Discovery (NASDAQ:DISCA) (NASDAQ:DISCK) (NASDAQ:DISCB) just made a significant move regarding its new GOLFTV streaming service: It has signed Tiger Woods to an exclusive content deal. I covered the new "Netflix of Golf" service when it was announced back in June, and it has the potential to be a big winner for Discovery over the long term.

Still, the market is skeptical of Discovery. Overwhelming the Woods news was the revelation of some near-term ratings issues at The Discovery Channel this quarter (due to production delays in its Fast N' Loud car show). This may be because the GOLFTV product isn't even out yet -- it will launch in January 2019, and only internationally (the PGA Tour still owns the U.S. rights). Therefore, the investing community doesn't yet know the economics of the new channel, except that Discovery is paying the PGA Tour $2 billion for 12-year international rights.

Here are the details around the Woods deal and why investors should be paying attention to Discovery.

Close-up of a golf ball rolling towards the hole and the shoes of the putter in the background

Image source: Getty Images.

Lessons from the master

Imagine getting regular golf lessons from one of the best golfers of all time? That seems to be the vision for the new content going forward. From the press release, the new deal will encompass:

  • weekly practice and instructional videos to improve your game,
  • exclusive access into Tiger's preparation routines,
  • behind-the-scenes access before and after PGA TOUR rounds, and
  • unique and exclusive post-round commentary.

In an interview with Deadline, Discovery CEO David Zaslav excitedly said the content was "not going to be the traditional stuff of golf telecasts." 

Woods himself issued a statement that was highly complimentary of Discovery: "I've been watching Discovery and David Zaslav build up a global sports platform with Eurosport, the Olympics and the launch of GOLFTV with us at the PGA TOUR, so I think they're the perfect partner to help grow the game. They're global, they get sports and know how to build new, younger and big audiences." 

The "Tiger effect" on ratings is alive and well

For those not in the know, Woods is in the midst of a career renaissance. After dominating the game in the late '90s and early 2000s, his career hit a rough patch, when a string of injuries and a high-profile divorce led to a five-year victory drought.

However, that changed just this past September, when Woods won the Tour Championship. It was his 80th PGA Tour win (which includes 14 majors), putting Woods only two wins behind Sam Snead for the most all-time. Shockingly, it was Woods' first win since 2013.

If you are questioning the wisdom of signing a scandal-plagued, older sports star to a long-term rights deal, you need to understand the "Tiger effect" on golf ratings. When Woods contended for this year's PGA Championship in August (he ultimately finished second to Brooks Koepka), it was the highest-rated round for the PGA Championship since 2009 (when Woods was also playing). So while a fair amount of golfers worldwide would be keen on the new GOLFTV app regardless, the addition of exclusive Woods content should dramatically increase the service's audience.

Even better, the GOLFTV subsidiary will own the global rights to the Tiger Woods content, including the U.S. That means that if the PGA Tour wants to have Tiger's content on its domestic PGA Tour Live platform (remember, GOLFTV is only streaming internationally), it will likely have to pay Discovery some sort of affiliate fee.

What this means for Discovery

It's hard to estimate the financial impact of the new service on Discovery in the near term, as the service isn't up and running yet. We also don't know the exact amount Discovery will be paying Woods every year (it's probably a pretty big number). According to Bloomberg, Woods hauled in $37 million in endorsements in 2017 from companies such as Nike, far below the $100 million Woods made at his peak.

Currently, Discovery's stock trades at a cheap valuation. Management guided to $2.3 billion in free cash flow this year. With the company's market capitalization at $20 billion, shares only trade around 8.7 times cash flow. While it does have $14.7 billion in debt, Discovery is rapidly paying this down after the integration of Scripps Networks Interactive.

The market is currently skeptical of media companies, as cord-cutting eats into both affiliate revenue and advertising. In response, Discovery is pivoting to get into every skinny and/or streaming bundle, while investing in original non-scripted content for niche audiences. If the company navigates this transition successfully, Discovery could become an under-the-radar winner in the years ahead.

Billy Duberstein owns shares of Discovery (A shares) and NFLX and has the following options: short January 2020 $22.50 puts on Discovery (A shares). His clients may own shares of some of the companies mentioned. The Motley Fool owns shares of and recommends Discovery (C shares) and NFLX. The Motley Fool recommends NKE. The Motley Fool has a disclosure policy.