Warner Bros. Discovery (WBD 1.98%) and Paramount Global (PARA 0.76%) have more than a few similarities. Both are legacy media companies that recently launched streaming services. Warner Bros. Discovery owns HBOMax and Discovery+, while Paramount is the parent of Paramount+.
Both companies are also the product of mergers. AT&T (T 3.40%) spun off WarnerMedia, which merged with Discovery to create Warner Bros. Discovery, while Paramount Global is the result of the combination of Viacom and CBS.
Both stocks are down sharply over the last year, as the chart below shows, and they also look cheap, at least according to some metrics.
Which streaming stock is the better buy today? Let's look at what each has to offer.
Warner Bros. Discovery: a work in progress
On paper, Warner Bros. Discovery seems to make sense. The merger brought two complementary media titans together: WarnerMedia, which owns the Turner networks (including CNN, TNT, and TBS) as well as HBO and the Warner Bros. movie studio, with Discovery, which is known for unscripted programming (including The Food Network and HGTV) as well as its namesake channels.
Despite its potential, the start has not been auspicious. The company has been plagued by a heavy debt burden, earlier mismanagement by AT&T, a disappointing financial performance, and questions about CEO David Zaslav -- who, coming from Discovery, has little experience with scripted programming.
In its third quarter, Warner Bros. lost $192 million in free cash flow and posted a net loss of $2.3 billion under generally accepted accounting principles (GAAP), as it took $1.5 billion in restructuring charges. It also holds $50 billion in debt, for which it paid $555 million in interest expense in its most recent quarter.
While it continued to grow subscribers in its streaming segment, the company actually saw revenue drop on a pro-forma basis in all three of its segments -- its studios, its cable networks, and direct-to-consumer (which includes HBO and streaming).
The decline in streaming was due to its September 2021 decision to stop selling HBOMax through Amazon Prime Video, which it reversed in December 2022. But its other two businesses are in secular decline as movie theater audiences peaked 20 years ago, and cord-cutting is accelerating while streaming options proliferate.
The company plans to merge the HBOMax and Discovery+ streaming services and raise prices. The move will test the thesis behind the merger and could be the biggest indicator yet of the company's prospects.
Paramount Global: ramping up streaming
Paramount has similar components to Warner Bros. Discovery, and in fact has the same three business segments: direct-to-consumer/streaming, its Paramount and Nickelodeon studios, and television media.
Among its television assets are CBS, Showtime, MTV, BET, Comedy Central, and Nickelodeon. And its primary streaming service is Paramount+, though it also owns PlutoTV, the largest free ad-based streaming network.
Paramount's most recent results were encouraging, though GAAP profits shrunk as it stepped up investments in its streaming business.
Overall revenue rose 4.6% to $6.9 billion, while net income fell $538 million to $231 million. Nearly all of Paramount's profits come from its television division, which reported $1.23 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA), even as revenue declined 5% due to headwinds from the decline of the pay-TV ecosystem.
Like Warner Bros. Discovery, Paramount faces a similar challenge in managing the decline of its legacy media business, while building its streaming service. Paramount+ continued to grow in the latest quarter, adding 4.7 million subscribers to reach 46 million, and has differentiated itself with access to live sports, including the NFL and the UEFA Champions League soccer.
Revenue from Paramount+ was up 95%, and its subscriber base should continue to grow in the fourth quarter as it expands in France, Germany, Austria, and Switzerland.
Which is the better buy?
Paramount and Warner Bros. have many of the same strengths and weaknesses, but Paramount seems to have a number of advantages over Warner Bros. Its streaming business is growing faster. The overall business is growing revenue, while Warner Bros.' is declining.
Paramount's debt burden is more manageable than Warner Bros. Discovery's -- and, perhaps most importantly, the merger that led to Paramount doesn't have the same legacy issues that Warner does since Viacom and CBS were once the same company earlier before splitting in 2006.
Warner Bros. Discovery, on the other hand, still needs to prove that the merger makes sense.
Both stocks face challenges in transitioning from legacy media to streaming, but Paramount seems better positioned to take those steps. It's the better buy today.
