Shares of Discovery (NASDAQ:DISCA), which owns eight cable networks soon to be wrapped into a streaming service, fell by nearly 50% in the wake of the Archegos scandal. But DISCA stock may not yet be a bargain.
I wrote about the company March 11, describing its “nosebleed valuation.” That was based, in part, on Oprah Winfrey selling one-quarter of her OWN network to Discovery in late 2020 for half what she’d sold another quarter for three years prior. When billionaires see trouble ahead, they’re usually right.
Winfrey’s stock doubled in value between her sale and my story. If she read it and sold, she did great. But it’s too late now. Discovery is due to open for trade April 5 at $43.31, after topping $77 as recently as March 19. The market cap is $19.6 billion on 2020 revenue of $10.6 billion.
DISCA Stock Discovers Archegos Mess
DISCA stock was one of several that had to be sold to meet margin calls for Archegos, a family office run by trader Bill Hwang. The Wall Street Journal called it an “epic meltdown,” $8 billion in losses over 10 days. The failure sparked a call for more regulation of so-called “family offices,” private wealth management firms serving individuals or small groups.
In the Archegos case, Hwang was reportedly able to buy $85 in stock for every $15 in collateral, using a network of European, Asian, and American banks, including Goldman Sachs (NYSE:GS). When ViacomCBS (NASDAQ:VIAC) announced it would sell more shares, taking advantage of its own stock’s gain, the value of existing shares fell. Hwang got called on his loans, and the whole pyramid came down.
Seeking Steady Stream
Discovery is combining content from eight channels, which include OWN, Food Network, HGTV, and Discovery Channel, into Discovery+. It costs $5 amonth, $7 per month without ads. In its February earnings release, the company estimated it would soon have 12 million subscribers. That would mean revenue of $60 million – $72 million per month, depending on which plan people were buying.
But Discovery hasn’t given up on cable. While advertising “new” shows on Discovery+, most of what’s there is from the back catalog. Many new shows remain exclusive to cable. The hope is that Discovery can maintain its cable revenue while also benefitting from streaming.
It hasn’t been working out that way. Discovery’s revenue in 2020 was lower than in 2019. Start-up costs for Discovery+ meant net income was down 37%. For the March quarter, to be announced May 5, the consensus earnings forecast is 66 cents a share. The adjusted earnings per share for the December quarter was 76 cents.
As a result, analysts are sharply divided on Discovery. There are 15 now tracked by Tipranks, with four saying buy, four saying sell, and seven not sure what to say. Before the collapse of Archegos, six were advising buy and only two were telling people to sell. The average price target, $48.50, is about 12% ahead of the April 5 opening price.
More Volatility Ahead
There may be more volatility to come.
On March 31, the “B” shares, Discovery (NASDAQ:DISCB), which hold 10 times the voting rights of DISCA, the more commonly traded “A” shares, nearly doubled at the opening. They are due to open April 5 at $111.17, after eventually losing 13.15% to end last week.
The shares seldom trade, because 95% of them are owned by octogenarian Liberty Media billionaire John Malone. The shares give him a 28% voting stake and effective control. Malone has warned the industry it must scale to reach a global market, and streaming offers better economics than cable.
Malone earned $325 million on paper in the B shares run-up. If he’s willing to get out to scale the business, the story isn’t over.
At the time of publication, Dana Blankenhorn owned no shares, directly or indirectly, in stocks mentioned in this story.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack newsletter.
