Why Discovery Inc. shares have fallen more than 35% so far in 2020
What happened
TV media company Discovery Inc. (NASDAQ: DISC.A)(NASDAQ: DISC B)(NASDAQ: DISC) has three share classes, and the prices of two of them fell more than 35% in the first half of 2020, according to data provided by S&P Global Market Intelligence.
The company’s “A” shares, which offer their owners one shareholder vote per share, fell 36.8% in the six months to June 30, while shares “C”, who do not have voting rights, fell 35.6%. . (The price of Class “B” preferred stock, whose owners get 10 shareholder votes per share, actually rose 4.8%).
So what
Discovery, the king of producing “unscripted” TV shows for its line of cable channels that includes the Discovery Channel, Animal Planet, HGTV and Food Network, is late to the streaming party, and it’s had all kinds consequences in 2020.
Because Discovery content is unscripted, it is relatively inexpensive to produce and easy to produce in large quantities. This makes it an easy sell as part of a cable set. Unfortunately, the number of cable subscriptions is falling rapidly: in the first quarter of 2020, for example, the cable company Comcast lost 388,000 residential cable customers, a big acceleration compared to Q1 2019, where it only lost 109,000.
Discovery has plans to launch a direct-to-consumer streaming service – à la disney+ or HBO Go – for quite some time. He even brought former Google executive Neil Chugani to spearhead the effort. Can Discovery’s content — which largely caters to niche interests — convince a big enough segment of the cable population to shell out for a streaming subscription?
Of course, the best time to have such a massive library of content available on demand in the US would have been the first half of 2020, when over 90% of the population was under stay-at-home or similar orders and eager entertainment and distraction. But Discovery missed the opportunity. The coronavirus pandemic has dealt Discovery a further blow by canceling major European sporting events and postponing the Olympics, all of which Discovery was to broadcast through its Eurosport channel.
In short, it’s been a rough six months for Discovery, and investors have been selling its shares.
Now what
Although Discovery’s stock price peaked in 2014 and has been on a downward trajectory ever since, it continues to turn impressive cash flow. Its review metrics have gotten cheaper and cheaper, but whether it should be considered a buy will depend on how you think things will evolve in the TV landscape over the next few years.
If you think the cable cord cut will be slow and Discovery’s content will be attractive enough to support a paid streaming service, stock probably looks like a good value. But if you expect the cord-cutting to accelerate and leave Discovery suffering revenue before it can launch its streaming service, or if you think its content won’t attract enough eyeballs – and dollars – while there are so many other streaming options to choose from, then you’ll probably want to skip this media company.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.