Is Warner Bros. Discovery a Buy?

Bulls Say

• Warner Bros. Discovery WBD owns one of the best rosters of production studios for both scripted and unscripted content.
• It owns the rights to the majority of the original programming broadcast on its channels, especially unscripted content, creating a large library that can generate multiple revenue streams.
• HBO Max has a long runway for growth in the U.S. and internationally, driven by its original series and deep and constantly expanding library.

Bears Say

• The streaming space is crowded and includes competitors like Netflix NFLX and Disney DIS. Warner Bros. Discovery may need to fund losses for many years to build a sizable customer base.
• International expansion exposes the company to multiple country-specific risks and regulatory regimes that may be more challenging than in the U.S.
• The business model for the cable network depends on the continued growth of affiliate fees. Any slowdown in the growth of these fees as pay-TV subscribers continue to decline could be a tremendous hit to profitability.

Morningstar Analyst Neil Macker Says

Warner Bros. Discovery is the result of combining Discovery Communications and WarnerMedia, spun out of AT&T. It’s one of the largest media companies in the world, with tremendous scale and reach. We project that the new company, led by CEO David Zaslav, will use its combined programming library and production capabilities to drive further growth in its streaming services as it navigates the transition toward a direct-to-consumer model, centered on a combined HBO Max/Discovery+ service.

WarnerMedia remains one of largest traditional media powerhouses and owns a deep content library, strong TV and film studios, linear cable networks, and a growing streaming service in HBO Max. Beyond the flagship HBO marquee, WarnerMedia owns a number of well-known media brands including CNN, TNT, TBS, Cartoon Network, Warner Bros. Studio, and Bleacher Report. It also controls a number of major franchises such as DC Comics (Superman, Wonder Woman), Adult Swim/Cartoon Network (Rick and Morty), HBO (Game of Thrones), and Warner Bros. Pictures (Harry Potter, The Matrix).

Discovery produces and owns unique unscripted content with proven appeal to audiences across cultures and languages. Discovery, TLC, HGTV, Food Network, and Animal Planet are the five flagship networks for the company in the United States and around the world; the namesake channel reaches more than 81 million subscribers in the U.S. and 226 million subscribers and viewers internationally. The company’s streaming service, Discovery+, has gained some early traction since launching in 2021.

While Zaslav has not run a more traditional media company like WarnerMedia, the longtime Discovery CEO presided over the transition of the company from a cable network owner to an unscripted content creation powerhouse. We expect that Zaslav will use his experience to help Warner Bros. Discovery transition into a direct-to-consumer powerhouse by focusing further investment in content and the user experience, which has garnered complaints on both HBO Max and Discovery+. We expect the combined streaming service will expand internationally and add more local language content, similar to competitors.

Key Proprietary Morningstar Metrics

• Fair Value Estimate: $40
• Star Rating: 5 Stars
• Economic Moat Rating: Narrow
• Moat Trend Rating: Stable