As an entertainment company, Warner Bros. Discovery (WBD 0.97%) competes with the likes of Walt Disney, Netflix, and Paramount Global. But Warner Bros. Discovery stock is currently trading at a valuation well below those rivals, which may lead some investors to wonder whether it's a smart buy now -- particularly as some analysts anticipate a bull market in 2023. Let's explore the state of the company and just why it may be a good bet.
The company is seeing streaming profits
Despite the global popularity of subscription video on demand (SVOD), many players in that industry have struggled to make their services profitable. According to an IndieWire report, of the major streaming services, only Netflix and Walt Disney-controlled Hulu are in the black. However, Warner Bros. Discovery is showing signs it could soon join that club.
In the first quarter, its U.S. streaming operation added 1.6 million subscribers and generated $50 million in profit. CEO David Zaslav stated during the company's earnings conference call that Warner Bros. Discovery expects the unit will maintain profitability through the rest of the year. "And," he added, "it's worth noting, HBO Max and Discovery+ are still only available to less than half of the global streaming market. So there is significant runway ahead of us."
Leveraging content for FAST success
Warner Bros. Discovery has rights to a vast array of characters spread across its enormous catalog of movies and TV shows, from the Harry Potter franchise and the DC universe to The Wizard of Oz and Looney Tunes. Its library of intellectual property is only rivaled by that of Walt Disney.
The diverse nature of Warner Bros. Discovery's content catalog presents many opportunities for revenue generation, including the arena of free ad-supported television (FAST).
Speaking on the Q1 earnings call, Jean-Briac Perrette, Warner Bros. Discovery's president and CEO of global streaming and games, discussed the company's "hybrid strategy" -- licensing content to third-party distributors while also developing its own FAST service.
"[W]e realize that the platforms and the distributors out there ... who have the scale and the size, and we want to get our channel portfolio out there and viewed," said Perrette. "And at some point in time ... we do see this opportunity for this [FAST] WB TV brand and platform to exist in an owned and operated environment."
The stock is trading at historic lows
For all of Warner Bros. Discovery's promise in streaming, perhaps the most compelling reason to invest in the company at this particular time is that its share price is far below its March 2021 peak of just over $70. Of course, at that time, streaming stocks in general were up as COVID-19 was at that point still suppressing social gatherings and other entertainment activities.
But now, Warner Bros. Discovery's stock looks undervalued. Based on the average forecast of 21 analysts following the company, its shares could reach a target of $19 within the next 12 months -- almost 50% higher than their current price.
Skeptics believe the current economic climate could drag on the company's stock price, and others have highlighted how Warner Bros. Discovery's debt burden of nearly $50 billion may hold it back. Still, Zaslav offered a positive outlook about that on the earnings call:
"Looking ahead to the second quarter, we are expecting to see a significant positive swing from negative $900 million in Q1 to around positive $900 million for a roughly cash-neutral, maybe positive, H1 free cash flow overall. This will support further debt reduction this quarter on our way to sub-4x leverage."
For investors considering Warner Bros. Discovery stock, the green shoots of streaming growth may well be encouraging, but how the company handles its debt situation could impact its stock price for a while.
Market-watchers would also do well to pay attention to what Warner Bros. Discovery says about its FAST ambitions over the coming months and whether its Q2 cash projections hold true. If the company continues on its current trajectory, it may well be primed to rise with a bull market.
