Stock Markets Analysis & Opinion

Can a Warner Bros. Discovery, Disney Bundle Fend Off Netflix?

  • Warner Bros. Discovery missed Q1 2024 EPS estimates by 20 cents as revenues dropped 6.9% YoY.
  • The company grew its subscribers to 99.6 million, up two million QoQ, and global average revenue per user (ARPU) rose 4% QoQ to $7.83.
  • Warner Bros. Discovery announced a partnership with Disney to offer a new bundled streaming package that will include Disney+, Hulu, and MAX and launch in summer 2024.
  • Media and entertainment giant Warner Bros Discovery (NASDAQ:WBD) shares initially tanked to $7.50 on its Q1 2024 earnings results. But the consumer discretionary sector giant recovered quickly on news of its new partnership with Walt Disney Company (NYSE:DIS) for a streaming bundle that would include Disney+, Hulu, Discovery, and MAX streaming services.

    The streaming wars are starting to heat up again as alliances are made to take on the incumbent giant Netflix (NASDAQ:NFLX), which commands 44% of the US streaming market with nearly 270 million subscribers.

    Warner Bros. competes with streaming service Comcast Corp (NASDAQ:CMCSA)-owned Peacock with 34 million subscribers, Paramount Global (NASDAQ:PARA) with 71.2 million subscribers, and Amazon.com (NASDAQ:AMZN) Prime with over 200 million subscribers.

    Over 20 Brands Combined

    Warner Bros. Discovery has well-known brands like HBO, CNN, HGTV, Food Network, Discovery Channel, TLC, and MAX. When combined with Disney+ and Hulu, additional brands include the iconic DC brand, which owns immortal superhero IPs including Superman, Batman, Wonder Woman and the Flash, Star Wars, and Pixar, along with ABC and FX. It's reminiscent of the cable TV packages except that it's on streaming. There's no information yet on whether the bundle will include live sports.

    A Streaming Juggernaut to Take on Netflix

    The combined total of subscribers between Disney+ (153.6 million), Hulu (50.2 million), and MAX (99.6 million) would total 303.4 million, making it the largest combined streaming partnership on the planet. Of course, a good chunk of members likely overlaps between services since Disney already offers a Disney+, ESPN and Hulu combined bundle for a single price. Additionally, existing subscribers to the individual packages may also decide to save money and convert to the bundle. The new Disney and Warner Bros. Discovery bundle is expected to launch in summer 2024.

    Warner Bros. Discovery President of Global Streaming and Games JB Parrette stated, “This new offering delivers for consumers the greatest collection of entertainment for the best value in streaming and will help drive incremental subscribers and much stronger retention. Offering this unprecedented entertainment value for fans across all the complimentary genres these three services offer presents a powerful new roadmap for the future of the industry."

    Daily Descending Triangle Pattern

    WBD is forming a daily descending triangle pattern. The descending trendline commenced at $9.51 on March 12, 2024, capping bounce attempts at lower highs towards the $7.51 flat-bottom lower trendline. Shares attempted to break down on April 30, 2024, when they fell through to $7.34, but quickly bounced back up to retest the ascending trendline again. WBD is attempting to break through the $8.02 ascending trendline resistance. The daily relative strength index (RSI) is also attempting to bounce through the 50-band, which has been a resistance band that it hasn't been able to cross since January 4, 2024.

    Earnings Missed

    Warner Bros. Discovery reported a Q1 2024 EPS loss of 40 cents, which missed consensus estimates by 20 cents. Revenues fell 6.9% YoY to $9.96 billion, missing analyst estimates of $10.22 billion. Global direct-to-consumer (DTC) subscribers rose 2 million to 99.6 million over Q4 2023. Global DTC average revenue-per-user (ARPU) rose 4% QoQ to $7.83. Distribution revenue fell 6% YoY due to a decline in U.S. pay-TV subscribers, partially offset by an increase in U.S. contractual affiliate rates and Argentina inflation impacts. Advertising revenue fell 11% due to audience declines in news networks and domestic general entertainment combined with a soft linear ad market in the U.S. and Latin America. EMEA growth partially offset the decline.

    A $200 Million Surprise Flop

    Video game fans were long awaiting the release of “The Suicide Squad: Kill the Justice League” by Rocksteady Studios, owned by Warner Bros. Rocksteady made its name with arguably the greatest superhero videogame made in 2015 called “Batman: Arkham Knight," which prompted a series of follow up games under the Arkham banner.

    Shockingly, the long-awaited Suicide Squad release was an undeniable flop as Warner Bros. Discovery took a $200 million hit to its EBITDA in Q1 2024 as a result. On the bright side, the Q1 results wouldn't have been so bad if you backed out of the video game flop. Moving forward, it's a one-off event, hopefully.

    Revitalizing the Lord of the Rings Series

    Warner Bros. Discovery CEO Dave Zaslav helped shares receive some optimism by announcing that its studio is in early script development for a new Lord of the Rings movie series with Peter Jackson and his writing team. The initial release rate would be in 2026, and the working title for the first movie is "Lord of the Rings: The Hunt for Gollum."

    Upbeat CEO Comments

    CEO Zaslav was upbeat during the conference call, pointing out how MAX Is gaining traction, with subscribers rising by two million in the first quarter of 2024. Ad sales also accelerated in its DTC segment, driven by a record March Madness and steadier ratings overall. Free cash flow improved by $1.3 billion YoY to $400 million even in its seasonably weakest quarter, which is Q1.

    International Expansion Accelerating with Exclusive Paris Olympics Coverage

    Zaslav stated that since the start of the year, they've expanded from a single market in the U.S. to 39 countries with its Latin America launch. They will add 25 markets across Europe with new markets in Belgium and France ahead of the Paris Olympics. MAX will be the exclusive place to watch every part of the Olympic games.

    Zaslav also noted that MAX is doing better than expected with its bundle deal with Netflix and Verizon Communications (NYSE:VZ). He expressed his confidence that they would hit their full-year 2025 adjusted EBITDA goal of $1 billion. With $90 million in positive EBITDA in Q1, they are off to a strong start. Churn is trending down in the U.S. and hit an all-time low in Q1. While ad sales fell 7% YoY in the quarter, he continues to see sequential improvement starting in Q2. Italy, Germany and Poland led to positive revenue growth in the EMEA. They are still negotiating with the NBA to renew their deal and have the right to match any third-party deal that is offered.

    Key Banc Sees a Silver Lining

    Analyst Brandon Nispel of Key Banc upgraded shares of WBD to Overweight from Sector Weight with an $11 price target. Nispel believes estimates have bottomed out, and the resolution of the NBA contract will be a positive catalyst. Subscriber growth DTC, profitability, and ARPU growth were all positive factors driving the upgrade. Nispel believes the stock’s valuation will bounce back to the historical 6.5X EBITDA and 15X free cash flow levels, up from its current 5.8X and 11X levels, respectively.

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