With a portfolio of networks that include Discovery Channel, Animal Planet and Oprah Winfrey Network, and content that spans several genres, including natural history, sports, food and travel, Discovery, Inc. (DISCA) is one of the most popular media companies. It has made several strategic alliances and garnered significant attention with the announcement of its merger with AT&T Inc.’s (T) WarnerMedia in May 2021.
However, the stock has lost 62.9% since hitting its $78.14 all-time high on March 19, 2021. and has retreated 7.5% over the past month to close Friday’s trading session at $28.18.
The stock has plunged in-part due to its forced liquidation of Archegos Capital positions. DISCA also faces intense competition from other players in the growing global streaming market, such as Netflix, Inc. (NFLX), The Walt Disney Company’s (DIS) Disney +, and DISH Network Corporation (DISH). Furthermore, with Amazon.com, Inc. (AMZN) reaching a deal in May 2021 to acquire movie and TV company MGM, the streaming space is expected to become even more competitive. So, DISCA’s near-term prospects look uncertain.
Here’s what we think could shape DISCA’s performance in the near term:
Positive Developments
T and DISCA agreed on May 17 to combine WarnerMedia’s premium entertainment, sports, and news assets with DISCA’s leading nonfiction and international entertainment and sports businesses to create a premier, standalone global entertainment company via a Reverse Morris Trust transaction. The combined company is to be named Warner Bros. Discovery, as announced last month.
DISCA and Altice USA, Inc. (ATUS) agreed on a mutually favorable distribution agreement in February 2021 whereby ATUS’ Optimum and Suddenlink subscribers can continue to access DISCA’s portfolio of networks.
Mixed Financials
DISCA’s $2.79 billion in total revenue for the first quarter, ended March 31, 2021, represents a 4.1% year-over-year rise. The company ended the quarter with 13 million global, next-generation paying, direct-to-consumer subscribers driven by Discovery+, which was launched in January 2021. However, its operating income declined 49.2% year-over-year to $396 million in the first quarter. DISCA’s net income came in at $191 million, down 53.1% year-over-year. Its EPS has declined 61.8% year-over-year to $0.21.
Ongoing Investigations
Several law firms are conducting an investigation against DISCA for possible breaches of fiduciary duty and other alleged law violations by the company’s board of directors in connection with its merger with T’s WarnerMedia. T’s shareholders are expected to receive stock representing 71% of the new company, while DISCA’s shareholders are expected to own 29%.
Also, earlier this month, Poland's ruling Law and Justice party proposed prohibiting companies outside the European Economic Area from gaining control of Polish radio and television stations, which could potentially impact DISCA’s TVN network.
POWR Ratings Don’t Indicate Enough Upside
DISCA has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, DISCA has a C grade for Stability, consistent with its beta of 1.37.
DISCA has a C grade for Growth also. This is justified given that analysts expect its revenue to increase 13.3% year-over-year to $12.09 billion in its fiscal year 2021, but that its EPS will decline 34.6% year-over-year to $0.53 for the quarter ending September 30, 2021.
Also, the stock has an F grade for Sentiment, in sync with unfavorable analyst sentiment.
Of 17 stocks in the Entertainment - Media Producers industry, DISCA is ranked #8. Click here to see the additional POWR Ratings for DISCA (Value, Quality, and Momentum).
Better than DISCA: Click here to access six top-rated stocks in the same industry.
Bottom Line
Available in more than 220 countries, DISCA is a prominent player in the global streaming space. However, the company is being investigated regarding its merger with WarnerMedia. In addition, its bottom line declined in the first quarter, and analysts expect its EPS to fall in the current quarter (ending September 30, 2021). So, we believe it is wise to wait for a better entry point in the stock.
DISCA shares fell $0.26 (-0.92%) in premarket trading Monday. Year-to-date, DISCA has declined -6.35%, versus a 16.13% rise in the benchmark S&P 500 index during the same period.
About the Author: Manisha Chatterjee
Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.
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