- Discovery (WBD) is finally independent of AT&T (T).
- It’s a big entertainment player, but tiny next to cloud-based competitors.
- Bulls are betting on Discovery chief David Zaslav as a media mogul.
While the resulting company is called “a streaming behemoth,” it opened for trade April 18 at under $25/share. That’s a market cap of just $12.5 billion on 2021 revenue of $12.2 billion for the former Discovery Inc.
The spin-off created a massive amount of WBD stock held by AT&T shareholders, who got 71% of the deal. The shares may be under pressure as those investors, who bought a dividend stock, sell out because WBD doesn’t have one.
You can see that as a glass half-empty or a glass half-full. Or you can understand it’s not as simple as that.
More or Less
WBD stock is both more and less than it seems.
It’s more than it seems because WBD starts life with a big hunk of AT&T’s debt. The complex deal gives WBD shareholders as much as 22% of the average consumer’s cable budget, thus enormous leverage in carriage negotiations. Discovery networks like Food Network and Travel Channel are now combined with Warner networks like CNN and TBS. The new company also owns HBO, the former pay cable service that has evolved into a streaming service.
It’s at HBO that your attention should focus. The HBO Max service reported 46.8 million subscribers at the end of 2021, paying an average of $11.15 per month. The company chose an aggressive price for the service in contrast to the low bundled price of Walt Disney’s (NYSE:DIS) Disney Plus.
It’s less than it seems because media reports are more focused on CNN, the news network whose own streaming service recently landed with a thud. Ad revenue for the whole group was down 13%, to $1.6 billion, after the political frenzy of 2020 expanded budgets. This was in contrast with content revenue, which was up 45% year-over-year to $4.4 billion. Operating income was estimated at $1.6 billion.
The spin-off is the work of David Zaslav, the Discovery CEO. He has wasted no time putting his imprint on the company, taking the resignations of AT&T’s Warner team and launching his own media tour. The degree to which Zaslav retains his focus and isn’t overawed by his new status as a “media mogul,” will determine how far the new company goes.
The bullish thesis for WBD starts with Zaslav’s successful integration of the former Scripps Media properties into Discovery, which were bought in 2018. Some analysts see the company rivaling Netflix (NASDAQ:NFLX) in streaming, with its over 200 million subscribers. Bank of America (NYSE:BAC) analysts say the new company has “the broadest offering the market has yet to see.”
There’s also the former Warner Brothers movie studio. During the pandemic, Warner released its films directly to HBO for streaming, but they’re now back in theaters. That could be a $2 billion business this year, according to analysts.
Bottom Line on WBD Stock
How you feel about WBD stock depends on how you feel about Zaslav, and about streaming’s future.
Personally, I’m bearish. As I’ve written many times the gating factor on streaming isn’t money, but time. Because the new services offer their whole catalogs for browsing, it’s easy to fill all your hours with just one.
WBD may look large, even undervalued, with estimated 2022 revenue near $47 billion. But it’s a minnow next to Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), which owns YouTube, Amazon (NASDAQ:AMZN), which owns Prime, and Apple (NASDAQ:AAPL), which has also entered the market. The new company is also smaller than Disney, Netflix and Peacock owner Comcast (NASDAQ:CMCSA).
Buy it as a speculation but be ready to bail at the first sign of trouble.
On the date of publication, Dana Blankenhorn held long positions in BAC, GOOGL, AMZN and AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.