Last year was challenging for entertainment and streaming companies as some of the industry's most prominent players watched their stocks plunge. Macroeconomic headwinds and increased competition led multiple companies to report disappointing quarterly earnings as they went to war over streaming subscribers.
However, 2023 has been a different story. Walt Disney (DIS -1.01%) and Warner Bros. Discovery (WBD -1.07%) shares have risen 23% and 57%, respectively, since the start of the year as investors grow bullish over the companies' 2023 outlooks. Yet, despite the swift rise, these companies' stocks remain down considerably year over year, illustrating just how far they fell over the last year.
If the market is beginning to recover, now might be an investing opportunity. So is Disney or Warner Bros. Discovery stock the better buy? Let's assess.
Disney
The House of Mouse is a very different company than it was just a few years ago. It's launched its flagship streaming service, overcome a pandemic, and had to contend with economic challenges, all within a space of three years. For instance, while pandemic closures in 2020 and 2021 were detrimental to box office and park revenue, Disney+'s growth after launching in 2019 skyrocketed as homebound consumers subscribed to the service in droves.
As a result, Disney spent a large portion of 2022 prioritizing its streaming growth by investing heavily in content for Disney+. The company's efforts seemingly paid off, achieving the most subscribers in the industry in third-quarter 2022 and retaining the top spot in the fourth quarter. Disney+ hit 235.7 million total members versus Netflix's 223.8 million.
Consequently, when Netflix reported an addition of 7.66 million members in Q4 2022 on Jan. 19, Disney's stock sympathetically increased 11% through Jan. 27. Investors hoped the company could once again beat its streaming nemesis in its upcoming earnings release.
Despite encouraging subscriber growth, Disney has a steep mountain to climb to get its media business back to growth. In its fiscal 2022, the company's media and entertainment segment reported a 42% year-over-year decline in operating income, with its Q4 2022 suffering a 91% fall in operating income to $83 million.
Recent success at the box office -- with Avatar: The Way of Water hitting $2.054 billion, surpassing Avengers: Infinity War for the fifth highest-grossing film of all time worldwide -- and price hikes across its streaming platforms are positive steps toward earnings growth. However, Disney is easily a five- to 10-year investment, with the company needing time to potentially overcome additional economic challenges and get its streaming business to profitability.
Warner Bros. Discovery
This entertainment giant was formed after the merger of Discovery and WarnerMedia in April 2022. As the home of franchises such as Game of Thrones, Harry Potter, and DC, the company should be unstoppable. However, its stock plummeted over 60% throughout 2022 as controversial restructuring moves, like canceling numerous streaming projects and letting multiple top executives go, concerned investors.
Since the start of 2023, Warner Bros. Discovery has enjoyed a stock boost of 57%, with exciting developments ahead. In the coming months, the entertainment giant will unveil its combined HBO Max and Discovery+ platform, launch a free ad-supported streaming TV (FAST) service, and expand its video game library by releasing two highly anticipated titles.
In fact, the PC and console Harry Potter-themed game Hogwarts Legacy will hit shelves in just a few weeks on Feb. 10. After years in production and pandemic-fueled delays, the company could be in for a big earnings boost in its current quarter thanks to the video game.
However, the biggest issue with Warner Bros. Discovery is its looming debt, left over from a pricey merger and restructuring costs. The company had $50.4 billion in debt compared to its $2.5 billion in cash as of Sept. 30. . Similar to Disney, an investment in Warner Bros. Discovery is best held for the very long term.
While Disney and Netflix are more often compared, Warner Bros. Discovery's business is more comparable to the House of Mouse as both companies regularly participate in streaming, parks, and at the box office. Even its DC branch is competing closely with Disney's Marvel, with both having multiple blockbusters releasing in 2023.
Both companies' stocks are likely to climb over the long term, but Warner Bros. Discovery's share price of $15 is currently too good to resist. Compared to Disney's price-to-earnings ratio of 63, the same metric for Warner Bros. Discovery sits at a far preferable 16. Additionally, Disney's average 12-month price target would yield an 11.4% return on an investment made today. Meanwhile, Warner Bros. Discovery would grant a 40% return, making its stock the better buy in 2023.
