Warner Bros. Discovery (WBD +0.70%) had a challenging first year, forming when WarnerMedia and Discovery merged in April. The company's stock plunged 62% throughout 2022 as macroeconomic headwinds and controversial restructuring moves spooked investors.
However, the shares have skyrocketed in 2023, climbing 57% since Jan. 1, as Wall Street has grown bullish on the prospects of a new year. Despite the swift rise, the stock could still have a long way to go and make an excellent investment. Here's why.
Shrinking down before getting bigger
Last year, Warner Bros. Discovery took a lot of heat for essentially taking a hammer to its business as it canceled multiple projects, let go top execs, and removed countless programs from its library in favor of tax write-offs. The company was stripping down its business, prioritizing only the most profitable parts. This method has led Warner Bros. Discovery to refocus on theatrical releases, merging its two streaming platforms, and bringing on new leadership in its DC film department.
The priority on theatrical releases comes after the pre-merger WarnerMedia debuted multiple blockbusters on streaming and in theaters simultaneously throughout 2020 and 2021. As a result, films such as 2020's Wonder Woman 1984 and 2021's The Suicide Squad earned some 77% less at the box office than their prequels released exclusively in theaters. While the pandemic is primarily to blame, Walt Disney's recent success with Avatar: The Way of Water hitting $2.11 billion proves in-theater audiences are back.
NASDAQ: WBD
Key Data Points
Moreover, in October 2022, Warner Bros. Discovery announced it had brought on Marvel alum James Gunn to co-lead DC Studios, with a plan to overhaul all movies, TV, and games related to DC. The move is promising in light of Gunn's success as director of two, soon to be three, Marvel's Guardians of the Galaxy films, which earned a combined $1.6 billion. Plus, it demonstrates that the company is prioritizing quality in its DC franchises, which could be incredibly lucrative in the long run.
In addition to a theatrical focus, Warner Bros. Discovery will unveil a new streaming platform later this year, combining HBO Max and Discovery+ into one service. The launch will allow it to better compete with giants like Disney+ and Netflix as it will boost subscribers by merging members from both platforms and offer a wider variety of content, including prestige TV series like Game of Thrones and Euphoria alongside reality shows Property Brothers and 90 Day Fiancé.
The stock is too cheap to ignore
The biggest concern with Warner Bros. Discovery is its significant debt. As a result of merging and restructuring costs, the company had $50.4 billion in debt compared to its $2.5 billion in cash as of Sept. 30. However, the entertainment company has explained that the slashes to content and layoffs prevalent in 2022 are behind it, with this year all about "relaunching and building."
Without almost-weekly reports of its latest canceled project or layoff, Warner Bros. Discovery's stock should become less volatile, which makes its current price incredibly attractive. Despite its 57% rise since Jan. 1, the company's stock is still down 45% year over year and trading at 16 times earnings. Compared to the competition, Warner Bros. Discovery shares offer far more value, with Disney's price-to-earnings ratio at 63 and Netflix's at 36.
Additionally, in the coming months, Warner Bros. Discovery has some exciting developments. On Feb. 10, its highly anticipated Harry Potter-themed video game Hogwarts Legacy will launch on consoles and PC. After multiple COVID-related delays, the game could provide a nice boost to revenue. Along with several blockbusters sprinkled throughout the year, such as sequels to Shazam!, Dune, and Aquaman, and the launch of its merged HBO Max and Discovery+ service, 2023 could see its stock rise high.
Warner Bros. Discovery shares have flown high in the first month of the year. However, they still have plenty of room to grow, making the stock a bargain in 2023.
