Squid Game is Netflix’s most popular TV show ever with a “mind-boggling 142 million member households globally” watching in the first four weeks of its run, according to Netflix’s 3rd quarter earnings release of October 19, 2021. Ted Lasso just swept the Emmys. While you may think of this as Apple TV versus Netflix, Warner Brothers is the creator of Ted Lasso. We know the top hits of Netflix. Disney has been a beloved brand for a century. However, are you aware that the combined merger of Warner Bros. and Discovery includes the Ted Lasso, Dune, Harry Potter and HBO franchises?
Netflix and Disney are currently one and two in the streaming wars. However, S&P Global is projecting that the combined merger of Warner Brothers and Discovery into Warner Bros. Discovery, with a stock symbol of WBD, is going to put the newly combined company into the number two spot at some point (unspecified), behind Disney. This puts pressure on Netflix, and even more heat on traditional TV brands like NBC (owned by Comcast). With a price-earnings ratio of 64, investors might not be pricing in the competition that Netflix faces going forward – yet.
If you look at the revenue growth in the above Stock Report Card, AMC Theaters looks outstanding. However, that’s because last year was terrible. AMC’s revenue dropped from $5.5 billion in 2019 to $1.2 billion in 2020. It’s looking like 2021 will bring in revenue over $2 billion. However, that is still much lower than it was before the pandemic. AMC was struggling with cash burn even when it brought in $5.5 billion in revenue. Today, the company still faces deferred lease expenses of at least half a billion. This, combined with high-interest rate debt has plunged AMC’s credit rating to CCC plus.
The rally on Reddit to save AMC has allowed the company to keep from sliding into bankruptcy in the near term. However, even with people returning to theaters, there is a very real possibility that AMC will continue to burn through cash until at least 2023. A return to profitability will require structural changes (and likely less staff and far more automation).
In terms of revenue growth, the story that looks the most compelling is the merger of Warner Brothers with Discovery. This was done (at least partly) because AT&T (the parent company of Warner Bros.) needed the cash ($43 billion) and to offload some debt ($1.5 billion as of March 31, 2021). The combined company could be worth $130 billion, according to Bloomberg. Discovery shareholders will be awarded 29% of the company, while AT&T shareholders will receive 71% of the new company.
The top three streaming networks, Netflix, Disney, and Warner Brothers Discovery, are all rated at the lowest rung of investment grade (BBB). The popularity of online entertainment engagement and subscription revenue has these companies with a stable outlook. However, as interest rates rise, the debt load will drag on profit margins. There’s not a great deal of room for added expenses. Disney still has room to improve its cash flow as more theme parks return to full capacity. Currently, however, Disney is only pocketing 3.8% of its revenue, as of the 3rd quarter of 2021. Of course, this is better than last year’s losses of -$2.864 billion.
Most stocks in the streaming services are very expensive. However, the Warner Bros. Discovery deal could reward Discovery shareholders. If the combined value hits $130 billion. Discovery‘s share of that would be $37.7 billion. That is 2.7 times higher than Discovery’s market value of $13.93 billion today. Analysts peg the value with a forward PE of only 10. By comparison, Netflix and Disney both have very elevated forward PEs, at 63.60 and 36 (like purchasing avocados for $20 and $10 each, respectively). The average price earnings ratio is about 17.
We’re all aware of the cost of our streaming services. We might even jump around, subscribing to Netflix when our favorite series drops, and then switching over to Apple TV when the preferred pastime launches there. However, it’s time to start understanding the price of ownership. Netflix and Disney could have bright futures. But if the price is too high, even the smallest miss in expectations could cause share price losses. On the other hand, it’s possible that investors haven’t done the math to discover just what a deal the Warner Bros. Discovery merger offers investors.
Full Disclosure: I own shares of Discovery, in anticipation of the finalization of the merger between Warner Bros. and Discovery in the first half of 2022.
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Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money was released on September 17, 2021.
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Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.