Walt Disney (DIS 0.74%) and Warner Bros. Discovery (WBD 1.11%) both disappointed investors with dismal returns this year. Disney's stock declined nearly 40% as inflationary headwinds throttled the post-pandemic recovery of its media and theme park businesses. The widening losses at its streaming business and the rising dollar exacerbated that pain.
Warner Bros. Discovery's stock has declined nearly 60% since it was spun off from AT&T in a merger with Discovery this April. Just like Disney, Warner's movie and media segments struggled with inflationary headwinds, while higher streaming expenses squeezed its operating margins. But unlike Disney, Warner couldn't offset that pressure with inflows from any theme parks or resorts.
Image source: Getty Images.
Both companies were also led by controversial CEOs. Disney's Bob Chapek, who took the reins in 2020, was criticized for focusing too heavily on cost-cutting measures, prioritizing the growth of Disney+ above all its other segments, and alienating its customers by clumsily inserting the company into controversial political debates. Chapek was eventually ousted and replaced by Disney's former CEO Bob Iger in November.
Meanwhile, Warner CEO David Zaslav attracted a lot of negative attention by prioritizing layoffs and the cancellations of major projects over the production of fresh content.
Faced with all these challenges, neither media giant seemed like a promising investment as rising interest rates and other macro headwinds crushed the market. But could one of these hated stocks bounce back a lot faster?
Disney's near-term growth still looks strong
Disney's revenue and adjusted earnings per share (EPS) rose 3% and 13%, respectively, in fiscal 2021 (ended October) as the sluggish post-pandemic recovery of its theme parks and resorts offset its rising media revenue. Its adjusted EPS increased 13%.
In fiscal 2022, Disney's revenue and adjusted EPS rose 23% and 54%, respectively, as all of its core businesses recovered. However, the operating loss at its closely watched direct-to-consumer (DTC) segment, which houses its streaming division, widened from $1.7 billion to $4.0 billion. As a result, the company's total operating margin plunged from 14.3% to 7.7%.
On the bright side, Disney ended fiscal 2022 with more than 235 million paid subscribers across all its streaming services (Disney+, Hulu, and ESPN+), which represented 31% from a year ago. Netflix's subscribers only rose 5% year over year to 223 million in its latest quarter.
Analysts expect Disney's revenue and adjusted EPS to increase 8% and 17%, respectively, this year as its theme parks attract more visitors, it releases new movies, and economies of scale slowly kick in at Disney+. Bob Iger's return could also allay some concerns about the House of Mouse becoming too focused on prices hikes and cost-cutting measures.
Warner Bros. Discoverey's future looks a lot murkier
Warner Bros. Discovery has turned in three quarterly reports since its spin-off from AT&T, and only the past two quarters fully reflect the merger between WarnerMedia and Discovery. On a pro forma constant currency basis, which smooths out those comparisons, revenue fell 1% year over year in the second quarter of 2022 and declined another 8% in the third quarter.
The company attributed those declines to tough year-over-year comparisons to the Olympics and two NBA playoff games in 2021, a lack of blockbuster movie releases this year (which was exacerbated by difficult comparisons to the industry's post-pandemic recovery in 2021), and inflationary headwinds for both ad purchases and movie ticket sales.
Those weaknesses offset the moderate growth of its DTC segment, which revolves around HBO Max and ended the third quarter with 94.9 million subscribers (across both its streaming and cable platforms). Yet that only represented 19% growth from a year earlier, which means it's both smaller and growing at a slower clip than Disney's streaming ecosystem.
Warner's DTC segment also remains deeply unprofitable, and its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) losses are consistently offsetting the positive adjusted EBITDA from its networks and studios segments. The entire company also remains unprofitable by GAAP (generally accepted accounting principles) standards, which explains why Zaslav aggressively canceled some of the company's biggest projects (including the Batgirl film) over the past year.
The better buy: Disney
I own both of these stocks. I bought my first shares of Disney 10 years ago, and I gained some shares of Warner Bros. Discovery through my investment in AT&T. I expect both stocks to remain out of favor for at least a few more quarters as inflation and higher interest rates curb the market's appetite for macro-sensitive media stocks.
Disney trades at 23 times forward earnings, which makes it seem a bit pricier than Warner, which trades at about eight times next year's adjusted EBITDA. However, Warner's growth is weaker, it isn't as well-diversified, and it's still unprofitable. Warner's aggressive cost-cutting measures also raise doubts regarding its ability to stay competitive in the cutthroat streaming market.
Walt Disney isn't a screaming bargain yet, but it's much more compelling than Warner right now.
