Please ensure Javascript is enabled for purposes of website accessibility

Is Discovery Stock A Buy After the Debut of Discovery+ TV Streaming?

By Nicholas Rossolillo - Jan 21, 2021 at 8:52AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A fortune faded is regaining some sparkle thanks to a new subscription service.

It's been a hard road for Discovery (DISCA)(DISCK) shareholders. The stock (from here on out, I'm referring to the class C shares trading under symbol DISCK, which has no voting rights) has been stuck in neutral for years, left in the dust as the at-home entertainment industry has steadily migrated away from cable TV packages in favor of streaming services.

But the announced debut of discovery+ during the fourth quarter of 2020 has sent shares rallying back to one-year highs. Is the next stop Discovery stock hitting all-time highs last seen in 2014?

Rocket fuel in a new digital era

Cable TV has been in a downward spiral for years. Cable subscriptions paired with advertising and content distribution revenue is still a lucrative business model, but nevertheless, one that has become outdated, thanks in no small part to the revolution set off by streaming giant Netflix

A family of four sitting on a couch watching TV.

Image source: Getty Images.

The lack of a direct-to-consumer streaming service of its own that cuts out the cable company has been a primary drag on Discovery's performance in recent years, even though it has remained a highly profitable firm. Free cash flow (basic profitability measured as revenue minus cash operating expenses and capital expenditures) was $3 billion over the last trailing 12 months, good for a healthy 28% free cash flow profit margin. But now that discovery+ is on the table, the prospect of the company picking up millions of new subscribers has rekindled optimism. Shares are up over 60% in the last three months off the news.  

Because of its ample free cash flow generation, Discovery has plenty of liquidity to grow its new streaming asset. This isn't the most nimble of media companies. Cash and equivalents at the end of September 2020 totaled $1.89 billion, but total debt was $15.3 billion. Nevertheless, Discovery is in good shape as it joins the increasingly crowded TV streaming industry and tries to capture a slice of the growing pie.  

Why discovery+ could be an exciting addition

Simply jumping into the streaming fray hasn't been a silver bullet for every media company. For AT&T and Comcast, for example, their respective HBO Max and Peacock streaming services are more a value-added source of income than they are a total game-changer. But for Discovery, which is a pure media and content creation outfit, forging a new path forward in digital television is a different story. 

That thesis holds weight considering what discovery+ is offering. Here in the U.S., discovery+ launched with the largest ever library of content for a new streaming platform, including episodes from programs on the company's namesake marquee channel, as well as programming from Food Network, HGTV, DIY, Animal Planet, Travel Channel, and TLC, to name just a few. Content partnerships will also bring additional non-fiction TV from A&E, The History Channel, and the BBC. Verizon is offering to pay for the first 12 months of discovery+ for its unlimited mobile customers, a similar deal that provided a big subscriber boost for Disney+ in its first year. Discovery+ made a global rollout before it debuted here in the U.S., partnering with Comcast's Sky in Europe where it will also support live sports like football (er, soccer here in the States), tennis, motorsports, and exclusive access to the Tokyo Summer Olympics.  

Discovery could be poised to recapture revenue growth in the year ahead as its ad sales in traditional TV rebound from the early effects of the pandemic, but adding its new streaming service to the mix could supercharge a run higher. And at just 7.2 times trailing 12-month free cash flow, Discovery stock is still as cheap as it was last summer when I last did a review of the business.

Simply put, there are few truly "cheap deals" on the market right now, but Discovery looks like a rare exception. It has a differentiated offering from its streaming TV peers with its extensive library of non-fiction and educational content, is highly profitable, and could be about to pick up many millions of new subscribers. The recent run in stock price has room to continue higher, so I say this media stock is a buy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

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

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.