Warner Bros. Discovery (WBD -0.71%) has had a troubling 2022, with its stock down 55% year to date. The company was the product of a merger between WarnerMedia and Discovery in April, leaving the company with considerable debt.
As a result, the entertainment giant has made several controversial changes to its content over the last few months, such as canceling multiple European projects, shutting down production on an all-but completed DC film after a $90 million investment, and shelving several animation series.
Investors have skeptically watched Warner Bros. Discovery's CEO David Zaslav slash the company's content and budget as he looks for savings. The result has dragged WBD's share price down further, falling 13% since Aug. 13 alone.
While Warner Bros. Discovery's debt is a massive red flag, the company's valuable content library and lucrative use of it could bring significant gains in the long run.
Green flag: A valuable content library
With franchises such as Harry Potter, DC, and Game of Thrones, Warner Bros. Discovery is home to one of Hollywood's most valuable content libraries. The company recently flexed this strength with its release of the Game of Thrones spin-off series House of the Dragon. When it premiered on Aug. 22, the show became the most-watched series premiere in HBO's history, with 9.986 million viewers in the U.S. alone.
Additionally, House of the Dragon was released within two weeks of Amazon's Lord of the Rings spin-off, The Rings of Power, and has beat it considerably in ratings and viewing numbers. The Game of Thrones prequel has an audience score of 84% on Rotten Tomatoes, while The Rings of Power is at 39%. House of the Dragon also attracted 51% more viewers than The Rings of Power in the three-day post-debut window.The immense success of House of the Dragon bodes well for future Game of Thrones spin-off shows, as the company has more planned down the road.
Moreover, Warner Bros. Discovery's content offers substantial gains beyond film and TV. For instance, its Studio Tour London - The Making of Harry Potter museum generated $160 million in revenue in 2019, before COVID-19.With public spaces seeing a reopening in 2022, Warner Bros. Discovery could see boosts in revenue from its similar Harry Potter museum in Hollywood and its attractions in theme parks worldwide.
An often overlooked but thriving part of Warner Bros. Discovery's business is its video games sector. The company sorts its gaming revenue under its "content" segment, which increased 7% in the six months ending June 30, primarily fueled by the release of its game LEGO Star Wars: The Skywalker Saga.Furthermore, the company is using its content library to attract players to its games, with highly anticipated titles releasing in the coming months, such as the DC game Gotham Knights in October and the Harry Potter-themed Hogwarts Legacy in February 2023. Both games will likely offer considerable boosts to revenue.
Red flag: Massive debt
When WarnerMedia spun off from AT&T in April, Warner Bros. Discovery took on the purchase price of $43 billion as debt. Along with debt from Discovery and other merging expenses, the company launched its business with about $57 billion of total debt. Many of the recent content changes and shifts in strategy have been to cut costs and pay down what it owes. As a result, the company reported a total debt of $51.3 billion in its most recent quarter, having paid almost $6 billion in three months.
Despite a significant debt, the company's free cash flow offers some potential light at the end of the tunnel. As of July, Warner Bros. Discovery's free cash flow was considerably higher than its biggest competitors, Netflix and Disney. The chart below shows the company's $2.5 billion free cash flow was more than double Disney's $1.2 billion and over 15 times Netflix's $160.21 million.
WBD Free Cash Flow data by YCharts.
As a result, Warner Bros. Discovery seems equipped to tackle its debt and invest in its growth. It plans to launch one all-encompassing streaming app in the summer of 2023, merging HBO Max and Discovery+, and eventually adding CNN content and other aspects of its business, too. Despite looming debt, the company has a diverse business that will likely provide investors significant gains in the long run.
Additionally, Warner Bros. Discovery's price-to-earnings ratio is sitting at 6.5, almost the lowest it's ever been, meaning its financial health is in better standing than its stock price would have you think. Now might be a great time to get the stock at a bargain and hopefully watch your investment grow over the next five years.
