The Media Giants Revival
Warner Bros. Discovery (NASDAQ: WBD) and Paramount Global (NASDAQ: PARA) emerged as newly revamped versions of established media companies last year. Warner Bros. formed through AT&T’s spin-off of WarnerMedia and its merger with Discovery, began trading as a separate entity in April. After Viacom and CBS merged in late 2019, ViacomCBS changed its ticker symbol to PARA and rebranded as Paramount Global.
Despite this, the stock has yet to generate much enthusiasm among investors. WBD’s stock has fallen almost 40% since its initial trading day, while Paramount’s stock has dropped nearly 30% since its rebranding. Both stocks faced similar challenges, such as advertising business struggles and loss-leading streaming strategies compressing their margins. Is it time for investors to consider these undervalued media stocks as others turn away?
Challenges for Warner Bros.
Warner Bros.’s revenue experienced a 5% decrease in 2022 to $43.1 billion on a pro forma basis. Its studios and networks divisions represented 86% of its top line, and both saw single-digit revenue declines. The direct-to-consumer (DTC) segment’s growth partially helped to counteract these decreases.
Several notable films were released by Warner Bros. studios throughout the year, including The Batman, Fantastic Beasts: The Secrets of Dumbledore, Elvis, and Black Adam. However, this dramatic growth was counterbalanced by lower TV licensing and home entertainment revenues. Its networks division faced challenges with slower ad sales and the ongoing decline of linear TV platforms.
Ad-supported and ad-free tiers of HBO and Discovery’s DTC business grew to 96 million subscribers by 2022, and the ad-supported tier gained more subscribers. Despite these investments, the DTC business remains unprofitable due to limited pricing power and massive streaming investments, resulting in a pro forma adjusted EBITDA loss of $2.1 billion in 2022 compared to $1.9 billion in 2021. As a result, Warner Bros.’s adjusted EBITDA for the full year fell 12% to $9.2 billion.
However, analysts predict Warner Bros.’s revenue will increase by 2% to $44 billion in 2023, and its adjusted EBITDA will grow 23% to $11.3 billion as macroeconomic headwinds subside and spending is controlled. With an enterprise value of $77.6 billion, Warner Bros. stock appears reasonably priced at two times this year’s sales and less than seven times its adjusted EBITDA.
Paramount’s Tough Climb
Despite a 4% decline in TV media revenue, Paramount’s DTC and filmed entertainment businesses contributed 5% to its revenue in 2022. Pluto TV continues to grow its DTC segment, with 79 monthly active users (MAUs) on a free platform and 56 million subscribers on Paramount+. Many box office hits were also achieved by its filmed entertainment division during the year, including Top Gun: Maverick, Sonic the Hedgehog 2, Scream 5, Smile, Jackass Forever, and The Lost City.
Like Warner Bros., Paramount’s TV media business, which owns CBS, The CW, Showtime, Comedy Central, Nickelodeon, BET, and other networks, struggled with macroeconomic headwinds for the advertising market and the gradual decline of linear TV platforms.
Even though Paramount’s top-line growth appears stable, its DTC losses significantly impact its margins. Adjusted operating income before depreciation and amortization (OIBDA) losses nearly doubled to $1.8 billion in 2022, resulting in a 26% decline in adjusted operating income to $3.3 billion.
Paramount aims to stabilize its DTC losses by streamlining its spending and increasing its streaming prices this year. It also anticipates the advertising market stabilizing in the second half of 2023.
Analysts project Paramount’s revenue to grow 2% to $30.9 billion this year, but its DTC losses are expected to reduce its adjusted OBIDA by 22% to $2.6 billion. However, based on its enterprise value of $28.8 billion, it remains cheaper than many of its industry peers at less than once this year’s sales and eleven times its adjusted OBIDA.
Warner Bros. Discovery: Top Choice
Although Warner Bros. Discovery and Paramount share fundamental similarities, Paramount’s expanding DTC losses and smaller base of paid streaming subscribers make it a riskier investment than Warner Bros. Paramount’s stock may appear more affordable than Warner Bros.’s, but it warrants trading at a discount until it demonstrates its ability to stabilize these losses.
Warner Bros. Discovery is the more favourable investment option when comparing these two traditional media giants. While both companies face challenges in the evolving media landscape, Warner Bros. Discovery’s more robust DTC subscriber base and better control over losses make it a more attractive choice for investors. Paramount Global must prove it can stabilize its DTC losses before it can be considered a better investment.
