In 2021, 78% of U.S. consumers had subscribed to at least one video streaming service, according to Statista -- an increase of 26% since 2015. With streaming services present in the majority of American homes now, the companies behind these platforms have gotten a great deal of attention in the media. Netflix (NFLX -0.51%) and Warner Bros. Discovery (WBD 0.97%) have regularly made headlines throughout 2022 as consumers speculated how content changes would affect them.
Streaming revenue reached a combined $80.8 billion in 2022 and is expected to have an annual growth rate of 11.5%, with the market worth $139.2 billion by 2027. As a result, it might not be a bad idea for investors to add a streaming stock to their portfolio. Netflix and Warner Bros. Discovery are two of the biggest names in the industry, so prospective investors might be mulling over which is the better stock. Let's find out.
1. Warner Bros. Discovery: A valuable content library
WarnerMedia merged with Discovery in April to form Warner Bros. Discovery, spinning off from AT&T (NYSE: T) in a deal worth $43 billion. The new company absorbed the purchase price as debt, which has put every move it makes under intense scrutiny as analysts ponder how it will pay it down. As a result, the entertainment company's share price has fallen 54% since April, with multiple changes in content and business strategy dragging it down further.
And yet, despite the troublesome year Warner Bros. Discovery has had, not all hope is lost. The company reported 92.1 million streaming subscribers in its most recent quarter, with its biggest service, HBO Max, only present in 61 countries. Meanwhile, Netflix has 220.7 million subscribers in over 190 countries. The upside for Warner Bros. Discovery is that Netflix is in three times as many countries but has a little more than double its subscribers, meaning WBD may have plenty of room to grow as it expands to its planned 190 countries by 2026.
Moreover, Warner Bros. Discovery's streaming business is often the media's focus, but its other offerings are worth considering. For instance, the company's studio tour in London on the making of Harry Potter generated $160 million in revenue in 2019, pre-pandemic. As public spaces begin to fill up again, its similar studio tour in Hollywood and its participation in other theme parks around the world could bring significant gains.
The company's video game efforts have also proven successful, with a 3% and 7% increase in its content segment in the three and six months ended June 30, respectively. This was primarily attributed to its game LEGO Star Wars: The Skywalker Saga. Upcoming games featuring Harry Potter and DC characters might also mean big gains for Warner Bros. Discovery in 2023.
2. Netflix: The original streamer
As one of the founders of the streaming industry, Netflix has been a fixture in most American homes for years. However, the rapid influx of competition since 2019 has knocked investors' confidence in the company. Netflix's stock is down 62% year to date as it has struggled to come back from losing its first subscribers in a decade in the first quarter of 2022.
Netflix has responded to its losses by significantly changing its subscription and content strategies. After years of rejecting the idea of using ads on its service, the company announced it would launch an ad-supported tier this coming November. The cost-effective membership could attract budget-conscious subscribers and make it easier for its current members to retain their subscriptions while also trying out the competition. As a result, some analysts have predicted the new tier could generate $8.5 billion in ad revenue by 2025.
Additionally, Netflix has expanded its offerings by launching Netflix Games in November 2021. It's still early days for the service, offering about 25 mobile games with plans to grow that figure to 50 by 2023. Netflix hasn't been able to attract many players just yet, as a report by Apptopia in August showed less than 1% of its streaming subscribers are engaging with its games daily.
However, the company has plans to change that as it announced on Sept. 26 that it had opened an internal games studio in Helsinki, Finland, led by Marko Lastikka, the former general manager and co-founder of mobile games titan Zynga.
So, which stock is the better buy?
Netflix and Warner Bros. Discovery are a tricky comparison as a tumultuous 2022 has made their futures ripe with uncertainty. However, when looking at each company's free cash flow, Warner Bros. Discovery looks more equipped to pay off its massive debt and invest in its growth. In the chart below, the difference is considerable, with Warner Bros. Discovery at $2.5 billion versus Netflix's $160 million.
WBD Free Cash Flow data by YCharts.
Moreover, Warner Bros. Discovery offers a better price-to-earnings ratio at 6.5, nearly the lowest its ever been. Meanwhile, Netflix's 20.1 multiple is relatively low compared to its past performance but still nowhere near WBD's more attractive figure.
With one of the strongest content libraries in Hollywood, a promising parks business, and even a successful video games business, Warner Bros. Discovery looks like it will offer investors larger returns for those willing to wait.
