Summary
- Discovery continues to own one of the most-watched pay-TV networks in North America.
- While Discovery still hasn’t announced its streaming platform, its strong library of content along with a high brand value should help the business to successfully launch its upcoming OTT offering.
- As the company continues to trade below its peers, there’s a high chance that Discovery’s stock will appreciate in the upcoming months.
Discovery (DISCA) continues to own one of the most-watched pay-TV networks in North America. As its advertising business, which accounts for more than half of the overall revenues, starts to improve sequentially, there's a great chance that the company will be able to beat its guidance for the current fiscal year and create additional shareholder value along the way. While Discovery still hasn't announced its streaming platform to the world, its strong library of content along with a high brand value should help the business to successfully launch its upcoming OTT offering and boost the number of its total subscribers. As the company continues to trade below its peers, there's a high chance that Discovery's stock will appreciate in the upcoming months. For that reason, I continue to hold a long position in Discovery and have no plans to sell it in the foreseeable future.
Advertising and OTT Will Drive Growth
The decline of the advertising business along with the lack of sports events during the second quarter of the year hurt Discovery's overall revenues. However, while total revenues were down 12.1% Y/Y to $2.54 billion, the company still beat the street consensus by $30 million, while its non-GAP EPS of $0.77 also beat the forecast by $0.05. Discovery also managed to stay profitable, as its net income was $271 million and its total business generated $879 million in free cash flow, which is an increase of 47.5% Y/Y.
In the latest conference call, Discovery said that the advertising business is recovering and its 10 biggest advertising markets were already up 4%. The business is expected to grow sequentially across the board in the upcoming months, as sports leagues start to reopen and advertisers return to the market. At the same time, Discovery will continue to benefit from being one of the biggest creators of non-scripted content around the globe. Each year, Discovery produces around 8000 hours of content and is able to successfully monetize it, since the non-scripted content is much cheaper to create in comparison to scripted movies and TV series. In addition, Discovery currently owns 4 out of 10 biggest pay-TV networks, which include TLC, HG Discovery, and others, in the United States. This helps the company to expand the number of its subscribers and diversify its user base.
Currently, the biggest unknown in Discovery's portfolio is its streaming offering. At the latest conference call, Discovery's CEO David Zaslav said that the company's OTT offering will be revealed very soon. Considering this, buying Discovery's stock at this stage, means betting on the success of the company's upcoming streaming business model. Discovery will likely have a much different OTT offering in comparison to its peers since its library consists mostly of a non-scripted content, which was mentioned above. At the same time, by fully owning its diversified library of content, which constantly increases in size, Discovery should have no problems growing the number of its subscribers for its upcoming streaming platform at the initial stages of the launch.
After launching the service, Discovery could decide to sell itself to a much bigger competitor, who is in dire need of new content. Considering that AMC (AMCX), MGM, and Viacom (VIAC)(VIACA) expressed interest in selling themselves to a bigger entity, Discovery could do the same, considering that it has one of the largest libraries of content in the world. In the recent conference call, the management said that they don't mind looking at strategic M&A opportunities.
Selling also makes sense for Discovery considering that more consumers will abandon linear TV offerings for OTT services. Sine Discovery hasn't launched its streaming service yet, it's currently unable to offset the potential losses from the advertising and distribution businesses in the long-term. At the same time, we don't know how successful Discovery will be in its efforts to transition itself to a direct-to-consumer business model.
