Consumers will always love to be entertained, especially on a screen, and that presents investors with a worthwhile opportunity to allocate capital. There are lot of media companies out there, all vying for a viewers' attention, and some businesses are better positioned than others for long-term success in the industry.
Two top streaming and entertainment companies that you might consider owning are Netflix (NFLX +0.13%) and Warner Bros. Discovery (WBD +0.28%). Both businesses have their own set of positive and negative characteristics that investors need to think about before deciding to buy.
Netflix is turning the corner financially
NASDAQ: NFLX
Key Data Points
With 231 million subscribers and 2022 revenue of $31.6 billion, Netflix is dominant in the industry. The company has been at the forefront of bringing streaming video entertainment to the masses. Even in a terrible macroeconomic environment, it was able to add 8.9 million net new members and increase sales 6.5% last year.
From a content perspective, Netflix still shines bright. According to data from Nielsen, Netflix commanded 7.3% of total TV viewing time in the U.S. in February, second only behind Alphabet's YouTube. As more households ditch their cable-TV subscriptions, the company can benefit, as it's the top streaming brand.
Netflix is facing a more competitive environment than it has for most of the past decade, and that means growth will be harder to come by. That's why the cheaper ad-supported tier was launched. It can expand Netflix's addressable market by attracting more price-sensitive consumers over time. Moreover, a reported foray into cloud gaming may help drive subscriber engagement.
After generating positive free cash flow (FCF) of $1.6 billion in 2022, Netflix management predicts the business will produce $3 billion in FCF this year, well on its path to becoming a sustainably profitable company based on this important financial metric. This is a huge milestone for Netflix, and it better positions the business against rivals that find themselves in worse financial conditions. Expect the business to resume its share repurchases sometime in 2023, a potential boost to investor returns.
Warner Bros. Discovery is undergoing major changes
NASDAQ: WBD
Key Data Points
Created after the merger of Discovery and WarnerMedia, Warner Bros. Discovery is an entertainment juggernaut, with 2022 revenue of $33.8 billion. It operates film and TV studios, cable networks, and a direct-to-consumer (DTC) offering that competes directly with Netflix.
That DTC segment includes Discovery+ and HBO Max, which are slated to combine into one service soon. The advantage this offering might have over Netflix is the sheer breadth of content available. Discovery+ specializes in nonfiction, real-life shows, and documentaries, while HBO Max is known for having some of the highest-quality content on the market. A combined service would certainly be an incredible value proposition that can satisfy every viewing taste in a household. As of Dec. 31, the DTC segment counted 96.1 million subscribers, with plans to have 130 million customers and produce $1 billion of profits by 2025.
It's not all good news, however, as Warner Bros. Discovery finds itself undergoing a huge restructuring. The company had a whopping $49.5 billion in debt as of Dec. 31, exceeding its current market capitalization of $34.9 billion. Even more discouraging is that the business posted a net loss of $7.3 billion in 2022. But shareholders can rest assured knowing that fixing this unfavorable financial situation is a key concern for the management team.
"Last year was a year of restructuring; 2023 will be a year of building," said CEO David Zaslav. Investors might be warming up to the stock, as it has soared 50% so far in 2023, outpacing the 11% gain in Netflix shares.
There's a clear winner
Taking all factors into consideration, I believe that Netflix, which currently sells at a historically cheap price-to-earnings (P/E) ratio of 33, is the better buy. Netflix is the leading pure-play streaming business, with a global audience, expertise in content creation, and a robust financial position with sustainable positive FCF on the horizon. And although growth over the next five years won't be what shareholders saw in the past, new initiatives could continue to drive healthy gains.
To be fair, Warner Bros. Discovery is in transition mode, and management could successfully execute against its plans to lower the debt burden and improve the financials. In addition, the DTC offering could impress with its subscriber additions over the next few years. But this is a risky bet for investors to take at the moment, so it's probably best to stay away from the stock.
