Discovery (NASDAQ:DISCA) has long made a career out of showing us the world, for better, worse, or just plain strange. Its “boom de yada” commercial remains as one of the greatest summaries of what a network does, ever. Yet it's recently discovered that, sometimes, success can be a bit of a problem as recent analyst moves from UBS both hurt and helped the company going forward.
Too Good for its Own Good
Discovery, according to word from UBS, is either already suffering from or will be suffering from a set of drawbacks in the near term that will likely see its stock price cut. The first, and perhaps largest, such problem is Discovery's current valuation. The company has seen its stock price nearly quadruple in the last year, which in turn makes further gains a bit unlikely.
Moreover, as noted by analyst John Hodulik, Discovery is already popular; its Discovery+ app is the fifth most downloaded streaming video on demand (SVOD) app, with about 14 million households in the US watching at least 20 hours of Discovery content per month. Gains here, therefore, are also likely to be hard to come by. The company has also already seen excellent expansion worldwide, which hurts its chances of tapping further markets as they've already been tapped.
Yet with vaccine take-up rates on the rise and lockdowns on the decline, Hodulik points out, the demand for streaming services is likely to start losing ground.
A Slipping Sentiment
UBS doesn't seem to be alone in terms of turning away from former darling Discovery; our latest research shows that there's been sentiment slipping toward bearishness since about July of 2020.
A year ago, things were comparatively quiet for Discovery, with three “buy” ratings and three “hold” ratings. Back in June, it was about the high-water mark, featuring five “buy” and five “hold.” Starting in September, though, sentiment began to shift, as the ratio was six “buy”, seven “hold” and, for the first time in months, one “sell.” Today, we sit at seven “buy”, nine “hold” and three “sell,” which makes a course of action fairly clear.
The price target, meanwhile, is a different matter. Even as UBS cut its rating, it also nearly doubled its price target, going from its original $24 to a new target of $46. That's still a significant downside priced in, as Discovery shares are price at $70.33 as of this writing. With new targets in the last month ranging from Barclays' $34 to Wells Fargo's $65, there's still some decent possibility out of this stock, but perhaps not right now.
But What Do You Do for an Encore?
Watching Discovery's performance over the last year or so reminds me of the old Daffy Duck cartoon where Daffy puts on a red devil suit, proceeds to imbibe a range of liquid explosives, and drop a lit match down his own throat. It's an amazing result, but even as Daffy notes, he can only do it once. That's kind of the situation for Discovery; it's brought out some amazing content, but a lot of that impact is gone now. The incredible run that “My Little Pony: Friendship is Magic” had is gone, and the general demand for streaming services is likely to slip away as well thanks to, as noted previously, improved vaccination rates against Covid-19. People can go outdoors again, or even to restaurants and the like, so while the ability to stay inside will remain, the requirement will fade. That's going to hurt all streamers, from Netflix (NASDAQ:NFLX) on down, and Discovery won't be an exception.
Discovery won't be giving up without a fight, however; it's got a range of new content coming out in the near term. “Undercover Billionaire” will be coming back to the Discovery Channel, reports note, and a new deal with beleaguered daytime talk star Ellen DeGeneres will bring new documentaries with it. In perhaps the biggest deal, though, Mike Rowe will be bringing “Dirty Jobs” back to Discovery, a move sure to get at least some eyeballs in play.
There's no denying that the company has clearly made a lot of headway thanks to the pandemic and the increased demand it placed on streaming services in general. That rising tide lifted its share of boats, and with the tide thankfully starting to ebb out, so too will the rise for the boats in question. Buying in on Discovery now may not be a great idea, but the company that's currently a big name in streaming will likely continue to be for some time. Looking for a better entry point down around the $40 range, therefore, may be your best bet.
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