Warner Bros. Discovery's (WBD 1.89%) stock price has declined more than 50% since it started trading as a stand-alone company on April 11. The new media giant, created through the merger of AT&T's WarnerMedia division with Discovery, failed to excite investors as macroeconomic headwinds throttled the growth of the broader media industry.
However, that steep sell-off reduced WBD's enterprise value to about $79 billion, or six times its estimated adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2023. Does that low valuation suggest it will bounce back quickly when the bear market finally ends? Let's review the bear and bull cases to decide.
Image source: Getty Images.
What the bears will tell you about WBD
The bears will point out that AT&T divested WarnerMedia because it was costing too much money to compete against Netflix, Walt Disney, and other media giants in the streaming market.
The merger of WarnerMedia with Discovery was meant to create a stronger competitor, yet WBD only finished its latest quarter with 92.1 million direct-to-consumer (DTC) subscribers, representing a sequential gain of just 1.7 million subscribers from the first quarter of 2022. That total includes both its streaming and cable subscribers.
By comparison, Netflix and Disney both reached about 221 million paid streaming subscribers in their latest quarters. WBD believes it can still reach 130 million DTC subscribers by 2025, but that's a very ambitious target: Even if it adds 2 million subscribers per quarter through the end of 2025, it would only reach about 120 million subscribers.
WBD's DTC segment is still deeply unprofitable. On a pro forma basis, its revenue rose 4% year over year (in constant currency terms) to $2.41 billion -- or 22% of its top line -- in the second quarter. But its operating expenses increased 16% to $2.74 billion by those same measures, and its adjusted EBITDA loss widened from $235 million to $518 million.
In a healthier economy, WBD could offset its DTC losses with the growth of its higher-margin networks and studios divisions. But its networks segment grappled with sluggish ad sales, lower distribution revenue, and cord-cutting headwinds during the quarter, while its studios segment struggled against tough comparisons to the industry's post-pandemic rebound last year.
| Segment | Q2 2022 Revenue | Revenue Growth (YOY) | Q2 2022 Adj. EBITDA | EBITDA Growth (YOY) |
|---|---|---|---|---|
| Networks | $6.12 billion | 1% | $2.36 billion | (11%) |
| Studios | $3.36 billion | 4% | $409 million | 0% |
| DTC | $2.41 billion | 4% | ($518 million) | N/A |
| Total* | $10.82 billion | (1%) | $1.76 billion | (31%) |
Data source: WBD. Pro forma, constant currency basis. *includes corporate segment and inter-segment eliminations. YOY = Year over year.
The current macro headwinds will likely curb the market's appetite for new ads as well as consumer spending on new movies. A global recession could exacerbate that pressure and make it even more difficult for WBD to support the growth of its DTC segment. That's why analysts expect WBD's revenue to rise just 4% to $47 billion in 2023.
That's also why WBD reduced its own adjusted EBITDA target for 2023 from $14 billion to "at least $12 billion" during its second-quarter report in early August. It's also still carrying a lot of leverage with a high debt-to-equity ratio of 1.7.
To counter that pressure, WBD has been canceling pricey projects and laying off staff to cut costs. But by doing so, it could also narrow its moat against Netflix, Disney, and other streaming providers that specialize in high-budget original content.
What the bulls will tell you about WBD
The bulls will admit that WBD faces plenty of near-term headwinds and that its abrupt cancellations of CNN+, the Batgirl film, and other major projects are chaotic and confusing. However, they'll also point out that WBD desperately needs to trim the fat and only retain its best content to generate sustainable returns in the saturated streaming market.
WBD still has plenty of lucrative franchises -- including DC Comics, Game of Thrones, and Harry Potter -- which can be expanded with new content. Like Netflix and Disney, WBD has been rolling out ad-supported tiers to reach more viewers. But unlike Netflix, WBD doesn't need to license a lot of third-party content because it already owns plenty of shows and movies. Instead, it can license out those properties to other streaming platforms to generate more distribution revenue.
Once inflation is reined in and the macroeconomic situation improves, WBD's networks and its studios business should roar back to life. When that happens, the original bullish thesis for WBD -- that it can support the expansion of its lower-margin DTC business with its more established media segments -- could finally pay off.
Is it the right stock to buy right now?
WBD isn't doomed yet, but the bears will continue to overpower the bulls for the foreseeable future. Its low valuation could limit its downside potential, but it also won't rally until it proves that it can keep pace with Netflix, Disney, and others in the cutthroat streaming market. Simply put, investors should avoid WBD and stick with more promising stocks for now.
