The video-streaming industry made countless headlines last year after many companies suffered steep stock declines. Increased competition and macroeconomic headwinds created a challenging environment for expansion. As a result, market leaders Netflix (NFLX 3.90%), Disney, and Warner Bros. Discovery (WBD 0.53%) watched their shares plunge between 44% and 62% in 2022.
Despite the sell-off, the global video-streaming market was valued at $59.14 billion in 2021 and is projected to expand at a compound annual growth rate of 22.4% through 2030, according to Grand View Research. Many streaming companies are still finding their footing as the market adapts to more platforms and avenues of revenue, such as advertising.
As two of the biggest names in streaming, Netflix and Warner Bros. Discovery are compelling options to invest in the growing industry. So which company's stock is the better buy? Let's assess.
Netflix: The king of content
Since Jan. 1, investors pushed Netflix's stock up almost 18%. The rally came after the streaming giant reported 7.66 million new subscribers in its fourth quarter of 2022.
While the membership growth was positive, Netflix's earnings showed the company still has a long way to go. Revenue rose 6% year over year to $31.6 billion in fiscal 2022. Meanwhile, operating income declined by 9% to $5.6 billion as operating margin went from 21% in 2021 to 18% in 2022. Netflix attributed the reduced margin to fluctuations in foreign exchange rates and content delays due to COVID-19. However, the company's dependency on revenue from streaming subscriptions in a highly competitive market highlighted its weakness.
Despite financial challenges, Netflix still dominated streaming content in 2022. According to Nielsen, the company was responsible for 11 out of 15 of the most-watched streaming programs throughout the year, with the top four all being on its platform. And when it came to most-watched streaming originals, Netflix produced all of the top 10.
Massive hits such as Stranger Things, Ozark, Wednesday, Bridgerton, and Dahmer were able to outshine Marvel-themed Disney+ shows and even HBO Max's return to Game of Thrones with its 2022 show, House of the Dragon.
Netflix has a mountain to climb to get its business back to yearly profit growth in the crowded streaming industry. However, there's no doubt the company at least has the content to attract viewers. The key going forward will be diversifying its revenue streams to lean less on unpredictable membership fluctuations.
Warner Bros. Discovery: Winning outside of streaming
After a year in which Warner Bros. Discovery's stock plummeted more than 60%, investors are seemingly optimistic about the entertainment company in 2023: Its shares have skyrocketed 50% since Jan. 1. The stock is a compelling buy with the majority of the company's restructuring costs behind it, a recent hit in video games, promising new leaders in the DC film department, and diversity in streaming via HBO Max and Discovery+.
Unlike Netflix, Warner Bros. Discovery has strong positions in multiple areas of entertainment, such as theme parks, video games, theatrical releases, and video streaming. While the company's long-term debt of $49.8 billion is significantly higher than Netflix's $14.3 billion, Warner Bros. Discovery's multiple revenue streams better safeguard it for the long haul.
Moreover, the company's recent video game release of Harry Potter-themed Hogwarts Legacy on Feb. 10 looks like it will be a massive success. The game launched on Sony's PlayStation 5, Microsoft's Xbox Series X|S, and PC. While console figures are still unknown, PC games marketplace Steam shows that Hogwarts Legacy so far achieved the third-highest all-time peak of concurrent players for a single-player title. As console sales tend to be higher than PC, the Harry Potter-themed game looks like it will provide Warner Bros. Discovery a substantial revenue boost in its current quarter.
Additionally, the success of Hogwarts Legacy will likely reinvigorate interest in the franchise, encouraging park attendance and merchandise sales. Warner Bros. Discovery has also shown interest in having a soft relaunch of its Harry Potter franchise at the box office, similar to what it is doing with DC. Hogwarts Legacy is a promising step forward with that.
While Netflix entered the mobile video games market with the launch of its Netflix Games service in November 2021, it's still a long way from profiting from the venture. The platform remains a free addition to its regular streaming subscription and has yet to attract many players. Meanwhile, Warner Bros. Discovery's past games and Hogwarts Legacy gives it a solid position in the $195.65 billion market.
Video games are just one way Warner Bros. Discovery is more financially diverse than Netflix. As a result, Warner Bros. Discovery's stock is currently the safer and better buy over the long term.
