Media giants lost $500 billion in value this year due to rising costs, unhealthy balance sheets, and increased attention to profitability. In this piece, I compared a pair of media companies to see which is better. Warner Bros. Discovery (NASDAQ:WBD) and Fox Corp. (NASDAQ:FOXA) (NASDAQ:FOX) share the same woes as the rest of the media industry, but one looks like a star.
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Warner Bros. Discovery (WBD)
Unfortunately, Warner Bros. Discovery became unprofitable in the June quarter, losing over $3.4 billion despite having $9.4 billion in revenue. Due to its lack of profitability and horrendous balance sheet, a bearish view may be appropriate, especially considering that its price-to-sales (P/S) multiple isn’t much lower than the industry’s average.
Warner Bros. Discovery’s stock has fallen hard as it tries to push its restructuring efforts forward. The company is trading at a P/S ratio of about 0.8 times versus the three-year industry average of about 1.0.
During the third quarter, the company reported -$192 million in free cash flow compared to $705 million in the year-ago quarter. WBD’s balance sheet also leaves much to be desired. It had $2.5 billion in cash on hand, $50.4 billion in gross debt, and 5.1x net leverage at the end of the third quarter.
By 2024, the company plans to see another $3.5 billion in content impairment and development write-offs, so it could continue to hemorrhage cash for some time. Many key executives are departing WBD as it tries to bring its spending under control.
A key issue for the broadcast industry is tumbling advertising revenue. Ad revenue in WBD’s Networks division fell 11% year-over-year, excluding currency exchange, due to falling audience numbers. On the other hand, ad revenue in the Direct-to-Consumer division more than doubled to $106 million, excluding currencies, due to subscriber growth on its ad-supported tiers. The company could turn things around.
What is the Price Target for WBD Stock?
Warner Bros. Discovery has a Moderate Buy consensus rating based on four Buy ratings, five Hold ratings, and one Sell rating over the last three months. At $18.75, the average price target for Warner Bros. Discovery implies upside potential of 111.4%.
Fox Corp. (FOX)
Fox looks much better than Warner Bros. Discovery. With a P/S of around one and a P/E ratio of about 14.4, it looks fairly valued, but any additional downside could present a buying opportunity. A neutral view appears appropriate, but investors might want to prepare to buy, especially the Class B shares.
Fox’s Class A shares, which trade under the ticker “FOXA,” have plunged 27% since the March 2019 IPO, while Class B, which trades under the ticker “FOX,” is off only 5%. The Class B shares are more attractive because they offer more voting power and have a slightly higher dividend yield (1.7%) than the Class A shares (1.6%). They are also slightly cheaper, with a P/E of 14.4 times versus Class A’s P/E of 15.3 times.
Fox doesn’t seem to have the same problem with falling ad revenue as the rest of the industry has. The company’s revenue rose 5% year-over-year to $3.2 billion in the first fiscal quarter, including an 8% increase in ad revenues, although much of that was due to political advertising. Management touts Fox’s focus on sports and news and the growth of its Tubi streaming platform as the primary drivers for its ad revenue.
With $5 billion in cash, $2.4 billion in current liabilities, and $8.2 billion in long-term liabilities at the end of its first fiscal quarter, Fox’s balance sheet is also more attractive than those of most competitors.
What is the Price Target for FOX/FOXA Stock?
FOXA has a Moderate Buy consensus rating based on seven Buys, four Holds, and one Sell rating assigned over the last three months. At $38.42, the average price target for FOXA implies upside potential of 27.6%.
Conclusion: Neutral on FOX, Bearish on WBD
Fox appears to be one of the best broadcasting plays across the board due to its solid ad revenue, balance sheet, and dividend, although the Class B shares look more attractive than the Class A. Meanwhile, Warner Bros. Discovery looks like one of the worst, as its position is the opposite of Fox’s, as explained above.
Since Fox looks fairly valued, a neutral view looks appropriate, with the caveat that a buying opportunity may be around the corner. A bearish view looks appropriate for WBD due to its poor fundamentals and potential overvaluation.
