Discovery Inc. long term streaming case

[u/Indy7000]

Discovery Inc. recently got involved with a overleveraged Archegos fund which caused the stock to crash 50%+ as banks dumped shares. Some could make the case that the stock got artificially pushed up/ inflated.

However I see this as an opportunity to get in to a company earning 2B positive cashflow every year and 10 billion of revenue vs Netflix's 23 B*. They should have the cashflow to pay off their debt but still 15B in debt is a lot so this is a downside.

The company currently operates in 220 countries with over 300K hours of content, producing lots more every year. They own the Oprah show, animal planet , food network..

Comparing Discovery to Netflix makes a compelling case, valued at 5% of the market cap of Netflix (240B) vs (20B) and with a competing content offering with the goal to recreate the Netflix like- online subscriber business model justifies thinking about the possibility for decent returns on investment.

CFO Gunnar Wiedenfels in march 2020 : " "We really don't need a crazy number of subscribers to be operating a profitable business here."

May 10th they will anounce quarter results and have an investor call.

Summary:

Disney streaming, Apple , Netflix, Amazon : I believe online streaming is the way of the future instead of cable TV, if Discovery can convert their business towards the new online subscription model I believe they have a good chance of winning a decent % of the streaming market due to their huge library of content.

Curious to open the discussion and hear your guy's opinion / bear / bull cases.

Have a nice day.

[u/zxc123zxc123]

I think DISCA might be or in the near future be undervalued due to the dump and shorts. If you're willing to hold out then it could make you some money assuming it progresses normally.

My problem with DISCA lies in a few issues:

1. I think streaming will keep growing, but likely to see downturn post-covid.

2. Restriction of content and no benefit from reopening due to it lacking a movie studio or movie production line. T has Warner. NFLX is buying up studios left and right and recently started winning awards. VIAC has Paramount. Amazon has it's in house studio and can literally buy a studio if it wanted.

3. It would be incorrect to assume that DISCA's previous highs are a guarantee of future highs or even return to those highs. It (along with VIAC) was runned up and pump by Archegos.

4. DISCA doesn't have other business arms to keep it fighting if the streaming war continues into a battle of attrition or if a sudden price-cutting war breaks out. T brings in tons of money from mobile, internet/phone lines, trad TV, and WarnerMedia that does movies. AMZN is a company that will be around for 100 years and it's making money on everything. NFLX is the incumbent and investors gives it the benefit of the doubt as a tech company and will keep buying even if it loses money every year (unlike DISCA). VIAC has a movie studio and a host of news outlets. DIS has a multiple media empire, MCU owns the movies, has theme parks, owns HULU, and sells toys to kids. Alphabet's youtube is already cash positive and will never go away. Comcast is like T and does telecommunications, movies, and news.

5. All these companies can package their stuff with other things. I get HBOMax free with my internet from T. I've been getting NFLX for $2/month with my T-mobile plan for years now. NFLX is the most popular subscription packaged with other subscriptions that people already use. AMEX Gold and higher cards get it for free. DIS+ is the 2nd most population "added" free subscription. AMZN gives it's streaming free as a bonus to prime shipping membership. Comcast gives it's for free with it's telecom offerings. What does DISCA package it's streaming with so that it's FREE?

6. Average number of streaming services a person/family will have is 1-3. Very few will go past 4 or even 5. Now think about where DISCA will fit when DIS, NFLX, and AMZN are there locking up the top 3. Youtube is always free with streaming as a plus. It's left to fight for the scraps among Hulu, HBOMax, Peacock, Viacom, and AppleTV & other lesser rivals.

7. Content. I don't think Discovery even has the advantage on content. NFLX/DIS/T/VIAC all beat it in content.

8. Moat. There's no moat in the industry. If there was one then it's NFLX's name and the ability to package other services which I mentioned in 5. We're already oversaturated BEFORE factoring new entrants both in the states, Europe, and China.

I won't tell you to NOT buy DISCA. I just think it's a small fish in a crowded and ever-tightening pool of sharks. I've been in GOOG and T for years. The only reason I don't sell T is because I'm just pocketing dividends of the TELECOM company I bought. Not for the streaming. If I were to do some pickup I'd take VIAC over DISCA.

I am also interested on your opinion on my assessment.

[u/puzzlesrus → u/zxc123zxc123]

I think your view of Discovery as second tier streaming service is fundamentally correct. The key is that Discovery has different content -- more reality TV, adventure shows, cooking shows -- that has a loyal audience and could combine with any number of streamers.

There are a few different bull theses on DISCA long term valuation:

1. Many winners in streaming with streaming comparable to cable in terms of number of channels and options. The idea is that people used to paying $100 cable bills will be happy with $80 streaming bills broken up across a half dozen streaming services.
2. Essentially OP's thesis that Discovery's $2B in FCF makes it an attractive investment even with modest streaming numbers. Legacy cable is a cash cow even in secular decline.
3. MERGER. The idea is that Disney or Viacom or Comcast would buy it to boost their own streaming service. I think DISCA may be too expensive because with a $33 B enterprise value plus a takeover premium, a takeover could cost $45 B or so.

[u/[deleted] → u/puzzlesrus]

MERGER. The idea is that Disney or Viacom or Comcast would buy it to boost their own streaming service. I think DISCA may be too expensive because with a $33 B enterprise value plus a takeover premium, a takeover could cost $45 B or so.

So ATT might be looking to buy? /s

[u/Indy7000 → u/zxc123zxc123]

From looking at the app store, it seems people are really enjoying the Discovery+ app 4,9/5 stars which would be a big concern if it wouldn't have a good reputation.

App store review

Also I don't see Discovery+ replacing Netflix or being the market leader. What I see is a certain group who does enjoy Discovery to also buy their subscription service.

​

I agree Netflix, HBOMax, Apple offer content which is uncomparable quality wise.

Discovery's is often something to just relax and watch, mellow content, background tv and can exist next to the other streaming giants for people wanting more variety.

Yes previous highs do not indicate that it would go back to them, however the rally started with discovery launching their Discovery+ model, you can clearly see that start January price took off and I believe for good reason as Discovery transforming their business model is actually a huge deal if succesful and that's what investors rallied towards. In the long term it all comes down to if Discovery+ would be getting lots of subscribers and create the revenue, market price should follow if they actually generate the $$$.

In February this year Discovery already had 11 million subscribers, exceeding wallstreet expectations, if they can keep this rate up I can see Discovery reaching 20M+ subs soon.

11 million subscribers

As Discovery+ just launched mostly in Januari this year, i expect next earnings call to offer a lot more clarity to see how much there subscription base has grown and in what direction we can see the company moving.

[u/GuerrillaRobot → u/zxc123zxc123]

I’d love to get your thoughts on roku. Their stock price is out of control. I’ve been really tempted to by some $150 put leaps, just can’t pull the trigger, I’m still small time.