The expensive merger of WarnerMedia and Discovery last April led to the founding of Warner Bros. Discovery (WBD -0.71%), saddling it with $43 billion of debt from the start. While this could have set the company up for failure, a valuable franchise library filled with hit brands like Harry Potter, Game of Thrones, The Lord of the Rings, and DC suggests this entertainment giant has a lucrative future under the right leadership.
Multiple controversial restructuring moves last year brought down the company's stock price and created skepticism about Warner Bros. Discovery's CEO, David Zaslav. However, slashes to spending brought the company's operating costs down significantly and have helped it focus on the most profitable parts of its business.
Here's why now is an exciting time to buy Warner Bros. Discovery stock.
Easing inflation boosts streaming
Inflation reached a high of 9% in June 2022 but has eased every month since. Prices rose 5% this past March. The improvement has gradually boosted the market, with many consumer-reliant stocks showing signs of recovery after last year's economic downturn. The ongoing situation saw Warner Bros. Discovery's stock plunge 63% last year then soar 38% in 2023.
The company's latest quarter has reflected easing price rises, and its streaming business turned a profit for the first time. In the first quarter of 2023, Warner Bros. Discovery's direct-to-consumer segment reported $50 million in EBITDA and 1.6 million new streaming subscribers.
The achievement comes a year earlier than expected. Zaslav had previously said the company's streaming business would break even in 2024 and hit profitability by 2025. However, on Warner Bros. Discovery's most recent earnings call, the CEO revealed that the streaming segment would now be profitable for the year.
Warner Bros. Discovery still has a long way to go before other parts of its business deliver consistent profits, but its streaming segment getting there is a major win. Meanwhile, easing inflation is likely to boost advertising revenue over the long term as businesses are able to expand their budgets.
A string of hits in its media offerings
In addition to economic improvements, Warner Bros. Discovery is benefiting from changes in its content strategy. After several canceled projects and slashes to its content last year, the company is prioritizing its heavy-hitting franchises and reaping the rewards.
In mid-January, the company debuted the first season of The Last of Us, an adaptation of the popular video game. The new show proved a massive success on HBO and Max. Its viewership skyrocketed 75% throughout the first season, and it became the most-watched show in the company's history outside of the U.S.
Moreover, this past February, the company enjoyed another win, this time in video games. The company released a smash hit with the Harry Potter-themed Hogwarts Legacy. It earned $1 billion in Q1 2023, more than any other game this year. The achievement has led to a recently announced Harry Potter series for HBO and Max. It could also spur the company to make similar games for its other big franchises, like Game of Thrones and The Lord of the Rings, down the road.
The return of audiences to theaters has also fueled Warner Bros. Discovery's box office ambitions. The company is revamping its DC film department with a new strategy, new leadership, and more movies on the way. It's also focused on expanding other franchises.
A bargain buy
Warner Bros. Discovery's challenges have dragged down its stock, making it a bargain buy compared to its long-term potential. The company's average 12-month price target of $22 projects a 69% stock-price rise in the coming months.
The entertainment giant will likely continue benefiting from easing inflation in its advertising and direct-to-consumer segments. Meanwhile, coming film releases this year, like the final Fast & Furious installment, Dune: Part Two, and Aquaman and the Lost Kingdom, could further grow its media earnings.
As a result, Warner Bros. Discovery's stock is an incredibly compelling buy right now.
