- Warner Brothers Discovery (WBD) stock has had a messy launch, but the stock looks cheap
- The company plans to combine its streaming assets into a single service
- To grow it must beat the Cloud Czars
Warner Brothers Discovery (NASDAQ:WBD) stock has a problem. People act like its products are free.
TV broadcasting wasn’t free, but ads paid the bills. Cable TV wasn’t free, but we thought of the bill as covering the service, not the programs.
In the world of streaming WBD, and all entertainment companies, must convince consumers to pay directly for something they once thought they got for nothing. This is proving a heavy lift, especially as popular services like Alphabet’s (NASDAQ:GOOGL) YouTube and (now) Amazon.Com’s (NASDAQ:AMZN) FreeVee remain free to use, once you have the technology in place.
Breaking that assumption will be costly, but it’s the only path forward WBD has.
|WBD||Warner Brothers Discovery||$18.43|
Opacity is My Friend
On the surface, WBD’s HBO Max looks like a hit. It had 48.6 million subscribers in the U.S., and 76.8 million globally, when the company split from AT&T (NYSE:T). Add in 15 million Discovery Plus subscribers and things look pretty good.
But do they? Many get HBO Max for free because they already get HBO, which began life as a paid cable service in the 1970s. AT&T wireless customers have it included in their bundles. This means that while, on the surface, WBD is 4th in paid streaming, behind only Netflix (NASDAQ:NFLX), Amazon and Walt Disney (NYSE:DIS), it may be further behind than investors think.
To this add “Live TV streaming,” which is a cable package offered via streaming sticks from Amazon, Roku (NASDAQ:ROKU), Alphabet or Apple (NASDAQ:AAPL). AT&T Now was 5th in this market, led by Disney’s Hulu Plus.
Cleanup on Aisle Four
The sudden closing of CNN+, just a month after it launched, illustrates just how contentious the split from AT&T became.
WBD CFO Gunnar Wiedenfels made it clear CNN+ was entirely an AT&T deal. He called it one of WBD’s “chunky investments” that could not meet the return on investment goals the new management has set. He said WarnerMedia profits will be $500 million less than originally anticipated, and the stock dropped 8%.
CEO David Zaslav told analysts 2022 will be “messy” but claimed the group is off to a good start. First quarter earnings were reported April 26 as $456 billion, 69 cents per share, on revenue of $3.17 billion. But over half that money came from advertising, on cable channels like Discovery, CNN, and TBS. Its international investors saw the future, with distribution revenue exceeding advertising at $536 million.
Part of the cleanup will involve combining all the company’s streaming assets into a single service. Zaslav predicted adding Discovery Plus, with 24 million customers, and CNN programming to the bundle will reduce churn and create a globally competitive offering.
The Bottom Line
The question investors must ask is whether WBD, as now constituted, offers a bargain or a value trap.
On the surface it looks like the former. WBD opened for trade April 28 at $19/share. That’s a market capitalization of $45 billion, just 13.36 times trailing P/E, last year’s earnings and less than four times last year’s revenue.
But investors are buying tomorrow, not yesterday. As AT&T shareholders own most of the common stock, a certain amount of selling pressure should be anticipated.
What’s left are Warner Brothers movies, cable programming, and streaming. Only streaming is growing. There, WBD faces not just traditional competitors, like Comcast (NASDAQ:CMCSA), Paramount Global (NASDAQ:PARA), and Disney, but the full might of Cloud Czars Amazon, Alphabet, and Apple. The Czars have prices starting at free and the capital to outbid WBD for talent and sports rights.
In short, the market is in “show me” mode regarding the new company. The stock is cheap because investors aren’t convinced WBD can beat its competitors into consumer wallets. To justify a higher price, Zaslav must prove these skeptics wrong.
On the date of publication, Dana Blankenhorn held long positions in AAPL, GOOGL, and AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.