Discovery, Inc. (DISCA) has joined the increasingly crowded subscription video-on-demand (SVOD) space, launching discovery+ on Jan. 4. For $4.99 per month, subscribers can browse a portfolio that includes HGTV, Food Network, TLC, Travel Channel, and its home-grown Discovery Channel. The company plans local language versions in 25 key markets in 2021, including Scandinavia, Italy, the Netherlands, and Spain, and it is already rolling out U.K., Ireland, and India versions.
- Discovery will launch the discovery+ SVOD service in January 2021.
- The stock has underperformed the broad market for seven years and pays no dividend.
- The service will have to compete for customers in the increasingly overcrowded space.
The media giant will have to compete for limited subscriber funds that have been scooped up by Netflix, Inc. (NFLX), The Walt Disney Company (DIS), Apple Inc. (AAPL), Amazon.com, Inc. (AMZN), AT&T Inc. (T), Comcast Corporation (CMCSA), and other specialty streamers in 2020. This market isn't infinite, and smaller services risk a backlash from customers who want bundled services that offer deep discounts. That should sound familiar because it's the operating model used for decades by traditional broadcasting, cable, and satellite operators.
Discovery stock has underperformed in recent years, posting an all-time high nearly seven years ago and entering a decline that hit a multi-year low in 2017. Even worse, it pays no dividend. Price action has been stuck in the lower half of the trading range for the past three years but may have turned the corner in 2020, underpinned by improved sentiment. Even so, it is still trading below the first quarter peak, unlike many issues that have lifted to 52-week highs this December.
Wall Street consensus on Discovery stock reflects apathy as opposed to forceful opinion, with a "Moderate Buy" rating based upon three "Buy," three "Hold," and no "Sell" recommendations. Price targets are centered in the mid-$20s, while the stock has now lifted above the Street-high $28. Analysts have not commented since the service announcement, but wild bullishness is unlikely because Discovery's footprint may not be large enough to support a direct-to-consumer business model.
Subscription business models are based on the idea of selling a product or service to receive monthly or yearly recurring subscription revenue. They focus on customer retention over customer acquisition. In essence, subscription business models focus on the way revenue is made so that a single customer pays multiple payments for prolonged access to a good or service.
Discovery Long-Term Chart (2008 – 2020)
A powerful uptrend off the 2008 low posted an all-time high at $45.38 in January 2014, giving way to a topping pattern that broke to the downside in the fourth quarter. A steady downtick accelerated in 2017, dropping the stock to the lowest low since the second quarter of 2010. It bounced strongly into November 2018, reversing at the .618 Fibonacci selloff retracement level, and ground sideways into December 2019, when it entered a decline that found support just above the prior low in March 2020.
A bounce into June failed at the 200-day exponential moving average (EMA), yielding narrow mixed action into third quarter earnings, which triggered a buy-the-news reaction. The stock has made steady progress since that time but still hasn't reached the November 2019 high at $33.65. A rally above that level will be needed to brighten the mixed technical outlook. Looking further ahead, the uptick needs to reach the 2018 high at $34.89 to confirm a multi-year double bottom and signal the first uptrend since 2014.
A double bottom pattern is a technical analysis charting pattern that describes a change in trend and a momentum reversal from prior leading price action. It describes the drop of a stock or index, a rebound, another drop to the same or similar level as the original drop, and finally another rebound.
The Bottom Line
Discovery is trading higher after announcing the launch of a new streaming service, but the company will need to prove that it can compete in an increasingly overcrowded medium.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.