After watching Netflix run away with the streaming market for the last decade, the big legacy media companies finally got serious and started to diversify their revenue streams in digital platforms and adapt to take advantage of the cord-cutting trends that hurt their TV advertising businesses. But which ones do it better?
The new Warner Bros. Discovery (WBD 0.24%) is the result of the merger between AT&T's WarnerMedia entertainment and cable networks with Discovery Communications. It has an impressive lineup of properties, including cable channels CNN, TNT, TBS, HBO, Discovery Channel, HGTV, Food Network, TLC, Investigation Discovery, and the Travel Channel, along with a rich catalog of content from the Warner Bros. film studio. Warner Bros. Discovery is also home to the DC Comics universe of superheroes, including Batman, Wonder Woman, and Superman, and the many films and series that have been based on them.
ViacomCBS -- formed out of the re-merger of Viacom and CBS -- changed its name to Paramount Global (PARA 7.98%) (PARA.A 4.18%) earlier this year, and beyond its namesake film studio, it owns an equally impressive list of networks, including Showtime, Comedy Central, CMT, BET, CBS Sports Net, TVLand, The CW, VH-1, MTV, Nickelodeon, and of course, CBS.
Warner Bros. Discovery reported disappointing results this year, while Paramount Global enjoys stronger momentum across its theatrical releases and streaming subscriptions. While most media companies face near-term headwinds with exposure to a weak TV advertising market, there are two reasons I favor Paramount Global stock at the moment.
Paramount+ doubled its subscriber count over the year-ago quarter
Warner Bros. Discovery didn't live up to investor expectations in the first half of 2022. On a pro forma basis (which assumes the merger was completed a year ago), its total revenue increased 2% year over year.
| Revenue Source | 2022 First-Half Revenue (Pro Forma) | YOY Change |
|---|---|---|
| Advertising | $5.6 billion | 2% |
| Distribution | $10.5 billion | 2% |
| Content | $5.7 billion | (2%) |
| Other | $442 million | 39% |
| Total | $22.2 billion | 2% |
Data source: Warner Bros. Discovery. YOY = Year-over-year.
HBO Max and Discovery+ added only 1.7 million new subscribers in the second quarter, bringing the company's streaming subscription total to 92 million. Direct-to-consumer was Warner Bros. Discovery's fastest-growing segment in the second quarter, with revenue up 4% year over year on an adjusted basis. Management plans to combine HBO Max and Discovery+ into one service, with the goal of attracting 40 million new subscribers by 2025.
While Warner Bros. Discovery and Paramount Global still depend on TV advertising for much of their revenue, streaming is the engine of growth for both. And that engine is revving faster for Paramount.
| Revenue Source | 2022 First-Half Revenue | YOY Change |
|---|---|---|
| TV Media | $10.9 billion | (3%) |
| Direct-to-consumer | $2.2 billion | 67% |
| Filmed entertainment | $1.9 billion | 36% |
| Eliminations | ($63) million | 2% |
| Total revenue | $15.1 billion | 8% |
Data source: Paramount Global. YOY = Year-over-year.
In the first half of the year, Paramount reported revenue growth of 8% year over year, led by a 67% increase in revenue from streaming services and a 36% increase from theatrical releases. The film Top Gun: Maverick made over $1.4 billion globally at the box office, becoming one of the greatest successes in Paramount's 110-year history as a film studio. Warner Bros. Discovery's top 2022 release, The Batman, generated just over half as much -- $770 million globally.
Paramount+ added over 4 million new subscribers in the second quarter. It now has 43 million, up from 21 million in Q2 2021. Meanwhile, its free ad-supported streaming service, Pluto TV, now has almost 70 million monthly active users, up from 52 million in the year-ago quarter.
There is no secret sauce to producing faster growth in entertainment. It's just a matter of having content people want to watch. Paramount Global's growth in 2022 reflects a company firing on all cylinders with its content production. Strong demand for the company's box office hits and popular new series, its deep library of shows and films, and access to live sports streaming allows Paramount+ to drive great results on the direct-to-consumer side.
Warner Bros. Discovery's debt makes the stock more expensive
At first glance, Warner Bros. Discovery looks cheaper on a price-to-earnings basis. Based on analysts' estimates for 2022 earnings, the stock trades at a forward P/E ratio of 6.6. But it's more expensive than it appears.
Add the company's net debt to its market cap and you get an enterprise value of $80 billion. On an enterprise-value-to-EBITDA basis, Warner Bros. Discovery trades at a ratio of 8, while Paramount Global trades at a bargain ratio of 5.3.
Both media giants face an uphill battle as they attempt to navigate the ongoing cord-cutting trend and a period of weak advertising spending due to a slowing economy, but Paramount Global offers stable revenue and a cheap valuation. That might explain why Warren Buffett's Berkshire Hathaway built a small stake in Paramount Global this year.
Paramount Global CEO Robert Bakish has a long track record of guiding media companies to growth in the digital era, and he seems to be doing it again. Paramount's stronger momentum in streaming and its lower valuation make its stock the better of these two investments.
