Investors had high hopes for Warner Bros. Discovery (WBD 1.08%) when the stock went public last April. However, the media merger has thus far been a disappointment. The stock fell quickly after the new company was formed last April and is down 54% since then.
Warner Bros. Discovery resulted from the merger between AT&T's WarnerMedia spin-off and Discovery Communications, and the company owns a number of high-profile media assets. Those include the Warner Bros. studio, HBO, the Turner networks such as CNN, TNT, and TBS, and Discovery's cable channels like HGTV and the Food Network, in addition to the Discovery-branded channels.
However, investors hoping for a comeback from the streaming stock in 2023 may want to look elsewhere. Here's why you're better off avoiding Warner Bros. Discovery stock this year.
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1. Warner Bros. Discovery is loaded with debt
Warner Bros. Discovery is the end result of AT&T's disastrous acquisition of Time Warner for $100 billion in 2018. AT&T funded that acquisition with debt and passed $43 billion of it on to Warner Bros. Discovery when it spun it off.
As of its most recent quarter, Warner Bros. Discovery had $50 billion in debt, which is especially problematic at a time when interest rates are rising. In its most recent quarter, it paid $555 million in interest expense, for an annual run rate of $2.2 billion, and that figure could go up. The company has more than $18 billion in debt maturing in the next five years, and if interest rates remain elevated, it will likely have to refinance at a higher rate.
The origin of the company has only added to Warner Bros. Discovery's problems. Management has accused AT&T of mismanaging the company and forced it to pay it $1.2 billion for inflating the value of some WarnerMedia assets. Shareholders have also filed a class action lawsuit alleging that HBO Max subscriber numbers were inflated prior to the merger, by including AT&T subscribers who got the service for free and never used it. In the merger between AT&T and Time Warner, HBO also lost much of the talent that drove its success for many years, making its strategic direction look aimless.
2. Its profitable divisions are declining
Investors were attracted to Warner Bros. Discovery largely because of the streaming business, but it still faces the same problem that other legacy media businesses do: It's losing money in streaming. And its other two businesses, its cable networks and studios, are profitable but experiencing declining revenue.
Cord-cutting has been hastened by the growth of streaming, and in the third quarter of 2022, revenue from Warner Bros. Discovery's cable networks fell 8% on a currency-neutral, pro forma basis to $5.2 billion.
Its studios segment saw revenue decline 5% to $3.1 billion on the same basis, even while moviegoers returned to theaters as pandemic fears ebbed. Despite the recovery from the pandemic, the long-term trend in moviegoing has been declining. Box-office ticket sales peaked in 2002, and as at-home entertainment options get even better, that decline is likely to continue.
Even revenue in the streaming segment declined 6% to $2.3 billion in the third quarter. This was as wholesale distribution revenue declined, in part from the decision to stop selling services through Amazon Channels, though Warner Bros. Discovery reversed that decision in December.
Warner Bros. Discovery finished the quarter with a generally accepted accounting principles (GAAP) operating loss of $2.2 billion, and a free cash flow loss of $192 million.
Given the decline of its most profitable businesses, those losses could get even worse, especially as CEO David Zaslav has warned that the ad market is particularly weak heading into 2023.
3. Competition is intense
No streaming service aside from Netflix is currently profitable, but the arms race in the industry is continuing. Amazon spent an estimated $15 billion on content in 2022, and big tech companies like Amazon and Alphabet went for a piece of the sports market -- each recently acquired rights to stream NFL games.
Warner Bros. Discovery's TNT network could lose rights to air NBA games when they expire in 2024. And CEO David Zaslav has been busy culling underperforming assets and content, just as larger companies seem to be angling for a greater portion of the sports world and a wider audience.
At this point, Zaslav seems to be aiming to cut his way to profitability, but that might lead the company to lose subscribers to rivals, something it can ill afford to do when its cable ecosystem is falling apart.
Warner Bros. Discovery has a heavy debt burden, challenges in both its legacy and streaming businesses, inherited problems from AT&T, and a set of deep-pocketed competitors including Apple, Netflix, Walt Disney, Amazon, and Alphabet vying for content; that means it's likely to have another difficult year in 2023. There's still a lot of work to do to get the company on the right track.
