Warner Bros. Discovery Stock: Big Things Cast Their Shadows Ahead
How Warner Bros. Discovery is now setting the course to seriously challenge Netflix in the future.
In the last 3 months the share price of Warner Bros. Discovery ( WBD 0.00%↑) from my investable sample portfolio has risen by 50% after a long period of decline.
What happened?
For the first time since the merger of Warner Media and Discovery, WBD reported a (small) net profit for the third quarter of 2024. And then, within a few days, two announcements from the company finally set the stage for a higher valuation by the capital markets.
Expansion of partnership with Comcast
The media and communications giant Comcast has been an important partner, but also a competitor, of Warner Bros. Discovery for many years. Just a few weeks ago, Comcast announced the spin-off of most of its cable networks into a separate public company.
In addition to the Xfinity cable networks and broadcast networks such as NBC, Comcast owns the Universal and DreamWorks film studios and the Peacock streaming service. Comcast also owns the European broadcaster Sky, which has been a strategic partner of Warner in Europe for many years.
All Sky customers in the UK, Germany and other European countries have been able to watch Warner Studios movies and successful HBO series as part of their Sky subscription for many years. Alongside sports rights, WBD content is arguably the most important selling point for a Sky subscription in Europe.
Recently, the relationship between Comcast and WBD has been extremely strained. This is because WBD is launching its global streaming service, Max, in the European markets which it previously shared with Comcast. After an existing licensing agreement expires, Max will be in direct competition with Sky from 2026 in important markets like UK and Germany. In a sign of how strained the relationship has become recently, WBD was even sued by Comcast in a dispute over the rights to broadcast the future Harry Potter series.
Now comes the settlement: WBD and Comcast have signed a series of long-term deals that guarantee Xfinity customers in the US and Sky customers in the UK access to WBD content in the future. The deal also includes the continued carriage of the WBD group's linear cable channels, including TNT, TBS, CNN, Discovery, Food Network and HGTV. Comcast has also secured the rights to include the ad-supported versions of Max and Discovery+ in its own streaming offerings.
Of particular note is the expansion of Sky UK's collaboration with WBD. With the launch of Max in the UK in early 2026, Sky customers will have access to a new, non-exclusive, ad-supported Max app. The app will be integrated into the Sky service. This means that Max will have a large user base of UK subscribers from the beginning, who will pay for Max as part of a bundle with Sky and also can be monetized through advertising. This agreement also ends the legal dispute between Comcast and WBD over the rights to the upcoming 'Harry Potter' series.
The Comcast deal is significant for WBD as it gives the company stability after losing the NBA rights. The exact terms of the deal are not known, but management seemed very pleased at an investor conference last week. It was pointed out that under the terms of the agreement, Comcast will pay more money than before to keep WBD content in its Sky portfolio. In addition, Comcast's per-subscriber fees for the entire portfolio will increase annually.
Separation Of Legacy TV And Studio/Streaming Businesses
In addition to the Comcast deal, WBD has announced a new corporate structure to be implemented immediately and expected to be in effect by mid-2025. The company will be split into two separate operating divisions:
Global Linear Networks: This division includes the traditional linear TV business with established news channels, sports channels and TV programmes. The focus of this shrinking legacy business will be to maximise profitability and free cash flow in order to rapidly reduce the group's overall debt.
Streaming & Studios: This segment includes the global streaming platform Max and the film and entertainment studios of WBD. HBO is also included in this segment. The focus in this segment is on a combination of growth and a high return on invested capital.
The new structure basically creates the conditions for a possible spin-off of the legacy business along the lines of Comcast. This is at least an option for WBD in the future.
Equally important, in my opinion, is that WBD Streaming & Studios will be very comparable to other leading media companies of the digital age (= Netflix) in the future. WBD Streaming & Studios is expected to have revenues of around $23 billion in 2025. This is expected to come in roughly equal parts from streaming (the direct-to-consumer segment) and the studio business.
By comparison, Netflix's revenue is expected to rise to almost $44 billion in 2025. This means that Netflix's revenue will initially be almost twice as big as WBD Streaming & Studios.
However, Netflix is currently over 13 times more expensive than WBD ($26bn), based on a market capitalisation of $389 billion. Taking net debt into account, Netflix's enterprise value ($398bn) is still more than 6x higher than WBD's EV ($64bn).
Assuming that Global Linear Networks will account for a large part of the net debt after the restructuring of WBD, WBD Streaming&Studios will be a growth company free of legacy issues that should be able to become a real challenger to industry leader Netflix.
It is very likely that the WBD streaming service Max will grow faster than Netflix over the next two years, at least in terms of subscribers. This is due to its entry into many new markets where Netflix has been active in for a long time. The growth potential from the technical prevention of multiple use of login data is also still ahead of WBD, while Netflix has already passed this growth spurt.
It remains to be seen how the profitability of WBD's new streaming and studio organisation will compare to Netflix. I am quite optimistic about this, because WBD's management, led by CEO David Zaslav and CFO Gunar Wiedenfels, has shown multiple times in the past how to make a media company profitable.
Conclusion on the Warner Bros. Discovery share
The announced restructuring of WBD is only a first step and does not fundamentally change the company's figures and challenges.
WBD remains dependent on the high cash flow margins of the shrinking Linear Networks, as the debt of course does not disappear as a matter when the group is restructured.
But we can see this step as a preparation for a second, bigger step. A sale, merger or spin-off of Linear Networks seems quite likely to me in the medium term.
The new, smaller WBD will then have to find a good balance between growth and profitability - especially in direct comparison with Netflix and the other streaming providers.
I remain very optimistic that WBD will be one of the leading players in a future all-digital media landscape - and that the share price will be significantly higher in a few years than it is today.
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*Disclaimer: The author and/or related individuals or companies hold shares in Warner Bros. Discovery. This post is an expression of opinion and not investment advice.