What happened
TV media company Discovery Inc. (DISC.A) (DISC.B) (DISCK) has three share classes, and the prices of two of them fell by 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 provide their owners with one shareholder vote per share, fell by 36.8% in the six-month period that ended June 30, while the "C" shares, which have no voting rights, dropped by 35.6%. (The price of the preferential "B" class shares, whose owners get 10 shareholder votes per share, actually rose by 4.8%).
Image source: Getty Images.
So what
Discovery, the king of producing "unscripted" TV shows for its cable channel lineup that includes Discovery Channel, Animal Planet, HGTV, and Food Network, is late to the streaming party, and that's had all kinds of consequences in 2020.
Because Discovery's content is unscripted, it's relatively cheap to produce, and easy to produce a lot of. That makes it an easy sell as part of a cable package. Unfortunately, cable subscription numbers are falling fast: In the first quarter of 2020, for example, cable provider Comcast lost 388,000 residential cable customers, a big acceleration from Q1 2019, when it only lost 109,000.
Discovery has been planning to launch a direct-to-consumer streaming service -- a la Disney+ or HBO Go -- for quite some time. It's even brought on former Google executive Neil Chugani to spearhead the effort. Can Discovery's content -- which largely caters to niche interests -- convince a large enough segment of the cable-cutting population to shell out for a streaming subscription?
Of course, the best time to have had such a massive content library available on demand in the U.S. would have been the first half of 2020, when more than 90% of the population was under stay-at-home or similar orders and eager for entertainment and distraction. But Discovery missed the chance. The coronavirus pandemic dealt Discovery a further blow by canceling major European sporting events and postponing the Olympics, all of which Discovery had been set to broadcast through its Eurosport channel.
In short, it was a rough six months for Discovery, and investors sold off its shares.
Now what
Although Discovery's share price peaked in 2014 and has been on a downward trajectory ever since, it still churns out impressive amounts of cash flow. Its valuation metrics have gotten steadily cheaper, but whether it ought to be viewed as a buy will depend on how you believe things will shake out in the TV landscape over the next few years.
If you think that cable cord-cutting will proceed slowly, and that Discovery's content will be attractive enough to support a paid streaming service, the stock probably looks like a good value. But if you expect cord-cutting will accelerate and leave Discovery hurting for revenue before it can get its streaming service off the ground, or if you believe that its content won't attract enough eyeballs -- and dollars -- when there are so many other streaming options to choose from, then you'll probably want to pass on this media company.
