A sell-off in 2022 led Warner Bros. Discovery's (WBD -1.07%) stock to plummet 62% over 12 months. The decline was prompted by costly restructuring moves and economic headwinds that burdened countless other consumer-reliant companies. However, investors have grown bullish about entertainment companies again this year, with Warner Bros. Discovery shares soaring almost 66% since Jan. 1.
Despite the rally in 2023, WBD's stock remains down 44% year over year, making the company's shares a compelling investment after showing signs of recovery.
Here's why Warner Bros. Discovery's stock is a screaming buy after a sell-off
Taking advantage of lucrative assets
Last year, it felt like you couldn't go a week without hearing how Warner Bros. Discovery had scrapped another piece of content as it cut costs to pay down the $43 billion in debt it took on after the merger of WarnerMedia and Discovery. The barrage of slashed projects triggered steep declines in its stock price as investors grew uneasy. However, like with the rest of its business, Warner Bros. Discovery seems to have slimmed down its content library to only the most lucrative franchises and is now milking them for all their worth.
On Feb. 10, the company released the Harry Potter-themed video game Hogwarts Legacy. The game earned $850 million in its first two weeks and sold more than 12 million units between Sony's PlayStation 5, Microsoft's Xbox Series X|S, and the PC. The new title has been Warner Bros. Discovery's biggest game launch ever and has broken Amazon's Twitch record for most concurrent viewers for a single-player game, hitting a peak of 1.28 million.
Hogwarts Legacy has seemingly reinvigorated the Harry Potter franchise after the less successful but related film series Fantastic Beasts has experienced dwindling interest with each of its three installments. In fact, Warner Bros. Discovery revealed that engagement with Wizarding World Digital, responsible for e-commerce and online news concerning Harry Potter, skyrocketed 300% in the first 10 days of February.
With fewer projects on the go, Warner Bros. Discovery is taking a quality-over-quantity approach to the media it produces. The strategy has the potential to save money and rebuild brand loyalty that has been tainted in recent years by the release of lackluster films in its DC and Harry Potter franchises.
There have already been reports that Warner Bros. Discovery is considering producing a Hogwarts Legacy TV series for HBO Max, which could go a long way in attracting new subscribers. Meanwhile, its success in relaunching its Game of Thrones brand with the show House of the Dragon in 2022 could lead to a lucrative future for the company.
Speaking of revamping franchises, CEO David Zaslav has also announced more Lord of the Rings movies are on the way. Along with a complete overhaul of its DC films over the next few years, the company's future box office returns are promising.
Warner Bros. Discovery stock is a bargain buy
Warner Bros. Discovery posted fourth-quarter 2022 earnings on Feb. 23, with revenue of $11.01 billion decreasing 9% year over year and missing analysts' expectations of $11.36 million. The company mainly attributed the decline to a burdened advertising market brought on by macroeconomic headwinds but expects to see an improvement in the second half of the year.
Warner Bros. Discovery still has a mountain to climb to get its business to profitability, ending Q4 2022 with $49.5 billion in debt on its balance sheet and $3.9 billion in cash on hand. However, Zaslav has said with restructuring costs mostly left behind in 2022, this year will focus on rebuilding, and it has started 2023 with a bang after the success of Hogwarts Legacy.
Moreover, Warner Bros. Discovery's stock is a far better value than its biggest competitors, illustrated by its price-to-earnings ratio of 17. The same metric for Netflix is a less preferable 31, while Disney's is 54.
Additionally, Warner Bros. Discovery's average 12-month price target of $21.29 is about 37% above its current price. With a positive long-term outlook and a bargain price, the entertainment company's stock feels like a no-brainer buy after a sell-off.
