Warner Bros. Discovery (WBD +0.13%) stock plummeted 60% in 2022, leading to concerns about when or how it can bounce back. The company faces headwinds seemingly on all fronts: with streaming video, in the movie studio, and on broadcast and cable TV.
Warner Bros. is a major streaming video leader in its own right with 95 million subscribers across HBO, HBO Max, and Discovery+. It also owns some of WarnerMedia's top franchises, such as Harry Potter, has access to notable characters in the DC Comics universe, and recently scored a major hit with the Game of Thrones spinoff House of the Dragon.
Image source: Getty Images.
Yet it's also riddled with debt, it owns the flagging CNN network, and it has been halting films and programming in development -- even works that are virtually complete -- because they have little prospect of being successfully marketed.
With all the conflicting signals, investors are right to question whether Warner Bros. Discovery stock is a buy. But here's why you should be keeping it on your radar.
On the small screen
Streaming video gets a lot of the attention because it's clear that's where movies are heading. And though Warner Bros.' HBO Max service has enjoyed a slow but steady rise in subscribers, it remains significantly behind Netflix, which has over 223 million subscribers, and Walt Disney, which has over 164 million subscribers at Disney+, but is at almost 236 million when you include ESPN+ and Hulu.
One of the main reasons for HBO Max's slower subscriber growth is the market is flooded with options beyond just the big three, with Peacock, Paramount+, and YouTube TV also vying for attention. Yet Warner Bros.' efforts have also been hampered because its subscription price is generally higher than most of its competitors', and prices will be going up again in the spring.
NASDAQ: WBD
Key Data Points
HBO Max has had a $15 per month fee since its launch in 2020, but CEO of streaming Jean-Briac Perrette said on the third-quarter earnings call that the service will see prices go "north" from there, particularly because the competition has been raising rates.
Netflix, for example, recently boosted its most popular tier to $15.49 per month. Warner Bros. seems intent on being the premium-priced option, but there could be some sense to that strategy.
A deep bench of talent
HBO Max has been able to attract a loyal and dedicated base of subscribers.
The service has a strong lineup of original programming, and it proved with House of the Dragon that it could revive what looked like damaged goods after the way the Game of Thrones series ended. It promises a lot of other storylines that might be explored as a result.
In addition, HBO Max has made a number of high-profile acquisitions, including the rights to popular franchises like Doctor Who and The Lord of the Rings, which should continue to attract subscribers. As the streaming market continues to evolve, it will be important for HBO Max to continue to innovate and adapt in order to remain competitive and attract new subscribers.
Image source: Getty Images.
It could also prove a lucrative venture to reboot the Harry Potter franchise, which has grossed almost $10 billion globally over the past two decades.
CEO David Zaslav has expressed an interest in exploring more of the Harry Potter world (particularly after the collapse of the Fantastic Beasts series). Warner Bros. has also shown it wants to make the DC Comics universe a strong contender by shaking up the division.
The biggest problem may be declining box office attendance, which while up from 2021, remains sharply below pre-pandemic levels. It's expected 2022 ended with $7.35 billion in ticket sales, a 35% decline from 2019.
Carrying a heavy burden
More problematic could be Warner Bros. Discovery's debt situation. Although it has paid off $6 billion worth of debt since the spinoff, it still has more than $50 billion in total debt on its balance sheet with $2.5 billion in cash on hand.
Yet as Zaslav told analysts, the company's capital structure is actually very solid and was purposefully designed, noting the debt it carries is "cheap, largely fixed, and long dated debt. And so from that perspective, I feel very, very good about it." Over $32 billion of it has maturities that are due five years or more into the future, with almost $22 billion worth coming due over 10 years from now.
As Zaslav is showing, he's determined to cut costs at all costs. He's dropped Wonder Woman 3 and trashed the nearly finished Batgirl film.
His new head of DC Studios even created a bit of an uproar when he announced actor Henry Cavill will not return as Superman in the new film being created, just after it was hinted he would be back at the end of the Black Adam movie (another project that looks to be ending).
Worth the risk
Overall, while the immediate future of Warner Bros. Discovery's streaming and moviemaking is challenged, it has a strong brand and a fairly deep portfolio that should help position the company to succeed in the long term.
It's still going to need to evolve and adapt to the changing landscape of the entertainment industry in order to remain relevant and successful, but trading at a fraction of its sales and its book value, as well as going for 13 times the free cash flow it produces, Warner Bros. Discovery looks like a cheap stock with the power to generate outsize returns in the future.
