Warner Bros. Discovery (WBD 0.24%) and Walt Disney (DIS -0.93%) are two giants in the entertainment industry, both with roots dating back a century. Over the decades, the rivals have competed across several media, including movies, TV shows, and comic books -- and most recently, in streaming video-on-demand content. But looking into the future, how might the companies fare, and for investors, which is the better buy? Let's break it down.
The balance sheets
Warner Bros. Discovery's debt-to-equity (D/E) ratio at the end of the first quarter of 2023 was about 1.1. That might put the company a little outside the comfort zone for some investors, but it's an improvement on its March 2022 D/E multiple of 1.2.
Warner Bros. has made tackling debt a big part of its mission, with CEO David Zaslav implementing a restructuring last year that seeks to cut costs by as much as $3.5 billion. Despite this, the company is still in the red by almost $50 billion, and Zaslav has offered C-suite bonuses to executives who might be able to help lighten the debt load.
By contrast, Walt Disney's D/E ratio was around 0.5 in late March 2023, a sign of its relatively healthy fiscal state. But that doesn't tell the whole story, particularly with the performance of its streaming unit.
The state of streaming
In its second quarter, Walt Disney reported a $700 million loss for its streaming division as Disney+ shed 4 million global subscribers -- the company's second quarterly loss in a row. Despite the struggles, Disney CEO Bob Iger believes streaming will turn the corner in 2024, especially as advertising becomes a bigger part of the company's direct-to-consumer play.
"Over 40% of our domestic advertising portfolio is addressable, including streaming," Iger said during Walt Disney's second-quarter earnings call. "We've added more than 1,000 advertisers over the past year, and now have 5,000 advertisers across our streaming platforms, with over a third buying advertising programmatically today."
Warner Bros. Discovery also sees opportunities in the streaming ad space, particularly with free ad-supported TV (FAST) content. Earlier this year, the company signed partnerships with Roku and Fox's Tubi, licensing some of its content library for streaming on their FAST platforms.
More recently, Warner Bros. has discussed the prospect of launching its own FAST offering, ostensibly called WBTV. Speaking with investors earlier this year, Zaslav said Warner Bros. Discovery has the "largest TV and motion picture library in the world," and that it could "create a Tubi or a Pluto without buying content from anybody."
Warner Bros.'s focus on FAST comes as the industry seems primed for solid growth over the coming years. According to research firm Omdia, revenue for FAST operators is projected to reach $12 billion by the end of 2027, which is triple the amount generated in 2022.
Other enterprises
Away from streaming, Walt Disney has seen notable success from its parks unit, bringing in $2.2 billion in the fiscal second quarter, up 20% year over year. In a call with investors, Iger said the company sees parks as a "key growth driver" and is expanding many of its international attractions to draw more visitors and improve capacity.
Warner Bros. Discovery's video games division has been a bright spot for the company following the release of the Harry Potter-themed Hogwarts Legacy in February 2023. The title has sold more than 15 million copies and generated over $1 billion in sales, making it one of the most popular games of the year so far.
The game is set to launch on Nintendo's Switch during the 2023 holiday season, and with more than 125 million Switch consoles sold over the years, the potential market is substantial.
The better buy
For investors weighing Warner Bros. Discovery and Walt Disney stock, there are certainly benefits and risks with both; Warner Bros.' strength in FAST and gaming are bright spots, but its debt burden is substantial.
Walt Disney seems to have good traction with its parks operation, but it has yet to make a profit from streaming. Still, the fact that the House of Mouse is not carrying the same debt woes as Warner Bros. could be the difference maker for some.
As we near the next set of earnings calls, those watching the market would do well to monitor Warner Bros. Discovery's moves in the FAST industry, while also paying attention to how Walt Disney pares streaming losses. If either company makes significant headway in the next quarter, then it could be a signal to snap up some shares.
