In the two weeks, two pieces of news surfaced regarding Warner Bros. Discovery’s (NASDAQ:WBD) streaming efforts. While they should have a positive, long-term effect on the price of WBD stock, I’m not sure this means that you should go out and buy shares just yet.
The reality is that the markets are still incredibly jittery. Until they calm down, I don’t think it makes sense to buy a business whose net debt, according to InvestorPlace’s Cristian Docan, is too high to ignore.
Further, until its streaming strategy becomes more apparent, you’re taking an unnecessary risk with your hard-earned capital. While it’s energizing to buy ahead of a juicy piece of market-moving news, more often than not, you can still make money when you buy a stock after the good news is out.
Warner Bros. Discovery’s streaming efforts are slowly taking shape. That doesn’t mean you should buy WBD right now.
Here’s why.
| WBD | Warner Bros. Discovery, Inc. | $17.75 |
WBD Stock and Its Downward Trajectory
The company’s stock fell almost 8% on April 26 after reporting lower guidance for 2022. Since then, it’s lost an additional 10%, falling to a low of $16.73 on May 24 before rebounding on the news it was forming a 50/50 joint venture with BT Group to create a premium sports offering for the U.K. and Ireland.
As my colleague said in mid-May, in addition to his debt concerns, “…there seems to be more downside than upside in the near-term.” His comments turned out to be pretty accurate.
What could help reverse the falling knife that is WBD stock is the news that it’s working with Brightline, a New York-based company whose connected TV ad products help streamers like Warner Bros. Discovery make ad revenue without losing too many customers in the process.
The two products WBD utilizes for its ad-lite streaming service are Click-to-Contact and Viewer’s Choice. They should both be available on Discovery+ in Q4 2022.
“Having more personalized ads makes sense for WBD, as the company enhances its advertising-based streaming approach. CFO Gunnar Wiedenfels noted on the first quarter earnings call that the Discovery+ ad-lite product has very low churn, generating $5-6 in incremental revenue from around 2-4 minutes of advertising,” FierceVideo reported on May 25.
I don’t think there’s any question that today’s inflationary times mean consumers will go for ad-supported services more than they might have during the pandemic. This is excellent news for owners of WBD stock.
The Less Surprising Piece of News
Warner Bros. Discovery’s head of global streaming, JB Perrette, confirmed the biggest non-secret in the world on May 18 at the company’s WBDUpfront event in New York City.
“In the not-too-distant future, we see a unique possibility to bring all these incredible stories and brands that shape culture, that delight, amaze and inform global consumers, and bring home these remarkable moments across all these genres in one, awesome global streaming product,” Broadcasting + Cable reported Perrette stated at the event.
The company believes it can win with a single streaming product combining HBO Max and Discovery+. I don’t think anyone doubts this to be the case. However, until it can get its personalized ad offerings up and running, there’s almost no chance CEO David Zaslav will greenlight a merger between the two.
More importantly, it’s got to have an ad-lite version available that can woo customers into the fold without scaring subscribers away. Until it gets that right with help from BrightLine, it can’t possibly merge the two.
HBO Max Plus Discovery+ Equals 3
I don’t think there’s any question that the eventual merger of the two streaming services will positively influence the price of WBD stock.
However, the markets at the moment aren’t in a forgiving mood.
The fact that it expects operating profits to be $500 million lower than its original guidance because of expensive initiatives, such as the now-shuttered CNN+, means there could be more surprises when it reports Q2 2022 results in July.
I’m not saying there will be, but if there are, single digits could be in the cards by the end of 2022.
If it were my money, I would wait until July to see what its Q2 2022 report is like. The merger of the two streaming services will happen. It’s only a matter of time.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
