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Why Discovery Communications Stock Dropped 10% in January

By John Ballard - Feb 4, 2020 at 12:01PM

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Investors say the cable content provider has no future in the age of streaming, but Discovery says, "not so fast."

What happened

Shares of Discovery Communications (DISC.A) (DISC.B) (DISCK) lost 10.6% in value last month, according to data provided by S&P Global Market Intelligence.

The last year has been a choppy one for the stock price. But there doesn't appear to be anything news-related that would have sent the shares down last month.

So, what caused the sudden drop?

A hand holding a TV remote with a collage of content options in the background.

Image source: Getty Images.

So what

Investors seem to be struggling to understand how Discovery will survive as the streaming wars heat up. This is evident when comparing Discovery's stock trading pattern last month with Netflix, which looks nearly symmetrical.

DISCA Chart

DISCA data by YCharts

Netflix reported earnings on Jan. 21, pointing to stellar growth in revenue and subscribers. Netflix stock jumped, but Discovery stock plunged. Is that justified?

Now what

Discovery owns a lot of popular content, including the namesake Discovery channel, HGTV, Food Network, TLC, Travel Channel, and Animal Planet. While these are all dependent on cable, Discovery revenue still increased 9% (excluding currency effects) year over year through the first three quarters of 2019. What's more, adjusted operating income surged 22% over the same period, and Wall Street analysts expect earnings to grow by a whopping 29% per year over the next five years. 

The strong growth on the bottom line is expected to be driven by Discovery's push into digital streaming. "We aim to become the Hulu equivalent in select TV markets in Europe," said CEO David Zaslav during the third-quarter conference call

Discovery is making smart use of partnerships in local markets, as well as operating its own tech infrastructure to power its direct-to-consumer platforms. 

The old saying on Wall Street, "content is king," may prove out with Discovery.

John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Discovery (C shares) and Netflix. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Warner Bros. Discovery, Inc. Stock Quote
Warner Bros. Discovery, Inc.
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Warner Bros. Discovery, Inc. Stock Quote
Warner Bros. Discovery, Inc.
DISCK
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Warner Bros. Discovery, Inc.
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