In this piece, I evaluated two media stocks, Warner Bros. Discovery (NASDAQ:WBD), and Paramount Global (NASDAQ:PARA), using TipRanks’ comparison tool to see which is better. A closer look suggests a bearish view for Warner Bros. Discovery and a neutral view for Paramount Global.
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Warner Bros. Discovery is a mass-media and entertainment conglomerate formed from the merger of Discovery with WarnerMedia following its spin-off from AT&T (NYSE:T) in 2022. Meanwhile, Paramount Global is a mass media and entertainment conglomerate controlled by National Amusements.
Shares of Warner Bros. Discovery are up 4% over the last year and 12% over the last three months, although they’re still off 12% for the last six months. Meanwhile, Paramount Global stock has plummeted 22% over the last year, including a 12% decline over the last six months. However, the stock has started to bounce back over the last three months, climbing 22%.
While both stocks are up over the last three months, Paramount Global’s gain is nearly double that of Warner Bros. Discovery’s bounce. However, both companies trade at steep discounts to their industry, so a closer look is needed to determine whether those discounts are warranted and if there might be any more fuel left in their tanks.
Neither company is profitable, so we’ll compare their price-to-sales (P/S) ratios to gauge their valuations against each other and their industry. For comparison, the U.S. media industry is trading at a P/S of 1.2 times versus its three-year average P/S of 1.5.
Warner Bros. Discovery (NASDAQ:WBD)
At a P/S of 0.7, Warner Bros. Discovery is trading at a steep discount to its industry but higher than Paramount Global’s valuation. However, despite that discount, a bearish view seems appropriate due to the company’s large amount of debt — and the rumor involving Paramount Global.
The key story for both companies is the rumor that surfaced in December, suggesting that key executives from both had met to discuss a possible merger. There’s been no update to this rumored meeting since the original report from Axios on December 20, although the news did trigger a slight decline in both companies’ share prices.
Multiple analysts have expressed doubt about a potential deal, with some equating it to catching a “falling knife” and others describing it as a “financial death sentence.” A critical issue for such a combination is debt, given Warner Bros. Discovery’s $43 billion in debt and Paramount Global’s $15 billion in debt.
Regulatory issues also seem to suggest a merger between these two companies would be nothing but a pipe dream.
These rumors aside, it will take time for Warner Bros. Discovery to crawl out from under its massive debt load, although it did manage a sizable improvement in its net income margin, which rose from -22% in 2022 to -11.5% over the last 12 months. Still, there’s simply no reason to keep holding this stock in the near term — whether or not an offer is officially made.
What is the Price Target for WBD Stock?
Warner Bros. Discovery has a Moderate Buy consensus rating based on nine Buys, six Holds, and zero Sell ratings assigned over the last three months. At $16.33, the average WBD stock price target implies upside potential of 43.9%.
Paramount Global (NASDAQ:PARA)
At a P/S of 0.3, Paramount Global is trading at an even steeper discount to its industry. Thus, a neutral view looks appropriate due to its lower valuation and the company’s slightly better metrics. As long as the rumor about a potential merger with Warner Bros. Discovery is not renewed, and if or when a better potential suitor appears, it may be worth considering a more constructive view on Paramount.
It does seem likely that other potential buyers could materialize, given that Paramount Global has been widely seen as a potential acquisition target for quite some time. In fact, a rumor that Skydance Media and RedBird Capital were “kicking the tires” on a Paramount acquisition circulated nearly two weeks before the Warner Bros. Discovery rumor.
Bank of America (NYSE:BAC) also downgraded the company in November, stating that its previous bullish view had been based on expectations of a sale. Additionally, the firm said Paramount Global had received credible bids on several of its assets but didn’t take any of them.
On a standalone basis, Paramount Global is in a better financial position than Warner Bros. Discovery, with far less debt and a net income margin of -4% for the last 12 months, following a barely profitable 2022. However, it may be a good idea to steer clear of this stock for now, pending any significant changes to the company’s financials or merger narrative.
What is the Price Target for PARA Stock?
Paramount Global has a Hold consensus rating based on four Buys, five Holds, and eight Sell ratings assigned over the last three months. At $14.56, the average Paramount Global stock price target implies upside potential of 0.5%.
Conclusion: Bearish on WBD, Neutral on PARA
Between Warner Bros. Discovery’s debt-laden, cash-burning financial position and what seems to be becoming a steady stream of merger rumors for Paramount Global, this might not be a good time to hold either stock.
However, Warner Bros. Discovery’s worse financial position makes Paramount Global the winner of this pairing, with the possibility of adopting a more constructive view on Paramount as its financials improve or if a more attractive suitor appears.
