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Time to Buy Warner Bros. Discovery On Its March to Profitability?

Warner Bros Stock Price

Media and entertainment giant Warner Bros. Discovery Inc. (NYSE: WBD) has hit a major milestone among streaming service providers: profitability. Streaming and profits are two words rarely mentioned in the same sentence. Streamers like The Walt Disney Co. (NYSE: DIS) Disney+ and Paramount Global (NYSE: PARA) Paramount+, Comcast Co. (NASDAQ: CMCSA) Peacock Network can attest to that.

Netflix Inc. (NASDAQ: NFLX) is the exception, as it was profitable in its Q3 2023 earnings results. The new mantra for profitability in streaming is to charge more for the service and spend less for the content, which is working for Netflix. Warner Bros.'s rebranding of its Max streaming service turned profitable in the first half of 2022.

MAX Streaming Profitability

HBO Max and Discovery+ streaming platforms were combined into the Max streaming service on May 23, 2023. The ad-supported tier costs $9.99 monthly with permission to stream on two devices. The premium ad-free tier is $15.99 monthly and can stream two devices and 30 downloads. Its ultimate ad-free tier costs $19.99 per month.

It includes more films and shows in 4K UHD, the ability to stream on four devices simultaneously, and the download capability of 100 periods or episodes for offline viewing. The third quarter of 2023 will provide a better impact on the launch of Max since it will be the first full quarter since the combination.

More for Less

The streaming service has reached profitability and expects to launch in 22 European countries in the spring of 2024. Francs and Belgium will follow in later 2024. Max includes live-streamed sports, which include Grand Slam Tournaments, Tour De France and the 2024 Olympic Games in Paris.

Warner Bros. Discovery, president of international, commented that Max was getting slightly profitable in the first half of 2023, the only service next to Netflix to make a claim. He stated, "What we see, at least in the last 12 months, is that the era of streaming we saw with over-delivery of content underpriced at this low level is over."

Content Brand Empire

Warner Bros. is one of the largest content providers in the world, serving over 220 countries in 50 languages. Some of its well-known brands include Food Network, HGTV, Discovery Channel, DC, OWN, TLC, TNT, TBS, Travel Channel, CNN, MotorTrend, Animal Planet, Science Channel, New Line Cinema, Cartoon Network, and Turner Classic Movies. The company had 181 Emmy nominations, which include 127 for HBO and Max.

Barbie Smashes Records

Warner Bros. produced the surprise box office hit Barbie, the highest-grossing film of 2023 with $1.44 billion and the company's highest-grossing film ever. Its DC entertainment universe is getting a revamp with a new Superman after ten years and a new Lord of the Rings after nine years. The company will continue with tentpole productions and licensing some library content to Netflix and Inc. (NASDAQ: AMZN) Prime Video.

On any night, Warner Bros. reaches a third of all cable viewers. It has a flourishing video game publishing division, recently hitting it big with Hogwarts Legacy, the best-selling game of 2023, with over 15 million copies sold, generating over $1 billion in revenues. Mortal Kombat 1 was released to critical acclaim in September 2023. Aquaman 2 is set to release on December 25, 2023. Lord of the Rings: The War of the Rohirrim is set to launch on April 12, 2024, and Joker 2 on October 4, 2024.

WGA Strike Settlement Impacts

The Writers Guild of America (WGA) strike has caused Warner Bros. to trim its earnings by $300 million to $500 million in 2023. According to the WGA, the increase in spending from the negotiation settlements would only amount to around $45 million. Negotiations with the Screen Actors Guild of the American Federation of Television and Radio Artists (SAG-AFTRA) are ongoing.

Improving Fundamentals

Warner Bros. reported its Q2 2023 earnings report for the quarter ending June 2023. The company lost 51 cents per share, which missed consensus analyst estimates by 17 cents. Revenues grew 5.4% YoY to $10.36 billion, missing consensus analyst estimates of $10.45 billion. The company generated $1.7 billion in cash flow. Global direct-to-consumer (DTC) subscribers fell by 1.8 million to 95.8 million. However, the combination of HBO Max and Discovery+ launch under the Max service is responsible for cancellations as subscribers switch to the combined platform. 

Debt Reduction

CEO David Zaslav has clarified that debt reduction has been a primary goal since its merger. The company ended the quarter with $47.8 billion in debt and cash of $3.1 billion. It repaid $1.6 billion of debt in the quarter. The company has retired $9 billion in debt since its merger. 

Zaslav commented, “And as we've said, we expect to be comfortably below 4x levered by the end of the year, firmly within the investment-grade rating by midpoint next year and at our target of 2.5 to 3x gross leverage by the close of 2024. With our free cash flow and leverage targets in sight, we are better positioned to lean into top-line growth opportunities across the company, and that's increasingly been our focus, starting with the direct consumer.”

Warner Bros. Discovery analyst ratings and price targets are at MarketBeat. Warner Bros. Discovery peers and competitor stocks can be found with the MarketBeat stock screener.

Warner Bros Discovery Stock chart


Daily Bear Flag Pattern

The daily candlestick chart on WBD depicts a bear flag pattern. Shares formed a daily market structure low (MSL) buy trigger after a swing low of $9.88 and bounced through $10.42 on Oct. 9, 2023. Shares peaked at $11.04 on Oct. 17, 2023, as they fell back under the ascending lower trendline of the flag to retest the MSL trigger.

The daily relative strength index (RSI) oscillation has slipped to the 40-band. Pullback support levels are at $10.15, $9.54, $9.18 and $8.84.

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