Investors should ignore much of the upbeat comments that have been made about Warner Bros. Discovery (NASDAQ:WBD) stock by the company and bullish analysts. For the most part, these comments have focused on how great the firm’s content is and how it can be “the next Disney (NYSE:DIS).” By focusing more on actual data and less on hyperbole, it’s quite easy to see that Warner Bros. Discovery is a sell at its current levels.
First of all, when it comes to the world of streaming, great content does not necessarily produce wonderful or even positive returns for stock investors. In my own opinion, Netflix (NASDAQ:NFLX) has some great content (and until very recently, much of the Street shared that view). Yet NFLX stock has tumbled 66% this year and 60% over the last 12 months.
As for the comparisons to Disney, it’s a little hard for me to determine whether the bullish analysts who call Warner Bros. Discovery “the next Disney” are being truly complimentary or sarcastic. After all, there’s evidence that Disney’s vaunted Disney+ continues to lose money, the company’s cable networks are still bleeding subscribers and its operating income fell year-over-year last quarter.
Meanwhile, despite the Great Reopening that should provide a huge boost to the company’s theme parks, DIS stock is down 43% versus March 2021, 15% since August 2020, and 24% since November 2019. So hearing that WBD stock is the “next Disney” should actually make investors run away from the new owner of HBO.
And indeed, Warner Bros. Discovery faces some of the same challenges as Disney. Both companies are being hurt by cord cutting, as excluding Time Warner, Discovery’s total subscriber base (including streaming) fell 4% year-over-year in Q1. Both have major profitability issues; Warner Media’s operating income sank 33% YOY last quarter, and Warner Bros. Discovery CFO Gunnar Wiedenfels said that Warner Media’s free cash flow dropped “even more” than its OI. In fact, Warner Media’s free cash flow fell a whopping $2.6 billion YOY and was “significantly negative in absolute terms,” the CFO stated.
Warner Bros. Discovery says that it can cut a great deal of costs at Time Warner and squeeze $3 billion of cost synergies out of the combined company. Still, with cord cutting continuing, most streaming channels losing meaningful amounts of money, and competition in the streaming sector extremely intense, it’s a terrible time to own cable channels and streaming channels. Making matters worse, Warner Bros. Discovery has been saddled with a huge debt of $14.4 billion.
Put everything together, and it’s clear that WBD stock is a sell.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.