Warner Bros. Discovery (NASDAQ: WBD) stock is flirting with new lows. Undoubtedly, WBD is a streaming underdog many counted out amid its share slump. Recent cost cuts and production cancellations also do not bode well for the newly-merged streaming newcomer. Though the odds are stacked against the firm at this juncture, I do view the valuation as absurdly low and think the company may have an easier time pole vaulting over expectations now that theyre essentially near the floor.
Making matters worse, theres a lot of debt weighing down the balance sheet that could prevent it from staying competitive in the front of new content production. Content is king when it comes to the streaming market. Though cost cuts and other initiatives can trim away at the debt load over time, its unclear when Warner Bros. Discovery will be able to give the streaming markets heavyweights a run for their money.
Nonetheless, I remain bullish on WBD stock due to its valuation.
Warner Bros. Discovery Follows in Disney+s Footsteps
Theres a lot of work to do before Warner Bros. Discovery can position itself to take on the likes of Netflix (NASDAQ: NFLX) or Walt Disneys (NYSE: DIS) Disney+ and Hulu platforms. Still, there are striking similarities between Warner Bros. Discovery and Disney before it embarked on its expensive streaming journey in the early days of the pandemic.
Like Disney, Warner Bros. Discovery participated in industry consolidation ahead of its streaming plans. Though Disney has grown to become the new king of streaming, the stock price really hasnt reflected the firms successes in the streaming market.
Of course, Disney had its Parks and Experiences segment weighing it down during the worst of the COVID-19 lockdowns. Further, investors have turned against the streamers ahead of a potential economic downturn. Streaming isnt just crowded; it requires hefty reinvestment for a reward that doesnt seem so worthwhile anymore.
As streamers pursue ad-supported tiers to win over cash-strapped viewers going into an economic downturn, Warner Bros. Discovery finds itself in a rather perplexing spot. As many of its rivals, like Disney, put their foot on the gas, Warner Bros. Discovery is pulling the brakes a bit to find the right balance between spending and debt repayment.
A Slow Start Doesnt Mean WBD Isnt a Capable Rival
Undoubtedly, having more than $50 billion in debt has put a dampener on Warner Bros. Discoverys long-term streaming plans. Still, investors should not discount the power of the newly-formed empire. The company has a wealth of brands (like DC Comics) and studios (Warner Bros.) to keep up with the likes of the streaming markets top dogs.
Though it will take a few years, I do think Warner Bros. Discovery is a streaming underdog that one would not want to bet against before it has the opportunity to floor it. After recent rounds of cuts could come a very aggressive streaming push. For now, legacy media and operational efficiencies will be the principal focus.
As Warner Bros. Discovery looks to cut the fat after its historic merger, investors shouldnt expect the firms streaming service to hibernate. Sure, content spending may not be as high as its bigger brothers in streaming. However, all it takes are a few must-see hits to take a meaningful share away from the incumbents.
The House of Dragon series based on the hit show Game of Thrones has put HBO Max back on the map. The show has generated incredibly favorable reviews, with an 85% rating on Rotten Tomatoes and 8.8/10 on IMDb. Though Warner Bros. wont be able to pump out hit content at the rate of Disney anytime soon, it can generate traction with a quality-over-quantity strategy.
At the end of the day, its all about getting the best return from every investment. Warner Bros. Discovery will need to be more selective with productions it gives a go, but lets not forget that HBO Max is a platform known for having more quality than quantity.
For now, viewers will slam Warner Bros. Discovery for show cancellations and cost cuts. With such a modest multiple on shares, though, the risk/reward ratio seems too good to pass up for those willing to hang on for the next five years.
In a year, HBO Max will have combined with Discovery+, and content spending could be at a level to bring on waves of subscribers from Netflix and other former streaming heavyweights that have a lot to lose as the floodgates open wider.
Is WBD a Good Stock to Buy?
Turning to Wall Street, WBD stock comes in as a Moderate Buy. Out of 16 analyst ratings, there are eight Buys, seven Holds, and one Sell.
The average Warner Bros. Discovery price forecast is $24.43, implying upside potential of 92.7%. Analyst price targets range from a low of $15.00 per share to a high of $44.00 per share.
Conclusion: WBD Stock is a Deep-Value Play
Management will have its hands full as it looks to steer Warner Bros. Discovery on the streaming path. Still, the 0.6x book value multiple seems absurdly low. Investors and analysts may dislike the stock today, but over the long run, I do view WBD as a deep-value play that many impatient people were too quick to count out.
Warner Bros. Discovery may be a tortoise against a hare in streaming. However, over the next 10 years, theres a good chance that this tortoise could find itself winning the race.