discovery with WarnerMedia.
Subscribers and subscriber growth
At the end of 2021, Disney+ had 129.8 million paying subscribers worldwide, an impressive total since launching just two years ago. Disney+ added a substantial 11.8 million subscribers during the most recent quarter.
Warner Brothers Discovery's streaming services are still separate segments although this should change now that the merger is closed. Adding Discovery+'s 22 million paid subscribers to HBO Max's 75 million gets it close to 100 million paid subscribers, which is in the ballpark of Disney+. Now that all of the content will be in one place, it will be a more attractive offering to consumers, so Warner Brothers Discovery has another gear coming in terms of subscriber growth. Discovery+ added 2 million subscribers in the fourth quarter of 2021, while HBO and HBO Max reported adding 13 million subscribers in 2021, including three million during the most recent quarter.
Both companies have much lower total subscriber counts than Netlfix's (NFLX -1.52%) industry-leading (but shrinking) 221 million, so both have room to grow going forward. I'll chalk up subscribers as a draw as Disney has a larger total, but Warner Brothers Discovery's new combined offering will give the company a catalyst for more growth going forward.
While the content comparison is a neck and neck finish, valuation is really where the two stocks begin to separate. Disney is trading at 21 times forward earnings, while Warner Brothers Discovery is trading at 15 times next year's earnings. Warner Brothers Discovery also expects to gain $3 billion of synergies thanks to the merger, so realizing these will make it an even better value in the future.
Warner Brothers Discovery or Disney?
Disney and Warner Brothers Discovery are two media empires that no other competitor can match in terms of content, and both look like solid investments overall. Both have large subscriber bases with room to grow. Warner Brothers Discovery has a slight advantage at CEO. With the two businesses on par on many aspects, I give the edge to Warner Brothers Discovery as the better buy going forward given its more attractive valuation.