Two streaming giants are currently in the investing spotlight for different reasons. Warner Bros. Discovery (WBD 1.37%) began trading as a newly combined independent company after Discovery Communications completed its merger with WarnerMedia, which was spun off from AT&T. Netflix (NFLX -0.20%), the category's pioneer, saw its stock price plunge after its earnings report last week in which it reported losing subscribers for the first time in a decade.
With the two pure-play content and streaming giants both at an inflection point, it's a good time to examine which is a better buy.
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Hastings vs. Zaslav
Warner Bros. Discovery CEO David Zaslav and Netflix's Chairman and co-CEO Reed Hastings are two of the highest-profile executives in the media space. After coming on board as CEO of Discovery in 2006, Zaslav transformed the network from a small channel into the international powerhouse it is today, acquiring Food Network and HGTV in the Scripps acquisition in 2018 and partnering with Oprah Winfrey to launch OWN in 2011 in what was a groundbreaking move at the time. He led the launch of Discovery+ and the merger with WarnerMedia that remolded the company into Warner Bros. Discovery.
Reed Hastings, on the other hand, founded Netflix in 1997 as a business where consumers could rent movies by mail. From there, the rest is history as he grew the company into the juggernaut that pioneered the streaming category and became the "N" in the FAANG stock acronym that has taken the market by storm for much of the past decade. Hastings grew the business from a mail-order service into a $100 billion global empire with 221 million subscribers (and, it should be noted, the company had hit a market cap north of $300 billion before the recent sell-off).
These are two top-notch CEOs and while Hastings has a higher profile with the general public, I'm going to call this a draw.
Content clash
Warner Bros. Discovery has a content library that is second to none in the industry. Brands under its umbrella, such as HBO, feature some of the world's most beloved television shows like The Sopranos, The Wire, and Game of Thrones. DC Entertainment houses iconic superheroes like Batman, Superman, Wonder Woman, the Flash, and Aquaman. Then there are the thousands of hours of original and unscripted content housed by Discovery, HGTV, TLC, and the Food Network (think everything from Shark Week to Flip or Flop). Add in worldwide news from CNN and sports rights to the NBA, MLB, and the NHL, and this is a very compelling mix of content that spans all genres.
Netflix has built a compelling content library of its own, licensing movies and shows from other studios and creating its own content. Netflix has created a bevy of new franchises with large fan bases, such as Stranger Things, Ozark, and The Witcher. The company also distributes hit shows like Narcos. On the feature film front, Netflix was a maverick as a nontraditional studio that created critically acclaimed, award-nominated movies like The Irishman and Roma. Netflix has also had success experimenting with one-off comedy specials like Dave Chapelle's recent stand-up specials.
While Netflix has a solid content library, I am going to give the win to Warner Bros. Discovery here as it has more breadth and depth of content as well as more long-standing franchises that it can leverage going forward. Furthermore, Warner Bros. Discovery is at an advantage because Netflix still has to rely on licensing a large portion of its content from other studios at a time when many of them are trying to grow their own streaming services.
Subscribers and subscriber growth
Discovery+ had 22 million subscribers to go along with HBO Max's 75 million at the time of the merger, giving the combined company almost 100 million paid subscribers. On the other hand, Netflix has the largest subscriber base of all streaming services with over 220 million. However, in the most recent quarter, which, caused the sell-off, Netflix posted a net loss in total subscribers for the first time in 10 years.
Netflix is the 800-pound gorilla in the room with the biggest subscriber base now, but Warner Bros. Discovery would have to double just to approach Netflix's current total so it probably has more runway for growth ahead. As a case in point, HBO Max gained 3 million subscribers during the last quarter at the same time that Netflix had a net loss of 200,000 subscribers, illustrating that the companies are at different points in their growth trajectories, at least for now.
Valuation
As one of the best growth stories of the past decade, Netflix traded at a premium multiple for years, but after the recent sell-off, its valuation looks downright attractive, at 20 times earnings and just 15 times next year's earnings. However, Warner Bros. Discovery's valuation looks even more attractive, trading at 14 times this year's earnings and just 10 times next year's earnings. Before Netflix's sell-off this week, valuation would have skewed widely in Warner Bros. Discovery's favor. The gap has narrowed but Warner Bros. Discovery still has the edge here.
And the winner is...
Both Netflix and Warner Bros. Discovery look like solid buys at attractive valuations, but Warner Bros. looks like the more compelling buy going forward thanks to its massive arsenal of content after the merger. Both companies will probably spend heavily on content in the years ahead to maintain and attract subscribers but Warner Bros. Discovery has the advantage of its more established library. Lastly, Warner Bros. Discovery has more runway for growth ahead and is demonstrating better subscriber growth, so Warner Bros. Discovery looks like the the better investment of the two streaming giants going forward and a strong buy overall.
