Warner Bros. Discovery (WBD -0.35%) and Paramount Global (PARA 2.91%) both emerged as newly rebranded versions of old media companies last year. Warner Bros., which was created by AT&T's spin-off of WarnerMedia and its merger with Discovery, started trading as a stand-alone company last April. ViacomCBS, which was created by the re-merging of Viacom and CBS in late 2019, rebranded itself as Paramount Global last February and changed its ticker symbol to PARA.
But investors haven't been enthusiastic about either stock. WBD's stock is down nearly 40% since its first trading day, while Paramount's stock slumped almost 30% since its rebranding. Both stocks tumbled for similar reasons: Their advertising businesses faced fierce macro headwinds, and their loss-leading streaming strategies compressed their margins. Should investors consider buying either of these out-of-favor media stocks as the bulls look the other way?
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Warner Bros. faces tough macro and competitive headwinds
Warner Bros.'s revenue fell 5% on a pro forma basis in 2022 to $43.1 billion. Its studios and networks divisions, which collectively accounted for 86% of its top line, both experienced single-digit revenue declines. The growth of the direct-to-consumer (DTC) segment, which brought in the rest of its revenue, partly offset those declines.
Warner Bros. studios' business released notable films like The Batman, Fantastic Beasts: The Secrets of Dumbledore, Elvis, and Black Adam throughout the year, but its theatrical growth was offset by its lower TV licensing and home entertainment revenues. Its networks division struggled with slower ad sales and the secular decline of linear TV platforms.
Its DTC business ended 2022 with 96 million subscribers for its streaming and on-demand HBO and Discovery services, and both its ad-supported and ad-free tiers gained more subscribers. But the DTC business also remains deeply unprofitable due to its massive streaming investments and lack of pricing power in the competitive market, and the segment's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss widened from $1.9 billion in 2021 to $2.1 billion in 2022 on a pro forma basis. As a result, Warner Bros.'s total adjusted EBITDA fell 12% to $9.2 billion for the full year.
But in 2023 analysts expect Warner Bros.'s revenue to rise 2% to $44 billion and for its adjusted EBITDA to grow 23% to $11.3 billion as the macro headwinds subside and it reins in its spending. Based on its enterprise value of $77.6 billion, Warner Bros. stock still looks fairly cheap at 2 times this year's sales and less than 7 times its adjusted EBITDA.
Paramount faces a tougher uphill battle
Paramount's revenue rose 5% to $30.2 billion in 2022 as the growth of its DTC and filmed entertainment businesses offset a 4% decline in its TV media revenue. Its DTC segment continued to expand with 56 million subscribers on Paramount+ and 79 monthly active users (MAUs) on its free Pluto TV platform. Its filmed entertainment division also scored six box office hits during the year: Top Gun: Maverick, Sonic the Hedgehog 2, Scream 5, Smile, Jackass Forever, and The Lost City.
Like Warner Bros., Paramount's TV media business -- which owns CBS, The CW, Showtime, Comedy Central, Nickelodeon, BET, and other networks -- struggled with macro headwinds for the advertising market and the slow death of linear TV platforms.
Paramount's top-line growth seems stable, but its DTC losses are crushing its margins. The segment's adjusted operating income before depreciation and amortization (OIBDA) loss nearly doubled to $1.8 billion in 2022, which caused the company's total adjusted OBIDA to sink 26% to $3.3 billion.
Paramount believes it can stabilize its DTC losses by streamlining its spending and raising its streaming prices this year. It also expects the advertising market to stabilize in the second half of 2023.
Analysts expect Paramount's revenue to rise 2% to $30.9 billion this year, but for its DTC losses to reduce its adjusted OBIDA by 22% to $2.6 billion. But based on its enterprise value of $28.8 billion, it still looks cheaper than many of its industry peers at less than one time this year's sales and eleven times its adjusted OBIDA.
The better buy: Warner Bros. Discovery
Warner Bros. Discovery and Paramount seem fundamentally similar, but Paramount's widening DTC losses and smaller base of paid streaming subscribers make it a much riskier investment than Warner Bros. Paramount's stock might seem cheaper than Warner Bros.'s, but it deserves to trade at that discount until it proves that it can stabilize those losses. I wouldn't rush to buy Warner Bros. Discovery right now, but I believe it has a better shot at a near-term comeback than Paramount Global this year.
