It's been a tough start to 2022 for the stock market with the benchmark S&P 500 down about 14% year to date. Still, a significant drop in the market can be a buying opportunity with discounts on quality businesses for long-term investors.
The entertainment industry in particular has struggled in 2022, creating outsize sales on stocks from some of your favorite content producers. With that in mind, here's why Netflix (NFLX -0.69%), Walt Disney (DIS -0.03%), and Warner Bros. Discovery (WBD -2.86%) are worth putting on your watch list this month.
The stock of the most widely used streaming service, Netflix, has been in free fall in 2022, dropping roughly 70%. Most of the sell-off occurred after the company reported the first quarterly loss in overall subscribers in 10 years and guided for a 2 million subscriber loss in its second quarter of 2022. Still, the company maintains the most paid subscribers -- some 222 million -- among its streaming competitors.
Perhaps more importantly, the company shouldn't have to take out additional debt. Netflix recently posted a quarter with $802 million in free cash flow and projects to be free-cash-flow positive indefinitely on an annual basis. By being cash flow positive, the company can also begin paying down its $14 billion in long-term debt.
While Netflix might not be a growth stock any longer, it probably shouldn't be trading like a value stock, having recently touched a five-year low in its price-to-earnings (P/E) ratio. As of this writing, Netflix is trading at a P/E of around 16. For reference, over the past five years, its average P/E is about 91, and it hadn't dipped below 40 until this year.
So if Netflix, the first mover in streaming with the most data and users, can grow its subscriber base once again, its current stock price could be a low point in what has otherwise been an overwhelming success story.
2. Walt Disney
Similar to Netflix, Disney's stock hasn't fared well in 2022, falling about 32% year to date. However, unlike Netflix, the company appears to be in growth mode for its flagship streaming platform, Disney+, adding 11.2 million subscribers to its nearly 130 million global base in its fiscal first quarter ended Jan. 1.
However, operating losses for Disney+ increased versus the prior year despite adding about 35 million subscribers during that time frame. Management has stated its intentions to raise prices for the service by 2023 to improve operating margins.
Additionally, with Netflix's subscriber growth stalling, investors could be assuming that Disney is going through similar challenges. However, on its last earnings call, CEO Bob Chapek reaffirmed his team was "very confident" that Disney+ could reach 230 million to 260 million subscribers by 2024.
Moreover, Disney's most profitable segment -- Parks, Experiences, and Products -- could surpass pre-pandemic levels. Its domestic theme-park resorts most recently saw their best-ever quarter in terms of revenue and operating income records. And according to Mastercard and Visa, travel demand is surging for spring and summer, which could bode well for the segment.
Disney will report its fiscal second-quarter earnings on Wednesday, May 11. If the company shows positive signs in both Disney+ and its Parks, Experiences, and Products segment, expect its stock to bounce back sooner rather than later.
3. Warner Bros. Discovery
The newly formed Warner Bros. Discovery became publicly traded in early April. Yet its stock is already down close to 30% since the merger between Warner Media and Discovery Communications. The resulting company owns impressive properties like HBO Max, Discovery+, and dozens of cable channels. It has about $10 billion in net debt and will have to spend heavily to keep up with its competitors. Specifically, management plans on spending $23 billion for content in 2022 but already has its eyes on cutting costs.
The WarnerMedia segment, which includes Warner Bros. Pictures and HBO Max, produced an eye-popping $40 billion in revenue over the past 15 months but virtually no free cash flow, according to Chief Financial Officer Gunnar Wiedenfels. And within the past month, Warner has abandoned the recently launched CNN+, a streaming offshoot of CNN, due to disappointing subscriber numbers.
Management also has halted scripted shows on both TBS and TNT as it aims to unlock $3 billion worth of synergies between WarnerMedia and Discovery Communications.
By scrutinizing every dollar's potential return on investment, Warner Bros. Discovery might be walking a fine line between cost savings and hurting its value proposition among its customers.
Still, if the media giant can succeed in unlocking its brand synergies with cost-cutting measures, it could soon see growing free cash flow alongside its impressive revenue. Look for potentially more cost-cutting across its properties in May, and as long as the popularity of its programming doesn't wane, the stock could find its footing soon.