Bill Gates once wrote that “content is king” and two decades later the legendary entertainment giant disney (SAY -3.48%) and the new but equally formidable handset Discovery of the Warner Brothers (WBD -7.77%) are both in the running for this title. Which stock is the best buy in the future?
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content crown
Disney offers a collection of iconic content that spans generations and geographies, from mainstays like Mickey Mouse and Disney Princess movies to franchises Millennials grew up with, like The Lion King. More recently, zoomers have grown up with the likes of Frozen and Cars. Disney rejuvenated Marvel and expanded the Marvel Universe with blockbuster movies like Black Panther and the avengers movies. Disney is also a juggernaut in the world of sports with ESPN.
While this is a daunting portfolio of content to compete with, Warner Brothers Discovery is probably the only company that can credibly claim to be Disney’s equal. HBO is home to prestige dramas like The Sopranos, Threadand The iron Throne. Brands like Harry Potter and Lord of the Rings have large and passionate fans, while sesame street captivated and educated several generations of children. Warner Brothers Discovery has extensive sports rights with the NBA, MLB and NHL. Add thousands of hours of unscripted and reality TV programming from HGTV, Food Network and Discovery Channel (think anything from TV host and restaurateur Guy Fieri to the crabbing series Deadliest Take), as well as cable news like CNN, and it’s a comprehensive and compelling content portfolio.
It can be argued that Disney or Warner Brothers Discovery have the superior content catalog, but there’s little separation here. It’s more of a 1a versus 1b.
Zaslav vs Chapek
Since taking over as CEO of Discovery in 2006, David Zaslav has guided Discovery on its journey from small network to global heavyweight, acquiring the Food Network and HGTV with the Scripps acquisition in 2018. He led the launch of Discovery+ and the merger with WarnerMedia. which transformed the company into Warner Brothers Discovery.
Bob Chapek took over as CEO of Disney in February 2020 after leading Disney’s Parks and Resorts division. Disney shares have been falling since he took office, but he has only been at the helm for two years. This period includes a big sale during the peak of COVID and the added challenge of Disney theme park closures. A two-year period is too narrow a window to judge Chapek’s reign, especially since it includes such a massive macroeconomic event.
That said, I give Zaslav the edge based on his long tenure at the helm of Discovery, his greater media experience, and his long history in mergers and acquisitions, which should be helpful to the future as he integrates Discovery into WarnerMedia.
Subscribers and subscriber growth
At the end of 2021, Disney+ had 129.8 million paid subscribers worldwide, an impressive total since its launch just two years ago. Disney+ added a substantial 11.8 million subscribers in the last quarter.
Warner Brothers Discovery’s streaming services are still separate segments, though that should change now that the merger is complete. Adding Discovery+’s 22 million paid subscribers to HBO Max’s 75 million gives it almost 100 million paid subscribers, which is in the ballpark of Disney+. Now that all the content will be in one place, it will be a more attractive offering for consumers, so Warner Brothers Discovery has another gear coming in terms of subscriber growth. Discovery+ added 2 million subscribers in Q4 2021, while HBO and HBO Max said they added 13 million subscribers in 2021, including three million in the last quarter.
Both companies have a much lower total number of subscribers than Netlfix (NFLX -5.48%) industry leading (but shrinking) 221 million, so both have room to grow in the future. I’ll count subscribers as a toss because Disney has a larger total, but Warner Brothers Discovery’s new combined offering will give the company a catalyst for more growth in the future.
Evaluation
While the content comparison is neck and neck, the valuation is really where the two stocks start to separate. Disney is trading at 21 times forward earnings, while Warner Brothers Discovery is trading at 15 times next year earnings. Warner Brothers Discovery also expects to gain $3 billion in synergies from the merger, so realizing them will make it even better value going forward.
Warner Brothers Discovery or Disney?
Disney and Warner Brothers Discovery are two media empires that no other competitor can match in terms of content, and both look like solid investments overall. Both have large subscriber bases with room for growth. Warner Brothers Discovery has a slight advantage as CEO. With the two companies tied on many counts, I give the edge to Warner Brothers Discovery as a best buy going forward given its more attractive valuation.
