A smart strategy that investors might want to entertain is to identify broad secular shifts happening across the economy. This can provide a nice hunting ground for potential stocks to buy, especially those that have a sizable growth opportunity. 

The streaming industry fits the description here. There are the heavyweights, like Netflix and Walt Disney, which each have hundreds of millions of subscribers. Unsurprisingly, these attract a lot of investor attention. 

And then there's a still sizable, but smaller, competitor like Warner Bros. Discovery (WBD -2.17%). Its shares are currently significantly below the price they debuted at after the merger of WarnerMedia and Discovery in April last year. Investors might be eyeing the business as a possible opportunity. 

But before adding this media stock to your portfolio, it's critical to understand one obvious reason to avoid it. Let's take a closer look. 

Financial troubles 

As a result of the business tie-up early last year, Warner Bros. Discovery was born. The company has its hands in traditional cable TV, film studios, and streaming entertainment. Popular channels include CNN, TNT, and Food Network. Well-known movies include the Harry Potter series, Batman, and Barbie. And perhaps the most successful series produced by the business was Game of Thrones. 

These are clearly some high-quality media assets all housed under one roof. The issue, however, is the company's massive debt burden. As of June 30, Warner Bros. Discovery had a gross debt balance of $47.8 billion, compared to cash of just $3.1 billion. The company's market cap currently sits at about $26 billion, giving you an idea of just how precarious the financial situation appears to be. 

Unsurprisingly, the management's goal is to cut costs through layoffs and reductions to content spending while also using the positive free cash flow (FCF) the company produces to pay down this huge debt burden. Warner Bros. Discovery generated $1.7 billion of FCF last quarter, which is encouraging. 

The goal is to lower the debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio below 4 by the end of this year and under 3 by the end of 2024. This is the most important metric shareholders need to watch. 

The path forward 

Legacy business segments might be the ones generating the bulk of operating profits for Warner Bros. Discovery, but one thing is obvious: Streaming is only going to grow in popularity. 

According to data from Nielsen, streaming accounted for 39% of overall TV viewing time in the U.S. in July, a greater share than both cable and broadcast TV. And there are now more households in this country that don't have a traditional cable subscription than those that do. This helps explain the direction that things are going in. 

Consequently, from Warner Bros. Discovery's perspective, I see two factors that put it at a disadvantage. The first is the unfavorable financial position that I outlined above. With a large chunk of cash production going toward servicing the debt, coupled with cost cuts, it frees up less capital to pay for fresh content. And introducing new shows and movies consistently is what will not only attract new subscribers but keep existing ones from canceling their memberships.  

The fact that the company's direct-to-consumer segment, which offers the revamped Max streaming service (formerly HBO Max), only has 96 million total customers means that it's facing an uphill battle. It's also losing money. 

Here's where Netflix really shines. Its first-mover advantage, having launched its streaming service domestically as far back as 2007, has resulted in tremendous scale, as evidenced by 238 million subscribers. This allows the business to spread its content costs over a huge user base, leading to an operating margin that will be close to 20% and a free cash flow of $5 billion for the full year of 2023, according to management estimates. 

Warner Bros. Discovery's primary focus is to pay down its debt balance. This puts it at a huge disadvantage when trying to grow the streaming business, which is only going to become more important.