It has been 100 years since the four Warner brothers set up their film business in Los Angeles, a centenary marked this summer by the release of the blockbuster Barbie. It has eclipsed every other release in 2023 and raked in more than $1bn at the box office so far. Warner Bros Discovery (Nasdaq: WBD) has created a mainstream global media phenomenon, a product franchise set to deliver beyond this first film for years to come. It’s a reminder of the marketing juggernaut that this $31bn entertainment giant can muster at its best.
Ahead of the release, WBD made a four-part television series, Barbie Dreamhouse Challenge, showing teams competing to make perfect homes, that aired in nearly 150 countries; it ran the Barbie-inspired Summer Baking Championship on its Food Network, and it even broadcast sneak previews of Barbie during the Discovery Sports coverage of the NBA basketball conference finals.
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One of the best stocks to buy
Reminders of WBD’s marketing muscle are important because its share price languishes not far above all-time lows. In part, this reflects difficult conditions in the media sector generally. Writers and actors are still on strike, with no deal in sight and few expect the impasse to end any time soon. This inevitably means fewer cinema releases and a slowdown in fresh content online. At the same time, streaming prices are being hiked to try to make the services more viable, just as viewers are struggling with higher living and borrowing costs. The outlook for advertising is also uncertain.
Some investors, moreover, have concerns about the finances of WBD, in particular its high debt load of $49bn. Others claim recent cost-cutting and redundancies have hurt morale. Debt is undoubtedly a problem, as it needs servicing and drains cash that could otherwise be spent on content. More positively, Barbie isn’t the only recent success. WBD’s video game spin-off TV series The Last of Us has proved popular, and the launch of the Harry Potter-themed Hogwarts Legacy video game brought in over $1bn in its first few weeks, too.
The leading library
More broadly, WBD has probably the best entertainment library in the sector. It brought us the very first talking films, after all, so its catalogue has been a long time in the making. It includes Harry Potter, Game of Thrones, Lord of the Rings and the DC superhero cast including Superman and Batman, as well as ever-popular quality output from its HBO business such as Succession and White Lotus. Ultimately, the value of a media company is in its potential content. WBD is second to none. And the management is there to monetise that content while applying the budgetary discipline necessary in a creative industry to build new content that makes money.
The business is reducing debt and improving free cash flow so it can go further. WBD is rumoured to be on the verge of licensing a considerable amount of content to Netflix, which would bring in money quite quickly to pay off more debt. Meantime, restructuring the business has reduced expenses, allowing a greater focus on creativity than cost savings.
No one suggests buying WBD on Barbie alone. But successes are demonstrations of strength, and they are small steps towards a tipping point when the company begins gaining more support from investors. The shares trade at a significant discount not only to the broader market but also to rivals such as Disney and Netflix. They will be volatile, but patient investors could be rewarded as content is leveraged more effectively, the Barbie success is repeated, cashflows improve and streaming business models become more profitable.
Barbie is now among the top 20 US domestic movies of all time by gross ticket sales. But there is still plenty to do. No one has yet cracked the secret sauce to make streaming a sustainable growth business; old-fashioned TV is in secular decline and a drain on financial resources; the changing shape of sports broadcasting as media “digitises” is presenting challenges; and the advertising market is mixed.
The CEO is driving change
CEO David Zaslav, a long-time media executive, has moved quickly to cut costs and restructure, which, as in any industry, creates tensions. A leaner business will be more focused and able to invest in profitable output.
A big concern for investors is the $49bn debt pile, but the board’s approach is generating more cash flow and cutting debt further than many expected, which bodes well. Some argue that WBD is completing a rationalisation process that competitors like Disney and Netflix are still grappling with.
The group is the result of a merger completed last year between the WarnerMedia business of telecoms group AT&T and Discovery, a media group specialising in documentaries. The combined media catalogue is deep, with output across films, TV shows, news and sports, non-fiction documentaries, music and video games. Brands include HBO, CNN, Batman, Harry Potter, Game of Thrones and Lord of the Rings.
Last year WBD made $9.2bn before interest, tax and depreciation on sales of $43bn. The analysts covering the stock expect double-digit earnings per share growth for the next few years, with big reductions in debt to come. The shares are cheap versus the overall industry, and analysts’ price target is $20, 59% higher than today.
Stephen Connolly is the managing director of consultancy Plain Money. He has worked in investment banking and asset management for over 30 years and writes on business and finance topics.
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