It's probably an understatement to say the streaming landscape has become incredibly competitive in recent years, with a seemingly endless number of options available for viewers to choose from. Clear leaders like Netflix, Walt Disney's Disney+, and Amazon Prime Video have hundreds of millions of subscribers each -- not to mention the fact they have deep pockets to continue investing heavily in fresh content.
However, a smaller rival might be an attractive investment candidate for those looking outside of the obvious streaming stocks for potential opportunities. To be more specific, is Warner Bros Discovery (WBD 1.08%) one such possible portfolio addition? Let's take a closer look to find out if you should buy this company in 2023.
Serving up compelling content
Formed after the completed merger of Discovery and AT&T's WarnerMedia, the business is now an entertainment powerhouse. Popular content that the company offers are channels like TBS, CNN, and HGTV, and streaming services HBO Max and Discovery+. Management plans to combine the two streaming services into one offering this spring, which would create a service that has a broad range of great shows and movies.
This appears to be a no-brainer strategic move as the business tries to take direct-to-consumer (DTC) industry heavyweights head-on. The goal is to offer a "product that actually appeals to everybody in a household," according to JB Perrette, CEO of Global Streaming and Games. Keeping users engaged and preventing them from taking their time to another platform is the name of the game.
For what it's worth, during the most recent quarter (the third quarter of 2022, ended Sept. 30), Warner Bros Discovery generated 24% of its $$9.8 billion of overall revenue from its DTC segment, where streaming services are included. The segment counts 95 million subscribers, compared to Netflix's 231 million and Disney+'s 164 million.
According to data from Nielsen, HBO Max commanded a 1.4% share of total TV viewing time in the U.S. in December, up from 1% in June. And if we include the company's traditional cable-TV segment, management says Warner Bros Discovery commands the most TV viewing time in the U.S.
Not only has the business started to license some of its content to third-party FAST (free, ad-supported tier) services, but it is also planning to launch its own FAST option later this year. By expanding the addressable market and targeting the most value-conscious consumers, the potential for incremental revenue is sizable.
Right-sizing the business
If you're an investor who is averse to owning businesses with lots of leverage, then this might not be an attractive opportunity. The company's financial situation is still bleak. Warner Bros Discovery had $50.4 billion of debt on its balance sheet, compared to $2.5 billion of cash, as of Sept. 30. To be fair, this is an entity that produces positive free cash flow, easing any worries about not being able to repay its obligations. Plus, the leadership team plans to benefit from $3.5 billion of synergies once acquisition-related transitions are complete and the cost structure is optimized.
Wall Street consensus analyst estimates call for earnings before interest, taxes, depreciation, and amortization (EBITDA) to increase 24% in 2023 versus 2022. This gain would come despite revenue only being expected to rise 2.1%. It's evident the newly formed enterprise is banking on a lot of operating leverage as we look forward, something investors should always be a little skeptical of when looking at a merger of this magnitude.
What should investors do?
As of this writing, Warner Bros Discovery's stock trades at a price-to-earnings multiple of just 6.5, the cheapest it has ever been. The stock's valuation is so low because shares have fallen more than 49% since they started trading publicly last April. But this doesn't mean the company is a worthy addition to your portfolio.
Based on the facts I've laid out above, it's hard for me to say that Warner Bros Discovery is the best streaming stock to own. I think Netflix looks better, especially after it just posted strong fourth-quarter 2022 subscriber additions that handily exceeded estimates. However, for investors who believe that Warner Bros Discovery can execute on its long-term growth targets, clean up its cost structure and balance sheet, and become a formidable streaming service, it might deserve a closer look in 2023.
