Warner Bros. Discovery Just Gave You a Good Reason Not to Buy Its Stock

Since WarnerMedia and Discovery merged to create Warner Bros. Discovery (WBD -1.75%) earlier this year, there has been much speculation about the company's future. One of the most recent whispers about Warner Bros. Discovery has been that rival Comcast (CMCSA 1.77%) is keen to acquire the company. However, Warner Bros. Discovery CEO David Zaslav reportedly quashed the rumors during a recent all-hands meeting, saying the company is not for sale. Here's what Zaslav's statement means for investors, and why they might want to avoid Warner Bros. Discovery's stock.

Zaslav adamant Warner Bros. Discovery is in a good place

According to various industry outlets, Zaslav did not address the Comcast speculation head-on, but instead framed Warner Bros. Discovery's current standing as a key reason why it was not entertaining a sale. "We have the strongest hand in the industry," Zaslav reportedly told Warner Bros. Discovery employees. "We have everything we need to be successful to be the biggest entertainment media company in the world."

The market is seemingly yet to be convinced by Zaslav's bullish belief in the company. At the time of writing, Warner Bros. Discovery's stock is hovering around $12 per share, roughly half of its value when the company came into being following the merger of WarnerMedia and Discovery this past spring.

There are numerous reasons Warner Bros. Discovery shares are down. Scathing headlines have scalded its decision to ax multiple film and TV projects, along with long-term questions about the company's potential to raise prices for its streaming offerings. Obviously, a takeover by a well-heeled company could have given Warner Bros. Discovery's stock an immediate boost.

A Comcast-Warner Bros. Discovery deal could have been a hit

Comcast is already a player in the streaming video space as the owner of NBCUniversal, which oversees Peacock. Peacock has 28 million subscribers, 13 million of which have paid accounts. Of course, those figures pale in comparison to Comcast's other streaming bet, Hulu.

Comcast has held a 33% stake in Hulu for some years, generating consistent revenue from the company's 46.2 million premium customers. However, Hulu's biggest shareholder, Walt Disney (DIS -0.07%), secured a deal with Comcast in 2019 to acquire that stake for at least $27.5 billion by January 2024. That arrangement has gained attention recently as Walt Disney CEO Bob Chapek noted he would prefer the deal to close sooner. In response, Comcast CEO Brian Roberts has suggested the price for his company's Hulu shares will be higher because of how successful the streamer has become.

Whatever price Comcast and Walt Disney eventually settle on, it's worth noting that the previously agreed upon minimum -- $27.5 billion -- is right in line with Warner Bros. Discovery's current $29 billion market cap. And considering Warner Bros. Discovery has over 92 million subscribers across HBO, HBO Max, and Discovery+, it's easy to see why it could be an attractive prospect for a rival flush with cash and ambition.

For Warner Bros. Discovery stakeholders, there would also be a lot to love from a Comcast takeover. Warner Bros. Discovery has already discussed plans to combine HBO Max and Discovery+ into a unified streamer next summer, so bundling in Peacock's content library would only have added even greater value for streaming customers. Of course, none of that matters now because Zaslav has nixed the idea of such a deal.

Zaslav's plan is the only plan

By shutting down all talk of a takeover -- from Comcast or otherwise -- Zaslav is effectively telling Warner Bros. Discovery stakeholders that his cost-conscious growth strategy is the only plan that matters. Of course, the executive has been signaling as much since before the WarnerMedia-Discovery deal closed, so investors have known all along his ambitions. But with Warner Bros. Discovery's stock down so much in the months since Zaslav took the reins, there are surely many who may not wish to go along for the ride.

Of course, the streaming space certainly shows plenty of promise. Some analysts anticipate the industry will be worth north of $470 billion this year, rising to almost $1.7 billion by 2029. To take advantage of that growth, Netflix (NFLX -0.70%) has said it will spend $17 billion on content annually over the next few years, and Walt Disney is primed to spend as much as $32 billion this year alone. For its part, Warner Bros. Discovery has stated it will spend more on content over this year and next on new movies and TV shows, but considering some of that programming has already been thrown out for tax purposes, it's uncertain how much value Warner Bros. Discovery will see from its outlay.

So, with all this in mind, investors should probably skip its stock until Warner Bros. Discovery shows the benefit of its tactics.