Warner Bros. Discovery, Inc. (NASDAQ:WBD) is a media company that offers content in about 50 different languages on various platforms. WBD, like many of its competitors, is losing money due to falling revenue and increased expenses due to the challenging macroeconomic environment.
The Warner Bros. Discovery, Inc. stock price has dropped by over 56% in the past year, which I ascribe to the company's poor profitability and precarious financial position. I have a fairly pessimistic outlook on the company's future performance because of its formidable rivalry in the pursuit of profitability and the relatively weak state of its balance sheet. I don't think it will be simple for the company to beat the likes of The Walt Disney Co. (DIS), Charter Communication Inc. (CHTR), and Netflix (NFLX) in the race for subscribers and revenue.
It has taken fifteen years since the advent of online video streaming to appreciate the industry-wide shifts it has wrought fully. In 2022, SVOD services finally eclipsed cable and broadcast TV in the United States, the most mature market for SVOD. Leading U.S. providers have created global footprints, and media corporations in many nations have launched domestic SVOD services. As a delivery method, on-demand streaming has significantly altered video consumption, thereby upending the entertainment business.
Earnings have also been affected by streaming's proliferation. Revenues during the cable TV era were said to have rivaled those of the global oil sector, but now that industry has all but disappeared. Streaming services make about one-sixth as much money per household as pay TV. There is a dispersed audience, it's simple to cancel a subscription, and the full potential of advertising hasn't been realized yet. The cost of content acquisition and production has only increased.
The business has substantial operational costs and faces stiff competition for customers. Most U.S. streaming services now offer ad-supported, lower-priced tiers in light of the weakening economy and many canceled subscriptions. Some companies are already offering annual contracts at steep discounts. Free Ad-Supported Television [FAST] services provide live and on-demand content with a less critical, more ad-centric slant. As a result of these services, subscription prices are lowered, which might hurt profits.
Streamers' competition, possibly exacerbated by future acquisitions to strengthen their positions, should not overshadow media and entertainment's bigger shifts. UGC and interactive video gaming may be gaining popularity across generations. More SVOD companies are likely to add games to their offerings through IP deals or acquisitions. They will probably also try to get more out of social media and content creators without creating their social networks or user-generated content. They may never be able to make as much money as they did when cable was at its best, but the way forward is likely to lead to new ideas, business models, and opportunities.
With increasing rivalry in the sector's pursuit of profits. To evaluate where Warner Bros. Discovery, Inc. stands in this competition, I will examine how its revenue, profitability, and subscriber count stack up against some of its main rivals. Regarding profitability, WBD lags behind two of its main competitors and slightly above the only rival it has managed to beat in revenues.
Compared to its three main rivals, WBD generates the lowest net income. It has the only negative bottom line because of its significant operational expenses and relatively modest sales. This illustrates how it lags behind competitors in cost management.
With Netflix seemingly looking like the closest match for WBD in terms of competition, I'd like to narrow down the comparison to the two as far as subscribers are concerned. While Warner Bros. Discovery's HBO Max and Discovery+ have about 95 million global subscribers, Netflix has over 223 million, more than 2X that of WBD. NFLX, with so many subscribers, also appears to have a much better strategy to make the most of its large market share, making it a better investment than WBD. To sum up, WBD is an underdog in this race and, in my opinion, will continue to trail behind the three competitors mentioned here in terms of profitability and subscribers.
Its balance sheet is quite alarming. The corporation has $53.48 billion in total debt and only $2.42 billion in cash. Its current debt level is extremely high, representing a whopping 1.7 times the company's current market cap of $32.13B. This high debt is affecting the company's financial status significantly. For instance, in the third quarter of 2022, the company spent more than $500M in interest payments. This wouldn't be a major concern if the company was generating constant cash flows, but that isn't the case. High costs and a harsh advertising climate in the third quarter caused a free cash flow deficit.
The company needs to generate free cash flow as quickly as possible, not only to service that debt but also to pay it down. Any debt the company needs to refinance will likely result in higher interest payments, given how much interest rates have risen. There is about $13.6 billion in senior notes with a weighted average interest rate of 3.6% that will be due within the next five years. Additionally, the firm has $4.0 billion in short-term debts due in less than three years. They need to pay down some of their debt when it comes due because any debt that ends up being refinanced is likely to be more expensive.
The entertainment industry is evolving very fast and is currently characterized by increasing competition for subscribers and profitability. The high number of subscribers will eventually turn into high revenues, which shall be significant in realizing high-profit margins. In this race, Warner Bros. Discovery, Inc. lags behind all its major rivals, leaving them in a risky position to turn profitable.
Besides the low subscribers and negative profits figures, Warner Bros. Discovery, Inc. has a very high debt, which is the biggest risk of investing in this company. The company spent more than $500M in interest payments in the third quarter alone. This would be a major problem if the company was generating free cashflows consistently, but that isn't the case. In the third quarter of 2022, Warner Bros. Discovery, Inc. reported negative $192M in free cashflows, which leaves the company's debt financing ability in question. Factoring in this high debt burden and the intense competition, I find it better to invest in any of the other three competitors, which are performing better than Warner Bros. Discovery, Inc.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information presented here is not intended to be taken as investment advice or as a recommendation regarding whether or not to purchase shares of the aforementioned company. Rather, it is an expression of my own analysis of the company's progress.